While Google (NASDAQ:GOOG) originally bought and developed the Android OS to give it to the world so the whole world could use Google apps and monetize its ad platform, Google never really counted on Samsung (OTC:SSNLF) becoming what it has become -- an Android Monster.
Today Samsung manufactures about 40% of all Android devices worldwide. That is both a blessing and a curse for Google. It's a blessing because Samsung has expanded the use of the Android OS beyond Google's imagination, and a curse because Samsung today is Google's major competitor at the same time.
As for the blessing, Google is reported to be on pace to generate about $8 billion in mobile-related revenue for 2013. That figure includes revenue from ads that appear on Apple (NASDAQ:AAPL) devices as well as music and video sales on Android devices.
However, as was widely reported last year, Google earns most of that revenue from Apple's iOS. I am sure things are different this year -- meaning that iOS ad revenue is less than Android ad revenue -- but that just to goes to show that Google does not really need Samsung that much.
It is also well known that Google gives 10% of the revenue it earns on Samsung devices back to Samsung. Samsung has signaled that it might want more, now that Google is producing more of those earnings on the Android platform. As Samsung sees is, it is only fair since Samsung is responsible for a big part of Android's success. Is it possible that Samsung will become greedy and ask for even more?
What will happen if Google resists? Will Samsung tweak the Android OS like Amazon (NASDAQ:AMZN) has done, in order not to display any Google ads? If so, what will Google's reaction be?
The truth is that Samsung needs Google more that Google needs Samsung, because the company's smartphones and tablets run on Android. In fact, the Android OS is the reason Samsung has become the biggest smartphone manufacturer in the world. For now, Samsung is stuck with the Android operating system and Google, even if it would prefer to get a divorce.
Ever since Google bought Motorola, Samsung has seen the writing on the wall. That writing says that the two companies are officially competitors and have different interests. While Google is not making any money from Motorola yet, the fact is that it sees very big potential based on the amount of money Samsung is making. Sooner or later, Google will want to copy Samsung's model and also cash in on hardware sales, in addition to the ad revenue from mobile devices.
Samsung has probably known this for some time now, and is making preparations for parting from Google and the Android OS altogether. Samsung has confirmed that it will roll out a new smartphone that will run on the Tizen OS that is fully supported by Intel (NASDAQ:INTC). In fact, Japan's NTT DoCoMo (NYSE:DCM) has agreed to carry the phone.
But Google also has a problem. If Samsung stops supporting the Android OS and rolls out a Galaxy phone running the Tizen OS, that might shrink Android's market share. And Samsung might just become successful at it, knowing how it makes such high quality phones. And if Samsung is successful, what's to stop Tizen from becoming an Android competitor?
In order for Google to answer a move like that, it has to beat Samsung in its own game. It has to make a phone that will rival anything Samsung has, so people don't buy Samsung devices. It has to make a device that will be so successful as to avert Samsung from becoming even bigger and prevent it from making Tizen successful and creating a competitive smartphone ecosystem.
For some time now, it has been rumoured that Google is making a super-phone code-named the X-Phone. No one really knows anything about it yet, but it is expected to blow everyone away, and put Google once and for all ahead of Samsung technologically.
Rumors have it that the phone will be a game-changer. For example, the X-Phone will permit full customization, including memory use. It will also encompass new exotic technologies from Google that will drive smartphone fans crazy. Another rumor is that the phone will be heavily subsidized.
One thing is for sure, in order for Google to stop the locomotive train called Samsung, that's exactly the type of phone it needs to make to gain hardware traction in the smartphone space. Anything less, and Google will have to pay homage to Samsung and give in to its every demand.
Google is destined -- by virtue of owning Motorola -- to become a big player in the smartphone space on the hardware side.
At the same time, Samsung has grown too big, and is now a dangerous opponent to be left alone.
While we don't know what kind of a super phone Google will make, more than likely it will be a device that will surprise everyone.
And if this phone is a success, then that will also translate to big profits for Google. One way or another, Google is destined to become the dominant Android-based phone manufacturer.
As I see it, Samsung is in a tight spot. One way or another, it will lose this battle because it really does not have a good hand. Google has all the aces in this game, and it can use them at will against Samsung.
In an ironic way, Samsung's success will become its demise. Yes, the X-Phone will kill the Android monster.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.