In the mobile operating systems world, there is Apple's (NASDAQ:AAPL) iOS and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android - and then the rest. The rest is now a field that's thinning with every passing day, and it is becoming increasingly prohibitive to entry.
The control that Apple and Google have over the mobile OS market is such that it has created the ideal moat within which to expand and further their respective agendas. But the questions remain: where are those respective agendas taking them? Is it a clear segregation, or are there some clues to how they will evolve over the next few years? Are they actually in competition with each other or do they complement each other?
In this article, I will walk you through the widening gap between iOS and Android, thereby giving insight into the psyche that underlies the strategic directions of their holding companies.
I will also answer this question: who is this old player in new clothes that is the only one that may have a legitimate claim as the "third son," and how will his entry further cement the future of iOS and Android?
The Current Market and the Non-Existent Competition
In the United States, Apple and Android are in control of more than 95% of the market, with a small percentage being held by Microsoft (NASDAQ:MSFT) and BlackBerry (BBRY). When you step outside the States and take a look at the global market share, things become a little different, with Android controlling over 75% of the market and Apple near 20%. Then, you have to zoom in to even see where the rest of the players are.
Though they come from different mothers, both iOS and Android have one thing in common that made them what they are today - device proliferation. On Apple's side, it was a deliberate effort; with Google, it was a de facto choice for manufacturers. Yet, both stand, not on the strength of the devices they power, but on the applications that sit on those devices.
The App Store Stranglehold
There's no smartphone without the "smart," frankly speaking, and that smart is brought by the applications and the way they allow users to interact with them.
Today, developers know that any app they create needs to run on all the most recent versions of both operating systems - iOS and Android - in order to fully exploit the smart devices market.
Disrupting this status quo is extremely difficult. The tech world is highly disruptive, and any new technology can easily topple an older one. In the mobile world, however, that is not the case.
Further making my point about this duopoly is WhatsApp's recent announcement:
Source: WhatsApp Blog
WhatsApp has all the money in the world (Facebook's (NASDAQ:FB) monetary muscle, basically), so why the need to kick out all the others? It's simply not worth the effort. Now, if a big company with deep pockets is thinking this, then why would smaller development companies even consider anything else?
And that's where the "third son" comes into the picture, as you'll soon see.
iOS and Android - The Brand Positioning Element
This is where the gap starts to show between seemingly similar dominators of the mobile world. Apple and Google are slowly bifurcating the global market into two clear segments. While the former hogs up the premium user segment, Google has gone mass-scale economy.
A good analogy would be the automobile market. Apple is like the luxury segment while Android is the economy equivalent that the average consumer drives. Of course, economy car makers do have luxury brands as well - like the Lexus - and so does Samsung (OTC:SSNLF) and other Android-run phone makers. But the two markets are pretty much cornered by each company.
Like the automakers, Apple makes phones that are of a higher quality and greater longevity. I still have an old iPhone 3GS that works as smooth as butter - even though I only use it for the loud alarm app it has - while my much newer Samsungs and Sony-Ericssons now make great paperweights. And that's the segment Apple is in - high-cost, high-margin. Google, on the other hand, relies on Android to bring more user traffic to Google Search to leverage ad revenues.
But the reality is...
Revenues From Their App Stores Make The Segmentation even Clearer
"As of Q1 2015, iOS App Store worldwide revenue was about 70% higher than on Google Play, up from 60% in Q3 2014, the report notes." - TechCrunch
But this is just downstream revenues for Apple. From a segmentation standpoint, the average cost of an iPhone versus an Android phone is where the gap starts. Even though Google doesn't directly participate in device pricing, that pricing does impact who chooses its technology over Apple's.
Downstream, the revenue gap between the two app stores is widening at a much faster pace.
What this means is that Apple is going to continue earning more revenue from its App Store while Android keeps earning more users - but lower revenues. It the long term, it will further help solidify each company's position in the market - the luxury and the economy.
Investor-speak: The Third Son
The implications of this widening gap are tremendous.
