I don't think a lot of people would be able to answer the title question - What do Amazon (AMZN), Alibaba, Facebook (FB) and Mozilla have in common? Most people would answer that these are all technology companies and organizations whose business model depends greatly on the Internet. However, that holds true for a lot of other technology companies like Twitter and LinkedIn (LNKD) as well. The correct answer is that these companies have recently started posing a significant threat to Google's (GOOG) dominant Android operating system. Smartphones and tablets are growing at a furious pace, replacing PCs and laptops as the main computing devices for consumers. Tablets are expected to overtake PC sales in the next couple of years, while smartphones will continue to dominate unit shipments for computing devices for the foreseeable future. Every technology company is investing heavily to get a big chunk of the fast growing mobile segment. Not having a mobile strategy isn't an option anymore and companies without mobile expertise have seen their stock prices being pounded. While Amazon has been an early leader in the mobile devices market, the other three companies have recently entered the mobile software area. All of them have considerable clout and pose a big threat to Google's mobile software dominance. While Mozilla threatens Google through an entirely new mobile OS, the others are using the open source Android to their own advantage. I think that Google's stock will come under pressure in the short term though the long term potential of Google remains attractive.
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 smart phones just in time. The company, by freely giving away the OS, 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.) Android is used by the world's biggest smart phone vendors such as Samsung (SSNLF.PK), LG, Sony (SNE), HTC etc. It is also being heavily used by Chinese vendors like Huawei, ZTE who have broken into top 10 of the global smart phone shipments. IDC thinks that Android will overtake Apple in Tablets as well. Cheap Android tablets have taken the emerging markets by storm with vendors selling decent Android tablets for very low prices.
Top Five Smartphone Operating Systems, Shipments, and Market Share, 4Q12 (Units in Millions)
4Q12 Unit Shipments
4Q12 Market Share
4Q11 Unit Shipments
4Q11 Market Share
Year over Year Change
Windows Phone/ Windows Mobile
Source: IDC Worldwide Mobile Phone Tracker, February 14, 2013
1. Amazon - Kindle
Amazon was an early player in the mobile devices market and was one of the first companies to introduce an e-reader. Kindle became a great success and AMZN has successfully modified the Kindle into a tablet. The Kindle Fire tablets run on the Android operating system, where AMZN has substituted Google services such as Google Play with its own app store. Amazon has successfully exploited Google's weakness in making its Android an open source. AMZN is building on Google's efforts to sell its own products and services. This is not good news for Google, as it has started to enter the e-commerce space which is dominated by AMZN.
2. Mozilla - Firefox
I have already described how Mozilla can be a serious threat to both Apple (AAPL) and Google in the mobile OS segment. The organization recently introduced the Firefox OS for smartphones which will compete with Android and iOS. Mozilla has already won over some major mobile companies and telecom carriers. Given the success of Firefox in the browser market, Mozilla has the potential to become a serious problem for Google. The new Firefox is built on the Linux OS and poses a bigger threat to Google than Apple.
3. Alibaba - New Operating System
Google had prevented Acer from launching a new smartphone based on Alibaba's operating system (built on Android). The "Aliyun" OS apparently violated the membership rules of the "Open Handset Alliance" and Acer was forced to withdraw the new smartphone. Alibaba wanted its own forked Android OS like Amazon and was unhappy with Google's actions. The company which owns the largest online shopping site in China has created a 1 billion yuan fund to subsidize Chinese app developers. Alibaba has also announced that 5 small Chinese handset makers Konka, Amoi Technology, G'Five International, Shenzhen Zopo d. and Beijing Little Chilli Technology would launch 6 smartphone models based on Alibaba's new OS. Alibaba is too big a company to be pushed around by Google and its new OS shows its aggression in the mobile software space. The Chinese government is also growing wary of Android's dominance in the Chinese mobile market and is promoting alternatives like Ubuntu to reduce Google's clout.
4. Facebook - Facebook Home
Facebook is one of Google's biggest competitors in the online advertising space. Google has tried to counter Facebook's social networking dominance by promoting Google Plus. Facebook on the other hand tried to gain market share in the Internet search area through a rival search service. Now FB has opened a new front by introducing new software "Facebook Home" on the Android operating system. "Facebook Home" is an Android launcher which highlights Facebook services while reducing the prominence of Google services. FB is trying to increase its share of the mobile advertising dollars through this new software.
What is Google doing to face the Android Threat
Google has not announced any measures to curtail Android modifications by other technology players. However, Google needs to strategize on what it exactly wants from the Android OS. The revenues from the sale of apps through Google's app store are still quite small, despite Android's dominance. In fact they are much smaller than Apple's revenues from app sales. Google recently replaced the head of the Android OS in what could mark a change in the Android strategy.
Stock Price and Valuation
Google's stock has pulled back by around 7% since touching its all time peak of $838. I think the recent decline was due to market concerns about increasing competition from Facebook and others. I think that Google faces a tough task in monetizing its non-search products and services. Rivals are competing furiously with Google in a number of areas. Oracle (ORCL), Nokia (NOK) and Microsoft (MSFT) have ganged up to complain about Android's dominance to the EU antitrust authorities. Google trades at a premium to other mega cap technology stocks with a forward P/E of ~15x.
Google faces tremendous competitive pressures in all its product and service lines. The company derives the majority of its revenue from search and has been criticized for being a "one trick pony". However, Google has managed to grow at a rapid pace despite facing severe competition from MSFT and Yahoo (YHOO). The company has the resources and the management expertise to overcome the new competitive pressures. The most admirable thing about Google is that it continues to take big risks and introduce great new products and services. Google Glass has the potential to create a new mutli-billion dollar mass market consumer technology segment like the iPad. I would look to buy the stock at lower levels.