Ever since Apple (AAPL) became the smartphone maker to beat, it seems like the media has labeled every new handset to come down the pike as a potential “iPhone killer”.  In reality, very few devices have proven capable of wrestling market share away from the Cupertino, California-based Company. Most of the successful iPhone competitors run some version of Google’s (GOOG) Android operating system, which more and more people are beginning to view as comparable, if not superior to Apple’s iOS (formerly iPhone OS).

It’s taken quite a while for Android devices to even show up as a blip on Apple’s radar. The first smartphones utilizing the OS were made by HTC Corporation and ran on the Deutsche Telekom (DTEGY) owned T-Mobile network in the U.S (HTC G1, Magic, and Hero). Although the hardware could compete, many users were apprehensive to switch to the smaller network (which, according to Wikipedia, only commands around 11% of the U.S. subscriber base) in lieu of the Verizon (VZ - Free Analyst Report, 31%) or AT&T (T - Free Analyst Report, 29%) networks that many people perceive as having farther reaching, and more reliable coverage. However, it should be noted that AT&T has received a lot of flak for dropped calls and poor 3G download speeds in cities like New York and San Francisco, which can be attributed to heavy concentrations of iPhone users.  

Another mark against Android early on was its lack of a competitive application marketplace. Apple became the first mover in the space on July 11, 2008 (the same day the iPhone 3G was released), when it updated its operating system to include the trademark “App Store”. This addition, along with the faster download speed provided by the 3G hardware, prompted droves of middle and upper-class consumers to adopt the device, propelling it to the forefront of the high-end cellphone market. According to Google’s recently acquired mobile advertising platform, AdMob, iPhones supplied 3.5% of its worldwide smartphone advert data in May 2008, compared to 47.9% in May 2009.

It took some time for Google to respond, as priced applications didn’t start showing up on its store, Android Market, until mid-February 2009, a full seven months after the App Store debuted. A month later, there were around 2,300 available apps, representing 10% of the tally Apple had racked up by that time. The number grew exponentially from there, and by the end of 2009, approximately 20,000 applications were being offered.

After the number of apps became respectable, all Google needed was a vessel—and that was Motorola (MOT). With the release of the Droid on October 28, 2009, the beleaguered handset maker of RAZR fame was finally able to deliver a phone that people wanted to buy. The device scored critical acclaim and received unprecedented marketing support from Motorola’s carrier partner Verizon Wireless. The combination of apps, desirable hardware, and backing from the nation’s most popular network proved successful, and the Droid became the most sought after Android device worldwide.
 According to AdMob’s data, it was the second most popular smartphone that hosted its ads in May 2010, with 7% of the market compared to the iPhone’s 40%. 

You may be wondering where other phone makers fit into the equation. Although devices based on Nokia’s (NOK) Symbian OS accounted for 44% of worldwide smartphone sales in the first quarter of 2010 (Gartner Research), they lack much of the functionality that Apple and Google can provide since they are used in lower-end smartphones.

Research in Motion (RIMM) commands around 19% of all smartphone sales (Gartner), but it also lacks some crucial functions probably because it appeals more to corporations, touchscreen opponents, and BlackBerry messenger enthusiasts who don’t necessarily seek out the added bells and whistles.

Today, the battle between Google and Apple has never been more intense, and the former now appears to have its best chance ever of capturing a meaningful amount of market share.
 Although there is still a wide discrepancy between the number of apps offered in Google and Apple’s stores (the most recent data says the Android Market has around 70,000 apps compared to App Store’s 225,000), the former appears to be quickly closing the gap. It now offers just as many apps as Apple did at this time last year, and Google’s vice president Andy Rubin says more than 160,000 Android devices are sold and activated every day.

With all this talk about app counts it makes you wonder when the breakneck speed will end? How much is too much? Is there a limit to the number of useful apps out at any given time?

Keep in mind, as Apple execs regularly point out, the company doesn’t make much profit from the store, or even iTunes for that matter. It only takes in 30% of app sales and uses some of that to pay credit card companies for processing the transactions. Its main objective with these stores is to get people buying iPhone, iTouch and iPad devices. And more recently, keeping tabs on what type of apps people are using so it can deliver targeted advertising through its new ad serving platform iAd. Therefore, quality and the usefulness of information apps provide to marketers may trump sheer numbers.

