Google's Android an iPhone Killer?

The struggle for dominance in the smartphone market is heating up and Google Inc.'s (NASDAQ: GOOG) Android operating system for handsets appears to be winning the war against Apple Inc.'s (Nasdaq: AAPL) iPhone system.

When Apple debuted the iPhone 4 on June 24 it broke sales records. In the first three days, the company sold 1.7 million devices in the United States, the United Kingdom, Japan, France and Germany, the most for any version of its top-selling product.

But the popular device has been plagued by misfortune – including the suicide of a Chinese worker, lost prototypes, reception problems, and an inauspicious introduction to the press and public when Chief Executive Steve Jobs could not get the phone to connect to the Internet.

Now comes word that the innovative iPhone and its operating system software package, known as iOS, has been knocked from its lofty perch among U.S. technophobes by Google's Android handset software.

Android had 27% of the U.S. market in the second quarter among new U.S. smartphone users, compared with 23% for iOS, market research firm Nielsen Co. said on its website Tuesday.

And while the iPhone retained a higher share than Android among existing smartphone users in the United States, when you look at global sales, the news just gets worse for Apple.

Android Sales Soar

The global smart phone market grew by 64% annually in the second quarter of 2010, according to Canalys, a provider of market analysis for the hi-tech marketplace.

Nokia Corp. (NYSE ADR: NOK) retained a substantial lead in the worldwide smart phone market, achieving a 38% market share, shipping a record 23.8 million smart phones based on the Symbian operating system during the quarter. At the same time, shipments of Research In Motion Ltd.'s (Nasdaq: RIMM) BlackBerry smart phones grew by 41%.

But the two big players' lost some of their market dominance, as their performance was outpaced by growth in the smart phone market as a whole. And the reason is clear: the market is under attack from Android.

With key products from HTC Corp., Motorola Inc. (NYSE: MOT), Samsung Electronics, Telefonaktiebolaget LM Ericsson (Nasdaq ADR: ERIC) and LG Electronics giving new smartphone purchasers more options, shipments of smart phones running the Android operating system have soared.

In fact, even though the original Droid didn't hit the market until November 2008, second quarter sales were up a whopping 886% year-over-year.

"There's a massive hunger for smartphones, and the Android universe came out not just with one blockbuster device but with a whole series of blockbuster devices," Roger Entner, head of telecom research at Nielsen, said in an interview with Bloomberg News.

And in the United States, the largest smart phone market in the world by a significant margin with 14.7 million units accounting for 23% of global shipments, Android devices collectively chalked up growth of 851%, according to Canalys.

Android is also flourishing in China, the world's second largest smart phone market with shipments of 6.9 million units representing 11% of the worldwide total. Some 475,000 Android devices were sold in the second quarter, from no presence in the country a year earlier.

"The story in the Asia Pacific region is similarly optimistic around Android," Canalys Senior Analyst, TY Lau wrote in a research report. "Android devices are gaining good traction in markets such as mainland China and South Korea, with growing numbers of consumers wanting more sophisticated smart phones."

Missteps Haunt iPhone 4

Apple has released an updated version of the iPhone each year since the first model made its debut, including the iPhone 3G in 2008, and the speedier iPhone 3GS in 2009. The iPhone was Apple's biggest moneymaker last quarter, outselling the Macintosh computer and accounting for 40% of sales.

But Apple, which has built its brand on delivering cool, meticulously crafted designs, was plagued by bad luck during the development of the iPhone 4. Moreover, it's been shooting itself in the foot at almost every juncture since it released the device to the market.

On July 16, 2009, a 25-year-old Chinese factory worker leaped from the window of his apartment building and fell 12 stories to his death. He had been accused by his superiors of losing an iPhone 4 prototype.

Months after the incident in China, an Apple engineer out drinking at a pub in Silicon Valley lost track of the iPhone 4 prototype he was testing. It was subsequently sold to a technology blog that dismantled it.

Then, when Steve Jobs introduced the new phone in front of a huge audience of reporters and Apple developers, it failed to connect to the Internet.

And since the phone's release, it's been plagued by reception problems, even though one of its top engineers warned the company that the antenna design might lead to dropped signals and customer dissatisfaction.

