The smartphone industry is evolving rapidly. Major players in this space such as Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) have seen their profits fall in recent months as the competition between manufacturers heats up. Similarly, competition is also heating up between major smartphone platforms. Android and iOS currently dominate the smartphone space. According to statistics from IDC, the two leading smartphone operating systems accounted for 92.3% of smartphone shipments in Q1. However, in recent times, Microsoft's (NASDAQ:MSFT) Windows Phone and BlackBerry (NASDAQ:BBRY) are trying to challenge the mighty duopoly, and it appears as if Google (NASDAQ:GOOG) does not like the challenge.
Windows Phone On The Rise
Initially, Windows Phone got off to a relatively slow start and Windows Phone 7 was unable to impress. However, more recently, Windows Phone sales have shown impressive growth. According to IDC's latest Worldwide Quarterly Mobile Phone Tracker report, Windows Phone shipments surged to 8.7 million in the second quarter as compared to just 4.9 million over the same period last year, showing 78% growth. Thus Windows Phone posted the largest year-on-year growth among its top 5 competitors and cemented its place as the third largest smartphone operating system in terms of market share.
Microsoft should also thank Nokia (NYSE:NOK) for the sales growth; IDC reports that Nokia accounted for 82% of all Windows phone sales during Q2 and was the major driving force behind Windows Phone's growth.
The latest market research from Gartner reaffirms Windows Phone's growth story. According to Gartner, Windows Phone's share in the smartphone market surged to 3.3% in 2Q13 from 2.6% in the same period last year, a rise of 27% on a year-over-year basis. According to Gartner, Nokia's Lumia sales grew 113% in the second quarter of 2013, which is quite impressive.
However, Gartner also warned that Microsoft must continue to grow its app database to reduce the gap between the apps available on Microsoft's operating system as compared to Android and iOS. "While Microsoft has managed to increase share and volume in the quarter, Microsoft should continue to focus on growing interest from app developers to help grow its appeal among users," noted Anshul Gupta, principal research analyst at Gartner. This is why the latest spat between Microsoft and Google is so important.
Fight Over YouTube App
Although Microsoft is working hard to attract developers to develop apps for its OS, it can't do much if one of the largest internet giants in the world wants to create trouble for it. If you haven't heard the news, Google has once again disabled the YouTube app for Windows Phone just a few days after it was re-launched.
Remember, Google refused to build a YouTube app for Windows Phone like it has done for iOS and Android because Windows Phone was too small a market for Google. When Microsoft went ahead and built a YouTube app itself, Google asked Microsoft to immediately remove the app from the Windows Phone store since the app did not display ads and allowed video downloads. Now that Microsoft has worked to remove Google's objections and released an updated version of the app, Google has again disabled the app but this time, for rather frivolous reasons.
Google has released the following statement on the latest farce:
"We're committed to providing users and creators with a great and consistent YouTube experience across devices, and we've been working with Microsoft to build a fully featured YouTube for Windows Phone app, based on HTML5. Unfortunately, Microsoft has not made the browser upgrades necessary to enable a fully-featured YouTube experience, and has instead re-released a YouTube app that violates our Terms of Service. It has been disabled. We value our broad developer community and therefore ask everyone to adhere to the same guidelines."
Basically, what Google is saying is that the latest YouTube app does not provide users with a "fully-featured YouTube experience" since the app is not based on HTML5 and uses Windows 8's native code. However, Google's latest demand stinks of hypocrisy from a company that prides itself on openness. Google's own YouTube apps for both Android and iOS are based on native code and not on HTML5.
Why is Google doing this? Forgive me for being a cynic, but I would have to agree with this explanation from David Howard, Corporate Vice President & Deputy General Counsel, Litigation & Antitrust, Microsoft:
"It seems to us that Google's reasons for blocking our app are manufactured so that we can't give our users the same experience Android and iPhone users are getting. The roadblocks Google has set up are impossible to overcome, and they know it…We think it's clear that Google just doesn't want Windows Phone users to have the same experience as Android and Apple users, and that their objections are nothing other than excuses."