Google gets no direct cash from its marketplace; the carriers and payment processors are the ones realizing app sales. Similar to Apple, part of its interest lies in trying to sell in-app ads through its AdMob platform. The much bigger revenue source -- and the reason why Google created Android in the first place -- is mobile search ads. Simply put, more smartphones with Google as the default browser equals more mobile ad revenue.

So what does Apple currently offer that Google does not? It seems that the games being sold by Apple are regarded by many as being higher quality. 

One possible explanation for this is that application developers appear to favor the App Store over the Android Marketplace. A recent survey of 2,733 developers by Appcelerator, a mobile-software tools provider, showed Apple was the clear winner. They citied ease of purchasing, discoverability, and size of the addressable market as the reasons. Additionally, many postings on tech blogs suggest programmers generally consider the App Store to be more developer friendly.
What they don’t like about the App Store is its more restrictive nature. Apple must approve every piece of software before selling it, a process that can chew up time and tends to exclude software that Apple deems “objectionable” (i.e. Prohibition 2: Dope Wars) or “degrading to the core experience of the iPhone” (i.e. Google Voice).

Anyone can produce apps for the Android Marketplace, or any independent marketplace for that matter since Google allows multiple stores to run on Android. In fact, even amateurs can try their hand at development with Google’s recently released App Inventor. The technology uses drag-and-drop coding that is so easy to understand even the elementary school children Google used to test the technology were able to create apps (although they were generally of lower sophistication than the retail variety).

In general, programmers’ biggest concern is the cost of offering the same application on multiple platforms, which explains why there is very little overlap between the two marketplaces.

According to the survey, programmers said they like Android’s long-term prospects better than Apple’s because  of the scope of devices it will likely end up on, which includes tablets, set-top boxes and web-connected TVs (via Google TV), as well as e-readers.

They also consider Android to be more functional. Currently, the recently released iOS 4 appears to be playing catch up to Android 2.1 (a.k.a. Éclair, Google names each new version of Android after a tasty desert), which was released on October, 26th 2009. Some capabilities now common to both operating systems include multitasking, and a universal email inbox.

The newest Android build, 2.2 (Froyo) offers a lot that iOS doesn’t, including Google Maps Navigation (a free turn-by-turn GPS app, which retails for around $50 in Apple’s app store), a mobile 3G hotspot (up to five Wi-Fi devices can piggy back onto a phones signal), and full Flash 10.1 capability (the same version that is used on regular computers). Froyo is currently available only to Nexus One owners, but Google will update a number of devices later this summer.

The iPhone 4 has some serious competition in the new crop of Android devices which includes the Motorola Droid X, HTC EVO 4 (which runs on Sprint’s (S) 4G and 3G networks), and HTC Droid Incredible.

It certainly doesn’t help that various reviewers (most notably Consumer Reports) have been apprehensive to recommend the iPhone 4 due to alleged issues involving the loss of reception when users hold the device by the lower left hand corner.

Steve Jobs recently held a press conference addressing the issue. He maintained his argument that all cellphones encounter reception issues. Although he did not apologize or announce a software fix, he did offer free cases for iPhone 4 customers.

It remains to be seen whether the public will buy into Mr. Jobs’ explanation, but with the iPhone losing some of it luster recently, it seems like the much speculated Verizon iPhone 4 in early 2011 is now less than guaranteed.

The iPhone 4 may end up being less dominant than many people initially thought. Perhaps there really is room enough for two, three, or even four big devices in the increasingly crowded smartphone space. If this turns out to be the case, we believe Motorola and HTC Corporation are the smartphone makers that will likely benefit the most, as they appear highly capable of producing hit products.

Although AT&T does have some Android devices (Samsung Captivate) we believe Verizon Wireless and to a lesser extent Sprint are most likely to profit from Google’s OS since they have exclusive deals with the most promising devices.

Even if people stopped buying Android devices altogether, Google would still continue making incremental revenues since the worldwide transition to smartphones increases the number of mobile web searches. Although the company doesn’t release platform specific data, we believe mobile devices have become a meaningful chunk of advertising revenues. And we doubt that smartphones will cannibalize laptop and desktop inquiries very much, assuming most on-the-go searching simply wouldn’t take place if people lacked mobile web access. Clearly, Google stands to benefit from the smartphone revolution.