Android's Death Is Grossly Exaggerated

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

An article that was recently published begins with the attention-getting banner:

"Android is in its death throes. Well, this may be overstating a bit, but I do believe that the Smartphone OS landscape will be very different in 4 years, and that Android OS, by Google (NASDAQ: GOOG) will be the loser."

It is attention grabbing for sure, but totally off the mark. As it stands, Android is taking market share away from everyone -- including Apple (NASDAQ: AAPL). The author continues claiming:

"My basic thesis is that Windows Phone 8 (WP8) from Microsoft (NASDAQ: MSFT) and BlackBerry 10 from Research in Motion (NASDAQ: BBRY) will take massive market share from Android."

"The problem herein is that Android has yet to put a strong contender into the tablet field to challenge the iPad's dominance. While there is nothing lacking in the Amazon Kindle Fire (it's a fine machine) --but no rational person realistically equates a Kindle Fire to an iPad. The size, performance, and features of the iPad put the KF to shame. New on the market, there is even an "iPad mini" a contender in the smaller-sized, lower-priced category."

While the claims make for rather interesting storytelling, they have no basis in fact or reality. Seriously? "Massive" market share going to Microsoft and Blackberry? No contender to the iPad? A quick glance at market share growth states otherwise. In this article we will cover what drives growth and we will provide an update on the market share for tablets and smart phones.

Price is the main driver of growth

For consumers, the main drivers for any device purchased are: (1) Affordability (2) Applications and (3) Innovation. For developers, the total user base along with market share growth is the primary concern. A larger market means more potential profit. Think like a developer. Would you really develop your application for a market that is virtually non-existent, like Microsoft or Blackberry, when you could be making your application for Android or iOS? It is just not logical (in most cases) to develop for the niche markets.

(Goldman report on consumer switching preferences p35)

 

Market share

Android by Google is taking a bite out of Apple on multiple fronts and among multiple product lines: Ultimately this will lead to Apple losing its zenith in the long term (recall the infamous Mac vs PC wars of the 1980's).

 

Apple, indeed, has a history of making fine products that are very expensive and proprietary -- only to give the market away to the competition. The problem Apple is facing currently is much like the same problem they encountered during the Operating System wars of the 1980's - 1990's, (i.e., they produced a far superior product that was light years ahead of the competition, yet they blundered by overcharging). This allowed a horde of inferior "affordable" and "good enough" products such as Microsoft's Windows along with the legions of IBM-compatible clone makers like Hewlett-Packard and Dell to overtake Apple. Now we see Apple repeating its past mistakes...but this time with Android.

Apple resides in its ivory, expensive, iPad castle with its moats while the unwashed masses are outside armed with the legion of cheaper Google Droids, and Amazon Kindle Fires. Even the odd Microsoft Surface is showing up to the siege. The legions are taking their toll as Apple's market share is shrinking.

Tablet market share

According to Strategy Analytics Apple's share has shrank from 64.5% to 56.7% while Android has leaped from 29.2% to 41.3%

"Shipments of Android tablets surged to a new high in the third quarter of 2012, accounting for 41% of all tablets shipped. Neil Mawston, Strategy Analytics' executive director, says that there's no one Android tablet responsible for the surge, which is more due to a large influx of devices from a wide variety of vendors including Asus, Samsung and Nook." Shipments of Apple's iPad lineup, meanwhile, shrank to 57% of the market"

 

Apple still has the lead in units sold (for tablets) but its market share is shrinking while Android is growing because of the superior value offered to the consumer.  Macworld.com chimes in on value:

"I think the Nexus 7 is the far better value. The difference is still quite clearly in favor of the Nexus 7 when you consider the 16GB models: $199 for the Nexus 7, versus $329 for the iPad mini."  and "I find it impossible to recommend the iPad mini, except for two sets of shoppers: people who want an iPad because of the brand's cachet or those who want one because they're already committed to the Apple ecosystem, and in both cases want the least-expensive model they can buy."  Otherwise, to me the Nexus 7 is superior to the iPad mini. Its display is better, I can find most of the apps I want or need on Android, and I prefer the open flexibility of the Android ecosystem."

Cheaper tablets

Google and Asus are also rumored to be working on a cheaper Nexus Tablet according to Cnet.com.

