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If Android Is So Hot, Why Are Samsung, HTC, and Motorola Struggling?

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Smartphone commoditization sets in.

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Back in 2010, I coined, somewhat prematurely, the phrase "The Great Smartphone Bear Market."

The idea was that the smartphone market was growing at an extraordinary rate, but nobody was really making any money, aside from Apple (NASDAQ:AAPL). Subsequently, from a device perspective, the industry has been a mixed bag overall, with some companies like Qualcomm (NASDAQ:QCOM) and ARM Holdings (NASDAQ:ARMH).generating huge returns on the component side.

But the smartphone bear is rearing its ugly head in 2013, as it seems like it's just getting harder and harder to make money producing smartphones, despite enormous growth within the category.

So let's take a step back and look at the big picture, which in this case would be operating systems.

Since 2009, the major story in the industry has been how rapidly devices powered by Google's (NASDAQ:GOOG) Android operating system have taken market share from the ecosystems of Apple, BlackBerry (NASDAQ:BBRY), Microsoft (NASDAQ:MSFT), and Nokia (NYSE:NOK).

Android only got off the ground in Q4 of 2009 when Motorola, now owned by Google, released the first Droid smartphone.

Less than four years later, Android had a whopping 79.3% share of the global smartphone market in Q2 of 2013, according to IDC.

To put that in perspective, when the Droid launched, the top three industry names -- Nokia, BlackBerry (then under the Research In Motion name), and Apple -- had a combined market share of just 73.8%!

So Android is big, really big, and it's even finding its way into new markets like digital cameras.

This is a very good thing for Google since, to an extent, it has significant control over the smartphone user experience. And obviously it's beneficial to have so many people hooked into Google's mobile services.

Incidentally, consumers have benefited from the rampant competition within the Android marketplace as the big names like Samsung (OTCMKTS:SSNLF), HTC (OTCMKTS:HTCXF), and Motorola have aggressively tried to one-up each other with a seemingly never-ending stream of new models.

But the battle for the high end of the smartphone market increasingly looks like the same race to the bottom suffered by the PC industry.

Let's get back to that 79.3% (and growing) market share number for Android.

That's the big headline number, but it's also vital to note that its sales were actually up a dramatic 76% year-over-year. The rest of the industry's sales grew by a measly 2%!

So building Android phones is a great way to make money, right?

Wrong.

There's an interesting storyline playing out if one dials down to a company level: The top Android phone makers -- the aforementioned Samsung, HTC, and Motorola -- aren't doing all that well.

Samsung and HTC both reported lower-than-expected earnings in July. Samsung's stock is down 20% year-to-date, while HTC is down a whopping 50%.

Samsung is seeing profit pressures due to increased costs for new product launches, R&D, and retail channel investments. In its earnings presentation, it also said that it expects "competition to intensify."

HTC is not only seeing its sales slide, but it also has collapsing profit margins and may actually post a loss in Q3.

And year to date, Motorola has actually posted an operating loss of $397 million for Google.

To be fair, Motorola and HTC haven't been hot for a long time, but there was a time when Samsung really was kicking butt.

Apparently, 76% growth isn't strong enough to sustain the Android smartphone makers.

So who's the new kid on the smartphone block?

That's right, you guessed it: the Motorola Moto X, which, in an interesting turnaround for a high-profile Android phone, was not designed to outspec the top dog, the Samsung Galaxy S4.

The Moto X has a lower resolution screen and a slower processor, and I think that's absolutely beautiful.

Why?

Because fighting a specs battle is a losing game.

Think about it.

Every company has access to the same mobile phone components -- or at least equivalent ones -- from companies like Qualcomm, Broadcom (NASDAQ:BRCM), and SanDisk (NASDAQ:SNDK).

So where can an Android smartphone maker get an edge?

Customized software? Nah, the customers that notice it usually hate it.

Manufacturing? Nope, contract manufacturers are open to everyone.

Supply chain? Sorry, Dell (NASDAQ:DELL) taught the world the magic of just-in-time inventory a long time ago.

The only way out is some type of differentiation via branding or marketing, which of course has a built-in disadvantage in that it costs lots of money, and it is difficult when the products themselves don't seem a whole lot different from each other.

Motorola is marketing the Moto X on its customization features and the fact that it's made in the USA.

Time will tell whether this actually works. But at the outset, it's a heck of a lot more sensible than simply stuffing a smartphone with expensive components that nobody cares about, and just hoping customers can tell the difference between it and its virtually identical competitors.

Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.

Twitter: @Minyanville

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