Google, Apple Tighten Grip on Smartphone Market

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Apple Inc. AAPL +2.03% and Google Inc. GOOG +1.12% have brought mobile giantsNokia Corp. NOK +1.21% and Research In Motion Ltd. RIMM -2.66% to their knees and captured more than 80% of the world's smartphone market. Now they are going after the rest.

Apple is marching into new markets—most recently U.S. prepaid mobile phones—to continue the growth of its iPhone and iPad devices and iOS software.

At the same time, the Cupertino, Calif., company is developing software, such as mapping, that it once obtained from Google to make its devices stand out and to control some features more tightly.

Google is shifting gears with its Android software to exert greater control over its destiny. In the past, Google relied on hardware manufacturers to build Android devices and on carriers and other retailers to sell them to consumers.

Today, Google is partly adopting Apple's integrated model by manufacturing some devices on its own and it plans to sell several devices directly with big marketing campaigns.

What's behind these moves? Apple and Google see bigger gains ahead. Of the about 1.4 billion phones sold this year, only about 35% will be smartphones, a percentage projected to climb to 75% in the next five years, according to research and trading firm Wedge Partners. That potential bounty is intensifying the fight to sell more devices and accompanying services.

Their ambitions are squeezing onetime market leaders RIM and Nokia. Last week, Nokia said its cellphone business is deteriorating rapidly and it would cut another 10,000 jobs by the end of 2013. BlackBerry-maker RIM is undergoing a strategic review under a new chief executive as its losses have mounted and its stock has slid.

Nokia, RIM and others "really underestimated what Apple and Google could do," said Michael Gartenberg, an analyst at research firm Gartner Inc. While Apple and Google have built up a "tremendous lead" thanks to their ability to offer books, music and hundreds of thousands of mobile apps, he said the mobile market is accelerating so much that "anything could change very quickly."

Overall, Google's Android held 59% of global smartphone shipments in this year's first quarter, up from 36.1% a year earlier, while Apple had 23%, up from 18.3%, according to IDC. Smartphones powered by Nokia's Symbian OS, which it is phasing out in favor of software from Microsoft, MSFT -0.60% dropped to 6.8% from 26% over the same period, and RIM's share fell to 6.4% from 13.6%.

Yet Apple and Google—just bit players in the mobile market five years ago—face challenges that could trip up the two amid fast-changing consumer tastes and evolving technology.

Google, which gives away its Android software to device makers, doesn't make much money from the devices, even though it comes preloaded with Google's search engine and other services, analysts say.

Its free software also has spawned devices with hundreds of different screen sizes and versions. Many Android devices are powered by older versions of the software, making it a challenge for apps to work well across them.

Google is moving to address such issues: Its $12.5 billion acquisition of handset maker Motorola Mobility Holdings Inc. takes it directly into hardware. Google also opened an online store to sell future Android devices, and is expected to spend heavily to promote the gadgets.

In coming weeks, Google is expected to unveil a lower-priced Android tablet that it developed with Asustek Computer Inc. 2357.TW +0.17% to dent the market share of Apple's iPad, people familiar with the matter have said.

Because of Google's prior approach to the mobile market, one major problem is that "the consumer experience is highly variant" depending on which Android device a person uses, said Rajeev Chand, a managing director at boutique investment bank Rutberg & Co. "Google is now trying to wrest back control" of Android.

Google officials didn't immediately respond to requests for comment.

Apple, whose iPhone shipments grew 89% during the first quarter of the year, estimates IDC, compared with 50% for the smartphone industry, faces pressure from investors to sustain that growth.

An Apple spokeswoman referred to Chief Executive Tim Cook's past remarks calling the size and momentum of Apple's app store "just phenomenal," and said its U.S. prepaid plans will make the iPhone more accessible.

Apple has taken steps to make the iPhone, whose 4S model Apple sells at a starting price of $649 for customers without a wireless contract, more affordable. Apple and its wireless partners now keep older iPhone models on the market at lower prices and sometimes at no charge with a wireless contract.

In recent weeks, Apple also said it would soon allow some U.S. carriers to sell iPhones with prepaid service plans, though consumers must shell out more for the phone upfront. Such plans are less expensive than longer contracts from wireless carriers, which also put the device out of reach for those who wanted more flexible billing.

Apple "needs to keep innovating at the high end and stake a flag in the mid tier," said Brian Blair, an analyst with Wedge Partners.

As Google and Apple's share has grown, the fighting between them has intensified. Last week, Apple unveiled the next version of its software for iPhones and iPads with a slate of features aimed at distancing itself from Google. They include a mapping service and enhanced Siri "virtual assistant" that provides an alternative way to search for information besides the traditional Google search box.

Google, meanwhile, has accelerated plans to launch its own Siri competitor that would work on Android-powered devices, people familiar with the matter have said.

Both companies also are trying to make their software more ubiquitous by pushing versions for tablets and TV software, believing consumers are going to want their phones to connect to a range of other wireless devices and services. Analysts said that other tech companies without similar reach will struggle to stay relevant to consumers.