Why Is This Important?
There are people who say that a YouTube app doesn't matter since users are able to access YouTube through the normal mobile browser, but they are missing the point. YouTube is an internet phenomenon -- a must-have service on which users spend many hours every day. YouTube is amongst the most downloaded apps on both Android and iOS. So when a top-end smartphone is not able to give users a YouTube experience similar to that on competitors' phones, it creates a problem.
Yes, Windows Phone users do have the alternative to access YouTube through the browser, but the lack of the YouTube app gives Windows Phone and Nokia haters one more reason to malign Microsoft's platform and generate negative PR.
Moreover, this is not just about YouTube. Today, Google has such a large footprint on the internet and mobile that the majority of internet users are addicted to its services and users want those services to work perfectly on their smartphone. This gives Google a lot of leverage over Microsoft, and this is not the first time that Google has used this leverage to annoy Microsoft and Windows Phone.
Earlier this year, Google announced that it would remove support for Microsoft's Exchange ActiveSync that was used to sync Gmail, Calendar and Contacts on Windows Phone devices. Google wants Microsoft to implement CalDAV and CardDAV protocol support to allow users to sync calendar and contacts. Microsoft has plans to release the Windows Phone GDR2 update later this year, which would support the required protocols and resolve this issue. But in the meanwhile, Google has been toying with Microsoft in terms of extending the deadline for ActiveSync support as it extended the latest deadline at the 11th hour.
Similarly, Google has not built a Google Maps app for Windows Phone like it has for Android and iOS, and Windows Phone users have had trouble accessing maps from their browser in the past. Earlier, Google had claimed Internet Explorer mobile does not offer a "good maps experience."
So where does this leave Windows Phone and Microsoft?
Ultimately it all comes down to leverage. There was a time when Microsoft was a huge technology giant that everyone sucked up to, but not anymore. In fact Microsoft has seen Google rise above it and there wasn't a lot that the Windows maker could do about it. Microsoft must have felt the pain seeing its influence shift to a competitor, but it has expressed that pain using the wrong channels.
On the other hand, Google has been smart about its battle with Microsoft. Unlike Microsoft, Google has not explicitly targeted or ridiculed Microsoft in public campaigns; rather, it has hit Microsoft where it hurts by disabling the YouTube app on Windows Phone and forcing Microsoft to adhere to Google's protocols for Calendar and Contacts sync on its mobile platform.
So from here on, Microsoft has two choices.
First, Microsoft has to realize that it is currently in a weaker position relative to Google in the ongoing battle to dominate the internet and especially mobile. Being the weaker competitor, Microsoft's active negative publicity campaigns against Google only serve to unnecessarily poke the internet giant. And when you poke a giant, you'd have to be stupid not to expect a response. So Microsoft will have to cut down on its rhetoric against Google if it expects the internet giant to cooperate. However, with Microsoft's recent statement in response to Google blocking YouTube, I don't expect that to happen.
Secondly, Microsoft can force Google to come to its own terms if it can somehow grow the Windows Phone platform to become a relevant competitor in the smartphone war. Despite its rivalry with Apple, Google could not even think of treating the iPhone maker the same way it is treating Microsoft; in fact, Google works extra hard to give iOS users the best experience with Google's services. This is because iOS is too big a market for Google to ignore, and ignoring iOS would be a big loss for Google itself. Thus if Windows Phone can achieve a share of around 10% of the smartphone market, it would be hard for Google to keep ignoring it.
None of the choices is easy, but Microsoft can no longer shy away from reality.
This also raises an interesting question for Nokia: Should it stay with the weaker partner and hope that the benefits of differentiation would outweigh the cost of fighting a mighty enemy, or should it change teams and join that enemy?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by Dividend Pros' analyst covering technology.