For one, it gives us a clear picture of how Apple's and Google's future revenues will grow in the mobile apps segment. While Apple's income from iTunes and App Store are likely to grow at a steady pace, Google's apps revenue chart is on a diminishing path that will be sustained solely by the much larger user base.
Second, it reveals a problem for Google in that it doesn't have the "device moat" that Apple has - and I believe that's the very spot in its armor where the "third son" will make his assault on the mobile OS market.
Third, as Google's revenues from Google Play start to flag, more and more developers - especially the top ones - will start to gravitate towards the higher-paying platform. The long-term impact of that is that Google Play will start to suffer from a lack of premium applications that will only be available on the App Store. In a sense, Google is going to be feeding business to Apple simply because its platform makes less money for developers. It's only logical.
And in this tale of two techies, there is another, third entity gearing up for the market that is going to take full advantage of the fact that device makers do not owe Google their loyalty. Once another, viable platform with a considerably robust app store is available, they may well be willing to shift - especially if they know it's going to make them more money than Android.
But Microsoft, having failed at this before, is not going to count on that assumption to get the job done right. This time, it has the tools, it has the will and it may have found the answer - middle ground.
This is the formula MSFT intends to use: Universal Windows Platform + Xamarin + Open Source. And thrown into that mix are HoloLens, PCs, Windows 10 and everything else, because at Microsoft, all roads lead to mobile.
"Because all of this comes down to how are you going to get developers to come to Windows. If you come to Windows, you are going to be on the phone, too. Even if you want to come to Windows because of HoloLens, you want to come to it because of Xbox, you want to come to the desktop, all those get you to the phone. It's not about let's do head-on competition. That will never work. You have to have a differentiated point of view."
Microsoft's acquisition of Xamarin - an interesting read even if I say so myself - is one part of the puzzle for the company's re-entry into the mobile/multi-device/multi-platform world. Using a powerful platform for developing mobile applications, and a strong developer base of more than 1.3 million, it has initiated its strategy.
In short, Xamarin will primarily be used to develop applications for Windows 10, but developers will be simultaneously developing those apps for iOS and Android. Microsoft has recognized the full implications I've written about in this article, and it's found its "middle ground" by giving developers more options to monetize their efforts.
Microsoft has also struck deals with Samsung and 11 other device manufacturers to load MS Office apps on all tablet devices it sells. The move might seem strange - and I don't think it can edge out Google that easily, as the article suggests - but I think it's doing this to make headway and foster relationships with device makers who may one day consider using Windows 10 as a cross-platform operating system that marries desktops and mobile devices.
In a way, that will eat into Google's market share with Android. This backdoor approach is being done in a carefully calculated manner by Nadella, who has already set the tone for subsequent stages in this guerilla war against Google by using the Xamarin/UWP/Open source formula I spoke about above.
What are the implications for investors? Well, frankly speaking, no one can predict what will happen five years down the road. However, I believe Microsoft has finally found a strategy that will keep hacking away at Google's Android base. In fact, it's already started offering Windows 10 as a free platform for devices under nine inches. Obviously, that's clearly targeted at all smartphones and the huge family of seven-inch tablets that is Google's primary market for Android.
I think there's no question that the strategy is sound, and it gives investors every reason to put even more money on MSFT.
As for AAPL, it's going to continue to get the cream of smartphone and tablet buyers who spend more on devices as well as apps, but Microsoft's move may well impede its efforts in the Enterprise phone segment - that's where the bulk of MS Office users are. It may not be able to crack Apple's premium smartphone dominance, but nothing's stopping it from taking a swing at it with flagship devices from Samsung, et al.
That leaves Google with strong organic growth in Android for now, but not as much revenue to show for it as Apple. If Microsoft - the third son of mobile OS - is successful at chipping away at its user base, it could spell trouble for Google several years down the road because it gets revenues from integrating Google Search into devices, and from paid apps on the Google Play Store.
Once Microsoft makes its presence felt on Android tablets, I believe the story is going to be similar to the one about the Bedouin and the camel. It has every chance of pushing Google's applications out in favor of its own, more popular collection of office and communication tools.
Disclosure: I/we 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.