Has Google's Android peaked?

June 11, 2012: 11:56 AM ET

Yes, Google's mobile operating system is a smash with consumers. That doesn't mean it isn't facing stiff competition and more than a few troubling signs.

By Kevin Kelleher, contributor

androidFORTUNE -- For several years, it seemed like nothing could slow the rise of Android. The little mobile operating system that Google bought for $50 million in 2005 was adopted by big smartphone makers like Motorola, HTC and Samsung. Android's share of the global smartphone market rose from about 2% in late 2008 to somewhere between 51% and 59% last quarter (depending on who's counting). Google's foothold in the mobile web seemed assuredly strong.

But it's starting to look like Android's growth may be stalling, just as Google (GOOG) is facing new challenges in mobile from longtime rivals Apple (AAPL) and Facebook (FB). Recent reports suggest the prospect of Android's growth peaking. First, Asymco's Horace Dediu noted that Android's net user gains had slowed for four straight months and that user growth in April was as slow as its been since 2009.

Then another report from IDC said that Android's share of the world smartphone market would decline from 61% this year to 53% in 2016. IDC projected Microsoft's (MSFT) Windows Phone 7 to boost its market share from 5% this year to 19% in four years, thanks largely to the long history in emerging markets of Nokia (NOK), Microsoft's partner in the mobile industry.

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And if Microsoft/Nokia will start eating away at Android's share in emerging markets, the iPhone has already been doing that in the U.S. After the iPhone became available on Verizon's (VZ) networks, Android's share of the U.S. smartphone market began to stabilize. And after the release of the iPhone 4S, that market share began to erode. If as expected Apple begins selling a LTE iPhone 5 this fall, Android could see its U.S. share decline further.

It's easy to read too much into short-term changes in market share. In April, for example, economic uncertainty in Europe and Asia led many owners of talk-and-text feature phones to hold off on upgrading to smartphones, and Android phones sold well amid the overall slowdown. And Google seems ready to match an iPhone 5 with Jelly Bean, aka Android 5.0, later this year.

But looking beyond the short-term, there are a few challenges that are likely to cause Google problems in holding onto its formidable presence on the mobile web. First off, the open nature of Andriod -- which allows it to power everything from $99 prepaid phones to high-end Galaxy S3's to Amazon (AMZN) Kindle Fire tablets -- leaves the platform so fragmented it's hard for developers to easily write apps for it.

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Writing apps for the iPhone involves a standard size screen and, unless iPhone owners are slow up upgrade their OS, one version of iOS at a time. But writing and testing apps for Android and all its myriad devices can be a daunting task. It doesn't help that many Android devices are slow to upgrade to the latest version of the software: Only 7% of Android devices run Ice Cream Sandwich, a.k.a. Android 4.0.

According to app-analytics firm Flurry, developers build two iOS apps for every Android app they create. In return, they make four times as much revenue from iPhone users than from Android users. That discrepancy is crucial because, as Flurry noted, "If the developer community embraces one platform over the other, developers will build the software that infinitely extends the value of the consumer experience, giving a platform a meaningful edge."

And it's not just developers put off by the complexity of working with Andriod. while the iPhone has made inroads into the enterprise market -- at the expense of Research-in-Motion's (RIMM) Blackberry -- a recent report by Gartner showed Android is "severely limited" in large companies because of the work involved in managing these same variations in devices and OS versions.

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Of course, Google makes most of its money from ads. Android is helpful insofar as it provides a ready-made platform for serving those ads. But Android seems to be peaking just as Google is facing new threats on other platforms. As Apple holds a conference with its own developers this week, it's expected to announce its own mapping app for iPhones, displacing Google. Apple may also integrate Facebook functionality into iOS 6, which could sideline Google's efforts in social networking. (Follow along with Apple's announcements live.)

None of this means Android is going away. IDC, which predicts a falling market share for Android, still sees it at the leading mobile platform for years to come. But there are enough clear challenges before Android to slow its impressive momentum of the last few years. If that happens, Google's plans to make money from smartphone users could hit a snag, and the company will have to get creative about the mobile web.

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