Android's Sinking Ship

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

Google’s (NASDAQ: GOOG) Android operating system currently powers 900 million devices, which are made by a plethora of hardware makers. There are over a million new Android activations each day, as well as nearly 50 billion app downloads. This all makes Google, who give the operating system away for free but pushes their services and advertisements on Android, very happy. Google's hardware partners, however, are not as universally happy with Android's 75% market share. The latest example of this is HTC, whose stock has dropped over 70% from April 2011.

Not only is HTC’s stock losing value but also market share. HTC’s smartphones captured a quarter of the US smartphone market for a brief time in 2011, putting the devices slightly ahead of Apple’s (NASDAQ: AAPL) iPhone. This victory was short lived, however, as Apple released the iPhone 4S and Samsung began capturing Android users with its "Galaxy" line of smartphones.

Bad news on all fronts

HTC now accounts for less than 5% of smartphone sales, and in its latest reporting made a profit of just $3 million. The latest debacle for the company was the HTC First, an Android smartphone that came pre-installed with Facebook’s "Home" interface. The First was discounted to just $0.99 on contract within a few weeks. The likelihood of many other carriers picking up the phone is negligible.

HTC has been described as being "in free fall," and former employees have taken to Twitter to tell their former coworkers to just give up and quit.

The company has been trying to launch a unified line of smartphones across all carriers for years. Up to this point, however, it has not had as much success as Samsung, Apple or Nokia, whose offerings are uniform regardless of carrier.

HTC has now pinned its hopes of a recovery on the HTC One, which although delayed has just launched to rave reviews.

Alongside the launch of the One, however, there have been some high-profile departures from HTC. The CEO of the company's Asia division has just left, as has the chief product officer, a VP of communications, the digital marketing director and the company's product strategy manager.

With competition heating up, the last thing that HTC needs is a brain drain at the top of the company.

Branding and unification

Of course HTC not only has to compete with other Android makers but the original ruler of the smartphone realm, Apple. For years Apple was the king of branding and unification, as the iPhone is identical on all carriers worldwide. Now Apple not only has to deal with Google pushing Android, but with Samsung and LG pushing branded and somewhat differentiated Android devices. Apple makes their money not only from hardware but services such as iTunes and the Apple App Store, which combine to create an Apple ecosystem. The company used to be alone in offering a complete ecosystem, but they are now not the only player with such an offering as now both Google and Microsoft have full sets of similar services. We could possibly even see Samsung launch some of its own services to go along with their unified and differentiated hardware line.

This branding and unified device line caught HTC by surprise. HTC had been used to releasing phones on specific carriers with the carriers' branding and specifications. Examples include the Droid phones on Verizon, the EVO phones on Sprint and the aforementioned HTC First. These partnerships and others like the one HTC has with Beats Audio are just one examples of HTC wasting time and effort on gimmicks while their competitors including Apple and Samsung strengthen their platforms.

Ever-growing competition

All of HTC’s woes come at a time when Blackberry is releasing more handsets globally, and Microsoft's (NASDAQ: MSFT) Windows Phone operating system is actually beginning to show some signs of life.

Maybe Android has become a problem rather than a solution for HTC.

Branching out and offering a line of Windows Phones would be a good start to get some diversification for HTC. They could put Windows Phone software on their existing hardware with few modifications, and should Windows Phone take off then HTC would be at the forefront of the Windows Phone success. Microsoft would be thrilled if HTC doubled down on Windows Phone, as it would give customers a non-Nokia choice for a Windows Phone. Several of the high-level departures from HTC have ended up at Microsoft as well; they could now reach back to HTC with a Windows Phone lifeline.

HTC has launched Windows Phones before, but like most hardware makers other than Nokia, the company's Windows Phone handsets have been a halfhearted afterthought. Doubling down on Windows Phone would give HTC employees something to stick around for, giving them another avenue to direct their resources instead of searching for a new job.

Hardware vs. software

Hardware makers always face slim margins. Think Dell and HP in the consumer PC market for examples. Software makers, on the other hand, have far higher margins; think Microsoft. The main exception to this is Apple, which makes both their own hardware and software and sells the package at high-end near-luxury prices. But Apple is the exception that makes the rule.

If there is any chance of a turnaround from HTC in the next two years, it is going to be done through at least two lines of unified smartphone lines running not only Android but Windows Phone.

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David Danna has no position in any stocks mentioned. 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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