Apple then committed a series of public relations gaffes by placing blame on everyone but itself. The lack of sensitivity has alienated customers and irritated its competitors and critics.

Apple's handling of the antenna revelations has been "uncharacteristically sloppy," Andy Hargreaves, an analyst at Pacific Crest Securities told the Los Angeles Times. "And [it shows] maybe even how little they really understood the depth or breadth of the problem."

The company's work-in-progress response "points out how much they were caught off guard by this," Hargreaves said.

Apple initially recommended that users avoid holding the phone in a way that could affect the antenna's performance. The company also said that a software error, dating to the June 2007 release of the first iPhone, has resulted in overstated signal strength, leading users to believe they had better reception than they did.

In defending the iPhone, Jobs showed videos of the BlackBerry Bold 9700, the HTC Droid Eris and the Samsung Omnia II losing signal strength when held in certain ways. And he offered free rubber cases, called bumpers, to all customers who bought or will buy the iPhone 4 by the end of September.

Still, Consumer Reports said it won't recommend the iPhone 4 following tests confirming the handset has a hardware shortcoming that causes signal quality to degrade. The publication had recommended the three previous iPhone models.

User Restrictions Could Hamper Future Sales

Buying an iPhone isn't the same as buying a car or a toaster. The iPhone comes with a complicated list of rules about what users can and can't do with it.

Apple products are heavily infested with Digital Restrictions Management (DRM) that prevents users from installing unapproved third-party applications.

iPhone owners can't unlock it and use it with the cell phone carrier of their choice – they are exclusively married to AT&T as the airtime provider. And Apple is unapologetic about these rules: A software update released in September 2007 erased unauthorized software and rendered hundreds of unlocked phones unusable.

Some iPhone owners have rebelled.

According to Toni Sacconaghi of Sanford C. Bernstein & Co., the top-ranked computer analyst by Institutional Investor magazine, users may have unlocked as many as 1 million handsets to run on unauthorized wireless networks, costing Apple between $300 million and $400 million in revenue.

Whether it's bad luck or bad management, surging Android sales represent a real threat to Apple's future, as Android dealers gear up to sell even more of the devices.

Handsets such as the Motorola's Droid and Droid Eris, which is sold through Verizon Wireless, the largest U.S. mobile-phone service provider, have been especially strong.

"Prior to launch of Droid, there had not been a lot of modern, touch-optimized smart phones available at Verizon," NPD analyst Ross Rubin told MarketWatch. Rubin added that the majority of smart-phone sales at a carrier typically come from customers who are already signed up to that carrier.

Verizon is expected to put heavy promotion behind the latest Android device – the Droid Incredible from HTC – for the next several months.

The latest data has also put pressure on Apple to expand its base of carriers for the iPhone. The device is still exclusive to AT&T in the U.S. market, with recent reports that it will expand to Verizon in January 2011.

Apple's European partners include Vodafone Group PLC, France Telecom SA (NYSE ADR: FTE) and Deutsche Telekom AG (PINK: DTEGY). Softbank Corp. carries the iPhone 4 in Japan

Android's startling success may mean Google will overtake Apple's iOS globally earlier than previously expected, Will Stofega, program director at research firm Interactive Data Corp. (NYSE: IDC) in Framingham, Massachusetts told Bloomberg. Earlier this year, IDC said it expected Android to overtake iOS globally in 2011.

"It could happen sooner," Stofega said.

News & Related Story Links:

• Bloomberg:
  Google's Android Passes Apple Among New U.S. Users
• Engadget:
  Android takes Q2 smartphone market share lead in US with 886 percent year-over-year growth
• Canalys:
  Android smart phone shipments grow 886% year-on-year in Q2 2010
• LA Times:
  Consumer Reports gives iPhone 4 cool reception
• LA Times:
  Could Apple's iPhone 4 be cursed?
• Bloomberg:
  Apple Users Unlocked 1 Million IPhones, Analyst Says
• MarketWatch:
  Android market share surpasses iPhone's, NPD says
• Money Morning:
  AT&T Rocks Smartphone Industry by Dropping Unlimited Data Plans
• Money Morning:
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