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A recent report indicated that with the next release of Google’s (NASDAQ: GOOG)ting system, Jelly Bean, Google will sell a line of five stock Android phones and tablets from multiple hardware makers directly to customers. This would be a shift in the Android ecosystem and could be targeted at unifying the ecosystem and attempting to push third party hardware makers into supporting and updating their devices longer, as well as toning down their custom interfaces. However Google faces a potentially larger issue with the open source Android ecosystem, forking. Google needs to implement a strategy to limit the impact this phenomenon has on the profits they earn from Android because in the long run this forking could have a larger impact than custom interfaces and a slow update cycle.
Forking occurs when a hardware manufacturer decides to take Android and significantly alter it and then ships their device with this altered version of Android. The issue that this procedure presents to Google is that the process of forking usually removes all Google control or input that they had in the operating system and the device that is running it. The Google app store is usually replaced as are all their other apps, this means that all the revenue Google would have made, by giving Android away for free as an open source OS and then making money from licensing their apps and taking a cut of digital sales through their apps, is gone. This alteration process goes beyond the custom interface and bundled apps that most Android manufacturers put on their phones, this process creates a custom fork of the Android operating system whereas the former creates fragmentation (or customer choice depending on how you see it) within traditional Google Android.
The largest example of this forking in the United States is the Amazon Kindle Fire. Amazon (NASDAQ: AMZN) does not advertise the Fire as an Android device but it does run a customized version of Android 2.3 Gingerbread. Gone on the Fire is the Google Play app store replaced by the Amazon app store, Amazon MP3 is the music service of choice, even the standard Android web browser is replaced by the Amazon Silk browser. A custom interface is also present on the Fire, it bears some resemblance to Android but not very much. Google also has no say in the update cycle of the Fire or the standards to which these forked devices are built. Google can claim that this forking actually enriches and broadens the Android ecosystem and it might if someone put Android in your toaster. But with phones, tablets and TVs, Google makes an Android standard and thus forking on these devices could hurt Google in the long run. The Kindle Fire is the most popular non-iPad tablet at the moment selling 3.9 million units in the fourth quarter of 2011 alone. According to a report earlier this year from ComScore the Kindle Fire makes up 54.4% of all Android tablets sold and with a rumored 10 inch version of the Fire launching later in 2012 it is only likely to get more popular.
Another very popular low priced Android based tablet is the Nook Tablet. Priced to compete with the Kindle Fire (at $200) and well below the iPad or the Galaxy Tab, the Nook Tablet from Barnes & Noble (NYSE: BKS)ilt on a modified version Android 2.3. Again with the Nook Tablet, the Google services are missing and the app selection is very limited, because of the lack of a decent app store, like the Google Play app store. According to HIS iSuppli the Nook was the fourth bestselling tablet in the last quarter of 2011 after the iPad, the Fire and all Samsung tablet sales combined. Microsoft also recently invested hundreds of millions into the Nook Tablet giving it significant fire power to take on other Google associated Android tablets and the Kindle Fire.
Strategic Analytics reported that in the last quarter of 2011 Android tablets rose from 29% of the tablet market to 39%, which should be a good sign for Google. However ISH iSuppli reports that the Fire and Nook make up 21% of all tablet sales globally and although these different surveys from different sources don’t add up perfectly with each other they indicate that thus far the real Android tablet success is coming from forked Android tablets that the Google services do not run on.
On top of these customized tablets Disney has a set of custom Android smartphones in Japan that do not run Google services but instead run a set of services offered by NTT Docomo, the largest Japanese cell phone carrier. Probably the most important fork of Android that exists today is the one being produced by Biadu, the Chinese search engine and all around Google competitor. Baidu (NASDAQ: BIDU) announced that they would be designing their own operating system that is based on Android. However, Biadu will replace the Google app store, search engine and many other Google services with their own competing services Biadu will also change the interface on their Android devices, this forked Android operating system will be called Yi. Currently Dell is working on devices to run the Yi operating system and other hardware makers will also roll out Yi devices.
China is the world’s largest smartphone market and is growing rapidly. As hundreds of millions of Chinese come online in the coming years the battle for smartphone market share will be fierce and with Biadu (which dominates the search market in china with close to 80% of all searches in China) pushing a version of Android that Google does not profit from, Google could lose some of the growth they have been experiencing as Android has the majority of the Asian smartphone market.
While the explosive growth of Android has been more than enough to satisfy Google and their shareholders. Going forward forking will be more of an issue for Google than fragmentation. The reason is that with a fragmented market where there are thousands of android devices running various generations of Android with various pre-installed apps and interfaces, Google still makes money because their apps and services are still included. Also the argument can be made that this type ecosystem maximizes consumer choice and thus gives Android the broadest possible appeal. This is not the case on forked versions of Android where all Google services are missing, forking also undermines some of the growth statistics about android such as its recent tablet market growth.
Though Android is growing in the tablet market it is not all Google Android, a considerable part of the growth is Amazon Android and Nook Android. Going forward Google will need to make sure that the version of Android with their services offers enough of an incentive so that other tech companies do not continue to fork android. Perhaps Google could offer more support to developers, hardware makers, enterprise users or even offer direct customer support to consumers as an incentive.
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