Google (NASDAQ:GOOG) is winning big with its strategy of giving its Android operating system for smartphones and tablets for free. This strategy allowed Google to comprehensively beat other smartphone operating systems and become the dominant smartphone operating system company in a very short period of time. Android now commands ~70% of the smartphone O/S market and over 40% of the tablet O/S market. The company used its marketing and technological strengths to make this Linux derivative the default operating system for almost all lower end smartphones. Its free strategy has enabled hundreds of hardware vendors to compete with the leading players such as Apple (NASDAQ:AAPL), BlackBerry (NASDAQ:BBRY) and Nokia (NYSE:NOK) on almost equal terms. While Google is currently not making a lot of money through Android, it is depriving its major competitors (Apple and Microsoft (NASDAQ:MSFT)) of billions of dollars in potential profits. Android has been Google's biggest success in my view after its internet search product. Android is allowing Google to reach hundreds of millions of users which it could never hope to do on its own. Android vendors such as Sony (NYSE:SNE), HTC etc. have become Google evangelists without gaining much from the exchange.
Android is winning Big
- Unassailable Lead in Smartphones O/S - Google's Android operating system is the undisputed leader in the smartphone operating space with almost 70% of global market share. Google managed to catch the growth wave in smartphones just in time. The company by freely giving away the O/S co-opted hundreds of hardware vendors into its ecosystem. Google has managed to gain hundreds of millions of customers for its services (Google Play, Google search, Gmail etc.) by spending very little money (development of Android O/S). Android is used by the world's biggest smartphone vendors such as Samsung, LG, Sony, HTC etc. It is also being heavily used by Chinese vendors like Huawei, ZTE who have broken into the top 10 of global smartphone shipments.
- IDC thinks Android will overtake Apple in Tablets O/S in 2013 - Cheap Android tablets have taken the emerging markets by storm with vendors selling decent Android tablets for very low prices. Other competitors such as Apple and Microsoft do not have tablets in the lower or middle income segment. The cheapest iPad sells of $329 which is out of the reach of many customers, effectively giving Android a monopoly in this segment. Microsoft has only woken up to the tablet market recently and has a negligible market share. The value proposition of cheap Android tablets has been underestimated by the markets. I was surprised to find one of my office guards using an Android tablet. For people who are unaware of the income levels in India, a guard in India has an annual income of between $1000-1500. IDC revised its 2013 tablet shipments up by 11% due to the surge in Android sales. IDC also predicted that Android would overtake Apple to become the No.1 tablet Operating system in 2013.
- Will it take over PCs and Laptops as well - Google recently announced that its Android head would leave his post to be replaced by Sundar Pichai, who already is in charge of Chrome. It is being speculated that this has been done to bring greater integration between Android and Chrome operating system for PCs. Google's operating system for PCs and laptops has never really taken off despite Google introducing cheap Chrome based products. It remains to be seen if Google manages to curtail Microsoft's dominance in the PC and laptop market.
- Microsoft threat - It is difficult for Android to increase its market share given its already large existing share of the smartphone operating system market. Microsoft , the sleeping Seattle giant has finally woken up to the threat of Android and has made its newest version of Windows to be heavily mobile friendly. The company has not only made Nokia as its exclusive Windows 8 partner, but has also introduced Windows 8 tablets on its own. MSFT has realized that having a presence in mobile devices is essential for its survival and is now heavily devoting resources towards this endeavor. The main advantage is its non-existent market share. IDC expects that MSFT will make up ~11% of the tablet market in 2017 from almost 0% now.
- BlackBerry threat - BlackBerry, the Canadian smartphone company, has resurrected itself with a new operating system (BBRY 10). BBRY is trying to retain if not gain global smartphone market share through its new offerings. While I think BBRY has little chance of surviving in its current form, other stronger players may buy/partner with BBRY. With its current market share down to single digits, BBRY also has a good chance of making inroads into Android's market share.
- Apple threat - Apple is currently Android's biggest competitor in both tablets and smartphones. Apple's iOS based ecosystem is as rich and diverse as Android's ecosystem. It also has the advantage of being tightly coupled with hardware unlike Android and its hundreds of hardware vendors. Apple is becoming aggressive in the emerging markets and will erode Android's near monopoly in the low income markets. If a cheaper iPhone is launched as many people expect, then Android will face greater pressure in the low and middle segment smartphones.
- Samsung, LG and Chinese government - Samsung has already launched its own operating system Tizen to counter the growing dominance of Google. While Samsung is Android's biggest smartphone vendor, the company is wary from Google's acquisition of Motorola. Samsung would not want to become too dependent on Google for its software needs. The company already makes MSFT based smartphones. LG too faces the same predicament as Samsung does and would also like to explore other options. The Chinese government is also a potentially big threat to Google's Android dominance. Google had to leave China because of the strict censorship rules and cyber-attacks. China does not like foreign companies gaining too much influence in its home market. Given that the Chinese vendors are almost completely dependent on Android, the Chinese government has started making noises about using an alternative operating system.
Stock Price and Valuation
Google is trading just ~3% shy of its all time high of $838 reached 10 days ago, as the market gives Google a higher valuation compared to other large cap technology companies. Google has seen a spectacular run over the last one year, gaining almost ~30% compared to NASDAQ which has increased by just ~6%. While other mega technology companies such as Intel (NASDAQ:INTC), MSFT and Apple trade at or below a P/E of 10x, Google trades at a forward P/E of ~16x.
Google is one company that faces almost as much competitive pressure as Apple does in the technology industry. However, Google has managed to grow revenues and profits in high double digits despite facing severe competition throughout its short history. Despite Microsoft and others pouring billions of dollars into internet search, Google continues to maintain a monopoly like position in that product category. New entrants like Facebook (NASDAQ:FB) also have failed to make a dent in Google's billion dollar internet search cash flows. Unlike older technology giants, Google has made huge bets in newer areas (Android, YouTube etc.). Some of them have turned out to successful even beyond Google's wildest dreams. The company is not resting on its laurels and continues to impress with new products and services. Google Glass is an example of how the company remains at the forefront of consumer technology innovation. I would look to buy the stock on pullbacks.
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.