Apple May Lose The Smartphone War To Google

| About: Apple Inc. (AAPL)

In the current smartphone war being fought between the two technology giants, Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG), RIM has taken the heaviest casualties. Research in Motion (Nasdaq: RIMM) used to have over 40% smartphone market share in 2008, and has less than 10% now, according to this Comscore report. This war has similarities to the PC wars of the 1980s, as I will show below.

The chart above shows that RIM was once a dominant player in the smartphone market
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This is a proxy war, so far as Google is fighting Apple using Samsung (OTC:SSNLF), HTC and LG. But the real contenders are Google and Apple, if you look at the market share graph below.

Android has continued to increase its share in the smartphone market

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If you combine all Android phones, Apple's iOS loses to Google's Android by a large margin - Android has over 64% of the market right now, according to data from Gartner. So, by making Android free, Google has created an army of companies to fight Apple - hence Steve Jobs' wish to destroy Android (and not just Samsung) last year. Jobs understood who his real enemy was.

The funny thing is that Google is not really interested in owning the smartphone market for its own sake - for the sake of selling smartphones, that is. It has other plans. Google is very focused on its core business of ad sales, despite appearances.

Look how complex Google's strategy is, how multi-layered. What is Apple selling? Apple is selling a phone on the back of which it tries to pack a few apps, a few stores, and some curvaceous hardware.

Everyone does that; but look what Google is doing. Google is giving away a highly efficient operating system for free; giving it away to very large tech companies in Asia so they can capture market share in the smartphone market at Apple's cost. Recent data from IDC shows that Samsung has done this very successfully.

Now, let's understand Google's aims better. What is the primary difference between a smartphone and a not-so-smart phone? If you believe the ads, it is the ability of smartphones to access information by way of the Internet. This brings us right to the lair of Google - whose main business is ad sales on the Internet. So, basically, the whole plan of Google is to let these smartphone makers fight out Google's war by proxy, so that, in the end, Google can sell more ads to more customers and make billions more through its Android environment.

Apple's attack on Samsung is important in the context of its broader fight against Google. However, because Google is using this shadow fighting technique (fronting other companies against Apple), Apple cannot win unless it can directly confront Google. Whether it can actually do that remains to be seen. This idea is the thrust of my article.

Marketing technique wise, Android is a few steps ahead of iOS; it is freely distributed, it works across various hardware platforms. You don't need a dedicated OS-run computer to fully use Android, unlike iOS which requires you to buy a Mac to fully use the iPhone and iPad's various features. Android has the power of Google apps, Google search and the whole search based technology behind it. iOS does not have something similar; the most important factor of iOS is its design elegance, which many users can choose to do without for the sake of Android efficiency. So, in the long run, Google is going to win this war unless Apple really steps up its iOS delivery methodology.

Now, my prediction is that in the next 5 years, Apple will lose this war. People will know that Apple has lost the war; its shares will fall, and although it will still make smartphones, it will not remain the unique company it is now.

It may seem difficult to destroy a half trillion dollar company, but historically speaking, larger companies (adjusting for inflation) have fallen. Apple's genius is in a pioneering design and ultra high end security (and other smooth features). However, this is the same kind of war that was fought in the 1980-90s between Microsoft (Nasdaq: MSFT) and Unix/IBM. Pioneering, high-end technology against cheap, easily available, efficient technology. Efficient won that war, although IBM and others were much bigger companies.

My geek friends tell me that Unix is a much better OS than Windows; but I say, so what? Microsoft won not because its technology was better, but because its total marketing package was so much smarter. It understood that rich people or geeks don't make a market, but ordinary people do. It made technology easily accessible to ordinary people.

Here's a lesson for Apple. Make iOS hardware-independent, and make it free. Don't force people to buy expensive gear to use your smartphones. Rich, not-so-picky Americans might buy a $3,000 Mac to use a $400 iphone; 5 billion Asians will say "no thanks," and Asia is the future of all markets.

Oh wait, hold on - that lesson won't work for Apple! The thing is, Google has something else to sell besides hardware; something so entirely different from the smartphone-related selling points that it does not need to tie Android to any hardware. It can afford to give customers freedom, because what it is selling - advertising - is not tied to any specific hardware platform. Apple has nothing similar to sell, so it needs to protect itself by binding customers to their hardware. Asian customers will not stay bound like that.

That is why I think Apple is going to lose this war to Google in the next few years. I give Apple 5 years because:

  1. The recent legal wins have given Apple a lifeline for another couple years or so, and,
  2. The win will only be total when people recognize the fact, which may take another 3 slow years.

There's another angle to this story. If you ask me: who is going to be runner up in market share after 5 years, I will not say Google/Android and Apple. I will say, Google/Android and Microsoft.

Sound strange? Microsoft has only about 2% of the market share right now. However, it has, like Google, an entirely different product to sell on the back of smartphones - the whole Microsoft Windows environment. Just like access to the Internet is the most important feature of a smartphone, its second most important feature is plain Jane computing - the old world of Microsoft Word, and Excel, and photo editing. This is the lair of Microsoft. If Microsoft can somehow manage to get a good share of the smartphone market and sell its computing environment, it can open up a brave new market for itself.

With Microsoft's recent tie ins with Nokia (NYSE: NOK) and even Samsung's forays into Windows Mobile world, it seems that Bill Gates (or whoever is creating Microsoft gameplans these days) has something similar in mind.

Earlier this week, Nokia introduced two new smartphones, the Lumia 920 and the midprice 820, which will run on Microsoft's latest operating system, Windows Phone 8. Although the Nokia/Microsoft partnership has not been successful so far, the introduction of new smartphones running on Windows Phone 8 operating system could change that. There is still some uncertainty over when Nokia's latest smartphones will be available for sale. But, if Nokia's latest phones hit the shelves before the start of the holiday season, the Finland-based company has a chance to become a formidable force in the smartphone market.

Once that happens, Microsoft's battle-hardy generals will take no time in trying to make your smartphone a super-PC, backed up by all the Microsoft products we love and/or hate so much, but generally can't do without. At that time, Apple, the original smartphone pioneer, will be fighting what I think is a losing battle against these two tech giants. Without a really useful product to back its pitch up (the Mac/iOS market share is small compared to Microsoft's various OS, according to this slick graphic from Reuters research), Apple will be relegated to a luxury brand that will still sell smartphones, but at a cost both to its customers and to itself.

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.