Google’s Road to Android Riches: Beat iPhone at Apple’s Roots

Google/Motorola could challenge iPhone by going bare-bones

By Anthony John Agnello, Consumer and Technology Writer

Apple iPhoneComparing Apple (NASDAQ:AAPL) and Google‘s (NASDAQ:GOOG) smartphone businesses is like — pun intended — comparing apples and oranges. That’s why headlines about Google Android phones recently outselling iPhones by 2 to 1, according to a Tuesday study from research group Nielsen, are besides the point. Apple makes phones. Google touts an operating system.

That 56% of smartphone consumers in the U.S. bought an Android-based phone in the past three months, while only 28% bought an iPhone using Apple’s iOS operating system in the same time period, isn’t reflective of the shape of the smartphone market or of how much money those companies are making in that market.

That’s all going to change, of course, once Google completes its planned acquisition of Motorola Mobility (NYSE:MMI) and joins the fray as a manufacturer of phones rather than just a software sales company. Even then, while Android’s footprint might grow even bigger when Google itself is making and selling smartphones, it likely won’t match Apple for revenue. Here’s why.

Apple is the biggest smartphone company in the world in terms of revenue, surpassing even longtime mobile market tyrant Nokia (NYSE:NOK) in recent quarters. During the second quarter of 2011, Apple sold more than 20 million iPhones — premium-priced machines that brought in a total of $13.3 billion in revenue. Nokia sold just less than 17 million smartphones, only bringing in approximately $3.4 billion in revenue. Google, meanwhile, reported a total of more than $8.5 billion in revenue for the second quarter across the entire company, even while it touted 500,000 daily Android phone activations around the world. Finally, Motorola sold just more than 4 million smartphones during the same period, with the Mobile Devices segment turning in $2.4 billion in revenue.

Unless the shape of the market changes dramatically between now and the time Google takes ownership of Motorola, Google simply won’t be able to match Apple’s take. Android doesn’t earn enough as a licensed platform split among the many smartphone manufacturers of the world, like Samsung (PINK:SSNLF) and HTC, and the added revenue of Motorola’s smartphones won’t tip the scale.

There is at least one scenario that could change Google’s fate in the market and transform Android’s commanding lead in worldwide operating system marketshare into a lead in revenue from actual smartphone sales — and it’s actually Finland’s prodigal son that provides the road map.

If Google hopes to overtake Apple’s smartphone business, it has to use Motorola to create a smartphone equivalent of the Nokia 1100 series of smartphones. The most basic, stripped-down feature phone to hit the market in 2003, the Nokia 1100 went on to become the best-selling mobile phone in history for no other reason than it was cheap and durable. Its success in the world market, especially in the poorest economies, helped Nokia become the face of the mobile market (even if it never made Nokia into a stock to rival Google or Apple).

If Google and Motorola can create a new Droid that is the cheapest, most durable and developer-friendly smartphone on the world market, it can break Apple’s hold on worldwide smartphone revenue. Where it can’t and shouldn’t try to compete is in making the desirable luxury phone, an area in which Apple has excelled.

Apple has an astronomical retention rate amongst its users, with 89% of iPhone users eventually upgrading to a newer model when they can. Apple’s retention rate is fueled by the low cost of older models — like the iPhone 3G, which AT&T (NYSE:T) charges just $49 for on new contracts — that were considered luxury items when they were first released. Apple owns this consumer mind space, and as long as Motorola continues to focus on beating Apple through flashy new tech as it’s doing with the new Droid Bioinic, it will lose.

The budget-smartphone model, however, would allow Google and Motorola to capture not just family consumers in the U.S. looking for cheaper options for their kids, but that portion of the 5.3 billion mobile subscribers around the world that have yet to upgrade to a smartphone. Cheap and unbreakable are two things Apple never will be. If Google goes with that model, then those headlines of Google outselling Apple 2 to 1 will mean something more — especially for shareholders.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media,

©2018 InvestorPlace Media, LLC