Google's got an Android problem

@CNNMoneyTech June 26, 2012: 11:46 AM ET
Android, Apple, iPhone, market share, tablet, iPad, iOS

NEW YORK (CNNMoney) -- More than half of the world's smartphones run Android. That sounds like a pretty comfy perch for Google, but it's a precarious one -- and the historical tides that made Android such a stunning success are starting to swing in the opposite direction.

On Wednesday, Google (GOOG, Fortune 500) is slated to unveil the latest version of Android at its developers conference. Expect some victory laps. The four-year-old mobile operating system is the center of a thriving ecosystem, and Google has seamlessly integrated most of its key products into Android, including search, Gmail, Chrome, Maps, Voice.

That gives Google a prime position in the fast-growing mobile realm.

But Android's success is partially accidental. The software only took off when Verizon Wireless released the Motorola Droid in late 2009.

Verizon (VZ, Fortune 500) needed a weapon to counter AT&T's then-exclusive deal with Apple. It threw all its weight behind the Droid, which was the first true iPhone competitor on the nation's most popular phone network.

Kickstarted by Verizon, Android went on to become a strong iPhone alternative for virtually all other hardware makers and wireless carriers. Google's mobile OS held a 59% share of the smartphone market as of last quarter, IDC analysts said.

Android's climb is about to end, IDC thinks.

Android's smartphone market share will peak this year at about 62% before slowly declining over the next five years, the research group predicted earlier this month. Though Android is expected to remain dominant, IDC believes that competitors like the iPhone and Microsoft's Windows Phone will chip away at Android's stranglehold.

Analysts' forecasts are often laughably wrong -- four years ago, no one expected Google to be a mobile phone power player -- but this time, Google has cause to be nervous.

Apple (AAPL, Fortune 500), Google's mobile arch-nemesis, is leading the assault on Android's empire. The iPhone accounted for roughly half of Verizon's smartphone sales last quarter and more than three-quarters of AT&T's.

But Apple is now coming at Android in the fast-growing prepaid market as well, where Google had long been the only smartphone player. Leap Wireless' (LEAP) Cricket and Sprint's (S, Fortune 500) Virgin Mobile both announced this month that they will offer the iPhone on their prepaid services.

Plus, Google's partners -- the same handset makers that catapulted Android into the spotlight -- have new reasons to be wary of their ally. Google completed its acquisition of Motorola Mobility a month ago, putting it into direct competition with its partners.

Google swears it will play nicely, but the saber-rattling has already started. Samsung's new CEO, Kwon Oh-hyun, hinted last week that he would like Samsung to be more in control of its own destiny.

In his inaugural speech to his new staff, Kwon called for a focus on creating new customer experiences and on "strengthening soft capabilities in software, user experience, design, and solutions," according to a Wall Street Journal report.

A spokesman from Google declined to comment for this story.

The uncertainty Google faces in the smartphone space is nothing compared to the giant question mark surrounding its tablet initiative. The iPad will account for 62% of the world's tablets this year, IDC estimates, compared to 36% for Android.

That's a trend heading in the wrong direction. Last year, Android held 38% of the market.

Microsoft's (MSFT, Fortune 500) Surface tablet, coming this fall, is a fresh threat.

So, in a way, is the Amazon (AMZN, Fortune 500) Kindle Fire, which sold well during the holidays and is the only rival tablet to make any headway against the market-leading iPad. It runs a heavily customized version of the open-source Android software, and it steers users toward Amazon's own app store -- not Google's.

Thanks to customers' sluggish Android adoption, software developers haven't exactly embraced Google's tablet initiative. There are 225,000 apps specifically designed for the iPad, but there are so few tablet-specific apps for Android that Google doesn't even make the number available.

That causes a chicken-and-egg problem.

"[Apps] are key to tablet users, which is why we have not seen great hardware from Asus and Samsung sell in big volumes so far," said Carolina Milanesi, analyst at Gartner.

Google has tried to fix some of Android's problems. It developed a much more feature-rich and dynamic version of Android, called Ice Cream Sandwich, that works the same on tablets and smartphones.

But only 7% of Android users are actually using ICS, six months after it was released to the public. Carriers like Verizon and AT&T often wait many months before deploying updates to their customers.

Google is widely expected to unveil a new tablet of its own design this week, a move aimed at catalyzing Android's growth. The Wall Street Journal also reported recently that Google is hatching plans to directly sell "unlocked" Android smartphones on its website, which will will work on any carrier.

Google will unveil Jelly Bean, the next version of Android, this week. It will show off some flashy advancements in the software and attempt to trump Apple and Microsoft's recent improvements to their own mobile operating systems.

None of those moves -- new devices, new sales channels, new software -- will matter if Android's rivals stop its momentum.

"Up to now Android has benefited from the fact that if you wanted an alternative to iPhone there was nothing else," said Gartner's Milanesi. "Things are changing."

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