"Needless to say, a Nexus 7 priced below $150 and eventually going to $99 would make Google's tablet even more competitively priced against the $329 iPad Mini -- even allowing for the high-quality build that Apple typically achieves with its tablets."

Digitimes.com reports that we might even see some cheaper android tablets launch in January in the Asia and South American markets.  We can also see the effects of cheaper androids in Japan as the android based Nexus 7 has taken the lead.

"Based on a survey of 2,400 consumer electronics stores in Japan, Google's Nexus 7 tablet had 44.4 percent of the market versus the iPad's 40.1 percent, according to Nikkei, Japan's largest business daily. The survey was done by market research firm BCN in December."

Smart phone market share

While Apple is taking damage in the tablet wars they are a sinking ship in the smart phone wars according to market share gains. Android smart phone adoption is growing at a rapid pace, according to IDC:

"The Android smartphone operating system was found on three out of every four smartphones shipped during the third quarter of 2012 (3Q12). According to the International Data Corporation (IDC) Worldwide Quarterly Mobile Phone Tracker, total Android smartphone shipments worldwide reached 136.0 million units, accounting for 75.0% of the 181.1 million smartphones shipped in 3Q12. The 91.5% year-over-year growth was nearly double the overall market growth rate of 46.4%."

"Android has been one of the primary growth engines of the smartphone market since it was launched in 2008," said Ramon Llamas, research manager, Mobile Phones at IDC. "In every year since then, Android has effectively outpaced the market and taken market share from the competition. In addition, the combination of smartphone vendors, mobile operators, and end-users who have embraced Android has driven shipment volumes higher. Even today, more vendors are introducing their first Android-powered smartphones to market."

(Smart Phone Market Share of 3Q12 Sales)

 

We can clearly see that Android is growing much quicker than iOS and overall unit shipments are 136 million for Android vs a mere 26.9 million for iOS in 3Q12. The Android Zerg strategy of overwhelming by cheaper "good enough" smart phones is working.  Blackberry is floundering at a mere 4.3% of 3Q12 sales share along with -34.7% growth (or lack of). Blackberry's total market share is just a mere 1.6% of the smart phone market. Microsoft is doing much better at 2% sales share but with 140% growth.

Consumer loyalty

Another factor to consider is once Android assimilates a consumer they tend to stick with the brand they know.

(Goldman report on consumer loyalty p33)

 

Applications

When it comes to applications it's a mixed bag. Android is gaining newer applications faster than iOS. This is most likely partly because the qualifications for android applications are lower than Apple's. However Apple apps on average generate 4x more profits. Android is starting to close the gap some, but it has a long ways to go. The thing to remember though is Android is quickly closing the revenue gap -- what happens when the gap is only 3x, 2x, 1x? As more Android devices are sold more users will purchase apps which will drive up revenue and attract yet more android developers.

 

Financials

Google is a stock that sounds expensive at $741 dollars. Just go down the street and mention that it costs $741 and the average Joe's reaction will be a "Wow that's expensive!" but really when you look at the numbers it's not unreasonable. The PEG ratio's about right in line with the average S&P 500 stock. Profits are nice and healthy, but the earnings growth does need some work. Net income however is very healthy at $10.56 billion. Total cash is $44.62 billion compared to $7.90 billion in debt. Personally I would like to see this figure come down some. Google does not pay a dividend... yet.

 

Conclusion

Apple is facing stiff competition and is in danger of being overwhelmed by the cheaper Android hordes. Much like the 1980's, Apple is dependent upon hardware sales to maintain high gross margins. Yet they are facing competition from Google who can give away the Android OS in order to generate revenue through increased Application sales. The Google strategy of "good enough" with far superior pricing is clearly working according to recent market share gains. For example a Nexus 7 16GB costs $199 vs an Apple Mini 16 GB at $329. The danger to Apple is clear and the stool is wobbling in face of the Android hordes. Apple has however been the focus of several rumors that say that a new cheaper iPhone is in the works. While this should stop the market share losses IF it is cheap enough -- it will also drag down Apples's gross margins. This is not to say that Apple is in any danger of losing the war, but I do see the market share declines continuing.

Blackberry taking over is just a fantasy. No argument is even necessary as the market share data proves they are all but dead. Microsoft will grow some, but we do not see it taking "massive" market share away from anyone.  We recommend buying Google for its long term potential and growing market share in tablets and smart phones.


austinwcraig has a long position in Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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