Google’s Android Problem
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Search giant Google (NASDAQ: GOOG) is no stranger to success; its core product is synonymous with searching the web. Often the company’s willingness to experiment is cited as one of the driving factors of its success, giving birth to new products that usher in new growth. Recently the most notable of these experiments has been Android OS, which has captured a huge chunk of the smartphone market. Android has been a big success for Google, but also brings its fair share of problems, including legal issues and a decline in one of Google’s core metrics. Cost-per-click, widely watched by analysts as an indicator of Google’s health, has declined, in part due to Android’s growing prominence. There is also the fact that as it currently stands, a significant portion of Android-based revenue accrues to companies other than Google. Despite its success, Android is a bit of a problem child for Google.
First and foremost is the ongoing trial with Oracle. For those not keeping up with the case, Oracle is asserting that Android violates several of their patents. Oracle seeking significant payments for damage caused by Google’s alleged infringement as well as ongoing royalties from future sales. As is often pointed out, Android is provided royalty free to manufacturers so any payments to Oracle as a result of the ongoing trial are a losing proposition.
Oracle isn’t the only one that has challenged Android on patent infringement, Microsoft (NASDAQ: MSFT) already receives royalties for 70% of US Android smartphones and is actively seeking more. As it stands, Microsoft has already signed agreements with most of the major Android OEMs, Motorola Mobility being the lone holdout. It is worth noting that Google is not paying Microsoft, even though the royalties are being paid due to Android.
And unfortunately for Google, that isn’t Android’s only issue. Its biggest strength, openness, is quickly becoming a thorn in Google’s side on several fronts. One of the biggest issues is security in its open marketplace. Just this month Google’s official app market was found hosting malicious Android apps, an occurrence that is less prevalent in Apple’s closed system.
Another drawback to openness is demonstrated by teh plethora of Android versions currently in use. Several versions are being used and it is never quite clear if and when a consumer’s device will get the latest and greatest version of Android. Most major OEMs have their own threads of Android, with custom UI elements built on Google’s foundation leading to considerable fragmentation in some cases. The freedom to tinker with Android plays a big role in its widespread adoption, but it comes at a cost to Google. Perhaps that clearest example of this is Amazon’s (NASDAQ: AMZN) Kindle line. The Kindle Fire sports its own fork of Android and happens to also be the dominant Android tablet.
As you can see above, the Kindle Fire is by far the undisputed leader, but it is a hollow victory for Android. The Kindle Fire’s fork is pretty removed from Android and ties into Amazon’s, not Google’s, ecosystem.
Android is also showing signs of losing steam in the US and there is another challenger on the horizon. Over the past two quarters Apple has chipped away at Android’s smartphone dominance and this quarter the two largest US carriers, Verizon Communications (NYSE: VZ) and AT&T (NYSE: T), both reported that at least half of their smartphone sales were iPhones. In AT&T’s case 4.3 million of its 5.5 million smartphones sold were iPhones, representing over 75% of sales for the quarter. And then there’s Microsoft and its Windows Phone. While Microsoft has yet to capture the attention of consumers, its recent devices have been well-regarded and are beginning to gather carrier support.
AT&T, long considered the iPhone carrier, is lending its weight to Windows Phone, putting a lot of muscle behind its recent launch of the Lumia 900, its flagship Windows Phone. While AT&T is the first to really push Windows Phone, Verizon has also indicated it is interested in supporting the platform. This may be of particular concern to Google since Verizon has been a major partner in pushing Android-based phones. In fact, Verizon’s CFO even said as much during their recent earnings call, remarking, “We helped create the Android platform from the beginning and it is an incredible platform today, and we are looking to do the same thing with a third ecosystem.”
Microsoft’s smartphone platform isn’t the only worry either, the company also has plans for the tablet market, aiming to capture market share with its impending Windows refresh. Other tablet operating systems have fallen flat, but Microsoft is capable of disrupting the tablet landscape, something both Apple and Google should be concerned with.
So where does that leave Google and Android? Still in a pretty good spot, though the company is at a crossroad of sorts. Android is performing well and will become increasingly important, despite its current growing pains. Its contribution to the decline in cost-per-click is likely a short-term issue due to the fact that mobile ads are currently an unknown. As Google continues to refine its approach and show the value of mobile ads, Android will likely become a driver of cost-per-click growth. As it stands the decline in cost-per-click isn't dire, as long as Google continues to control sizable market share. Market growth alone more than offsets the decline in cost-per-click.
Android is also still in its early stages and will continue to change as Google develops a clearer picture of what direction it intends to go with. Google has taken steps to streamline its Android approach, collecting its various products under a single roof, Google Play, as well as being rumored to be building its own Android devices. If Google can stop Android from running wild and resolve its legal issues, Android will become an even stronger catalyst for growth.
TigerAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, Microsoft, and Oracle. Motley Fool newsletter services recommend Amazon.com, 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. If you have questions about this post or the Fool’s blog network, click here for information.