How Does Google Profit from Android?

How Does Google Profit from Android?
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Looking at the stats for Android’s growth over the last few months it is clear that Google’s platform is outpacing the competition. More people are now buying Android smartphones than any other platform. The number of Android apps is increasing at a dizzying rate. If this growth continues (and it’s a big if) then Android will have a strong lead in the mobile market.

You might reasonably assume that the growth of Android makes Google ever more rich and powerful, but what does Google actually make from Android? Let’s break it down.

Hardware Sales

The Android platform runs on a wide variety of devices. Google works with around 40 separate manufacturers, all producing Android smartphones. According to Andy Rubin back in June 2011 there are 500,000 Android activations a day. There’s plenty to argue about over exactly what that means, but it is safe to say that more Android devices have been sold in the last few months than devices on any other platform.

What does Google make from every Android device sold? What’s their cut? The surprising answer is – absolutely nothing.

The Android platform is distributed for free. In fact because of the patent wars and licensing issues Microsoft is making more from the direct sale of Android smartphones than Google is. Because of the patents that Microsoft holds they are able to demand royalty payments on Android devices. There isn’t much transparency with these deals, but reportedly HTC pay Microsoft $5 for every Android smartphone they sell and Microsoft is seeking $15 per handset from Samsung.

Bizarrely this means that Microsoft make more money from Android than they do from Windows Phone 7.

Google did release two handsets of their own, manufactured by HTC and Samsung. The Google Nexus One and the Google Nexus S must have brought some cash in, but neither was a huge success and they never revealed what their profit margin on each handset actually was.

Apps and Games

Android Market

When Google launched the Android Market they went with the same 70/30 developer/publisher split as Apple set up in the App Store. What this means is that for every app or game sold, Google gets 30% of the money. According to them, most of that money goes to the carriers and the rest covers distribution costs, so once again Google effectively makes nothing (of course not everyone accepts this as true).

They charge a one-time $25 fee for developers to register. This compares favourably with Apple’s $99 per year fee for developers and Microsoft’s $99 fee to register in order to sell your apps through their Marketplace.

The potential amount Google can earn from app and game sales is further reduced when you consider that Android has a much higher percentage of free apps. The sales of premium apps are also far lower proportionately than they are on iOS. It is also worth considering that Apple control the app market for iOS devices while on Android you can sideload apps and buy from alternative markets.

So How Does Google Make Money from Android?

Google has fingers in many pies, but their business model for generating income is all about advertising. Well over 90% of all their revenue comes from advertising and naturally the bulk of that income is from websites rather than Android apps. Although they are starting to generate more advertising money from apps as the platform grows.

By creating an open platform and distributing it for free, and by offering minimum barriers to developers of third-party apps and games, Google has managed to spark incredible growth. Add to this the lack of restrictions and licensing on hardware and you end up with a vast array of devices at a wide range of price points. The more popular the platform grows, the more money Google can make from advertising.

A Lesson in Monetization from Apple

There have been complaints in the past about Google painting themselves as the underdog. It’s a claim that leaves many people incredulous, but in the mobile space it may be a valid point. While Apple’s iOS may represent a lower percentage of the overall smartphone market, right now they make an astronomical amount of money out of it. Apple has monetized their platform to the max. Every aspect of the iOS eco-system is set up to be profitable.

The result of that is that Apple has more cash in the bank than Google and they made a net income of $7.308 billion in Q2 of 2011 compared to Google’s net income over the same period of $2.505 billion.

You may think that Google should do a better job of monetizing Android, but realistically the approach they took is what led to the meteoric rise of the platform. If they hadn’t made it accessible and attractive to developers and manufacturers it would not be as popular as it is.

Can Google really compete?

Google and Motorola

The acquisition of Motorola Mobility is a clear statement that Google is going to fight to defend the platform. Naturally, why wouldn’t they? Whether they can come out on top against Apple and Microsoft in the long-term is debatable. Much depends on what happens in the patent wars and if Android ends up becoming more expensive to license then manufacturers could look elsewhere.

There have been rumors for quite some time about HTC developing their own mobile platform, or even acquiring one, and Samsung manufacture devices on various platforms. As the top two manufacturers of Android smartphones, the platform can’t afford to lose them. It’s also possible that the Motorola deal will lead Google into the hardware market and it could certainly bolster their earnings from Android.

Google can compete, but it looks like a rough road ahead. To answer the original question in the title of this article, of course Google makes money from Android, just nowhere near as much as you might assume. They haven’t taken this course out of altruistic concern for people who can’t afford iPhones, although Android has undeniably opened up the smartphone market to people with less disposable income. They are building for long-term profit rather than short-term gain and as every good capitalist knows – you have to speculate to accumulate.

What do you think? Will Android falter? Is Google’s approach a good one? Post a comment and let us know.