Does BMW need to come out with a cheap car because Kia's gaining market share ?
That's not really a good comparison. People are discussing Android v iOS in terms of hardware sales and profit, but that's really just short-term thinking.
Let's forget the fact that Apple's share of smartphone profits has dropped steadily from 9x% to now (as of last quarter) being almost at parity with Samsung.
What this has always been about for Google is a land-grab. They're after eyeballs and users. They're working on building the strongest software (app) ecosystem possible for their platform. The last study done (posted in this forum) shows that Android is almost at parity with Apple in terms of popular app availability/quality (96%), a dramatic shift from two years ago. That is largely due to developers realizing that publishing Android applications opens the floodgate to 8 out of 10 smartphones shipped worldwide per quarter.
Without the land grab, there is no developer support. Without developer support, there are no eyeballs. This is why Windows Phone is stuck in a rut, despite a slick OS and quality hardware. Microsoft need to either buy app development outright, or flood the market with enough cheap phones to attract developers through market share. If they fully market synergies with Windows desktop and XBOX, they might also attract users/apps in that way.
In closing, Google's strategy has never been about hardware profits. Do you really think anyone would spend $12 billion on Motorola to make money on handsets? Their strategy is to lock as many users (low/mid/high -end) into their ecosystem as early as possible, profits be damned. Those users will translate into accounts that use Google services, like search, e-mail, maps, and will download apps/music/movies/books through Google Play. They don't want to sell cars, they want to run the toll bridge.
Apple is doing a great job selling cars and running the toll bridge. But the writing is on the wall. The trend line hasn't deviated much for Android or Apple, one steadily rising and the other steadily declining. Apple sold more iPhones last quarter YOY, but their profits dropped by nearly $2 billion YOY. This makes absolute sense if you realize that smartphones are now a commodity, and Android/iOS are now encroaching in each other's territory (Android having more premium devices, while Apple is set to release a lower end device).