Android-iPhone Battle Has Parallels to Windows-Apple Struggle of the ’90s

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Google’s (NASDAQ:GOOG) Android operating system competes with Apple’s (NASDAQ:AAPL) iPhone OS in the smartphone market. The market research firm NPD recently released data indicating that Android-based smartphones overtook Apple in terms of market share in the US.  Android’s adoption has increased in the last year due to its availability to a broad group of mobile phone makers.

We believe there are strong parallels between Google’s Android strategy in the smartphone market and the strategy that Microsoft (NASDAQ:MSFT) used against Apple in late 1980s and throughout the 1990s to become the dominant operating system in the PC market.

Microsoft licensed its OS to any PC manufacturer that was interested and Google is doing the same with its Android operating system and mobile phone makers  This suggests that iPhone’s market share may not increase as much as we forecast and that there could as much as 25% downside to the $296 Trefis price estimate for Apple’s stock if history were to repeat itself in the smartphone market.

Apple Wins in the ’80s, Loses in the ’90s to Microsoft’s MS-DOS and Windows

In the late 1970s, Apple launched the Apple II computer which become one of the most successful computers (in homes and schools) throughout the 1980s.  According to Gartner, a market research firm, Apple had as much as 16% market share in the PC market during the 1980s.

In the 1990s, however, the situation changed and Apple started to lose market share to PC makers running Microsoft’s Windows operating system.  Unlike Apple, Microsoft licensed its operating system (MS-DOS, Windows) to multiple PC makers.  The PC market of the 1990s was much bigger than that of the 1980s and Apple’s computer market share declined to less than 5%.  As of 2009, Apple had about 4% market share in the PC market.

Is Google’s Android the New MS-DOS / Windows?

The Android mobile operating system by Google is a modified version of the Linux OS and is open for use by mobile phone and other device makers.  Android is already compatible with most of the mobile phone manufacturers that do not have proprietary operating systems of their own.  For example, Motorola and HTC make use of the freely available Android OS for their mobile phones.

Android Gains Share Faster than the iPhone

The Apple iPhone, launched in 2007, increased its market share in the global mobile phone market from 0.3% in 2007 to 2.0% in 2009.  According to a report from market research firm NPD, the iPhone had US smartphone market share (of phones in use rather than sold) of 21% in Q1 2010.

The first Android-based mobile phone was sold in October of 2008, more than a year after the iPhone launch. Despite the delayed start, Android-based mobile phones have surpassed the iPhone in the US smartphone market.  NPD reported that Android had US market share of 28 % in Q1 2010, behind RIM’s (NASDAQ:RIMM) BlackBerry (36%) and ahead of Apple’s iPhone (21%).

Potential Impact of Slower iPhone Market Share Gains

We forecast that Apple will continue to gain market share and reach about 11% share by the end of the Trefis forecast period.

However, given the parallels between Microsoft’s MS-DOS / Windows licensing strategy and Google’s strategy to distribute the Android operating system to a wide range of mobile phone makers, its important to consider the potential impact on Apple of lower than expected mobile market share.

By modifying our forecast for Apple’s iPhone market share above, you can see how there could be as much as a 25% downside to the $296 Trefis price estimate for Apple’s stock if Apple were to have half as much market share (about 5.5%) than we currently forecast by the end of the Trefis forecast period.

You can see our complete model for Apple’s stock here.

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