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Android Economics

Charles Arthur, writing for The Guardian, has noted that court filings seem to be revealing Google’s Android revenues. If this is the case, we have a significant breakthrough in understanding the economics of Android and the overall mobile platform strategy of Google.

The new data is a reference to a settlement offer Google made to Oracle of $2.8 million and 0.515% of Android revenues on an ongoing basis. The key assumption to make this data useful is that the $2.8 million offer represents 0.515% of revenues to date.

In other words, that revenues from 2008 to end of 2011 multiplied by 0.00515 results in $2.8 million. That implies that revenues from 2008 to 2011 were $544 million.

I think that’s a fair assumption. I don’t see why Google would offer a higher or lower royalty rate for years 2008 through 2011 than for years after 2011. The offer would seem to be 0.0515% in the future as well as retroactively in the past.

If we work with this assumption then the next question is how to distribute this $544 million over the four years 2008 through 2011? The installed base of Android has grown exponentially and it would seem logical to assume that revenues have followed in a similar pattern. Here is a chart of installed base given activation data supplied by Google.

If we assume revenues were distributed the same way we would get something like this:

The sum of the bars in this chart equals $544 million and the ramp is approximately the same as the installed base. The relationship between the first graph and the second is a multiple equivalent to the revenue per device.

Therefore a second assumption is that revenue per device remained fairly constant. In this model the revenue comes out to be about $1.70 per device per year. It’s possible that rev/dev/yr. is increasing as Google services are discovered by users. It’s also possible that the rev/dev/yr. is decreasing as later adopters are less likely to engage as early users. I just don’t know how to adjust this value so by leaving it at the average, I can avoid introducing more assumptions.

Now we can stop and look at this figure and do a test. Does $1.70 make sense as a device revenue for Android? Google had spoken about targeting $10/device/yr. but we have no indication that they are nearly at that level. If they did achieve that level, with an installed base of 300 million, Google could be collecting $3 billion a year in Android income. Are they getting it?

As of October, Google mentioned that it had a $2.5 billion “mobile run rate”. But we know that this figure is not only from Android. Mobile includes all mobile devices and services including those running inside iOS, Symbian, BlackBerry, Windows Phone, etc.  They could be counting ads on all mobile browsers as well as ads running inside all apps on all platforms. Furthermore, Google also testified that iOS accounts for two thirds of their mobile search revenues[1].

Adding run rate to the Android revenue chart results in the following:

So the step is to take the “run rate” figure of $2.5 billion and assume, as Charles Arthur did, that iOS income is what is left after taking out the Android part[2]. I also noted that Google previously mentioned a run rate of $1 billion and I will assign that run rate to 2010 and $2.5b to all of 2011. Since we know the number of iOS devices in use for years 2010 and 2011 we can calculate Google’s revenues per iOS device in use.

If we thus combine all the data we know (revenues derived from settlement offer, units in use, run rate and iOS installed base) we get the following revenue profile:

This shows a positive trend for Google: revenues per smartphone per year is increasing. However, the growth is coming from non-Android devices which means mostly iOS. Revenues per device for Android is probably declining.

The story for iOS revenues however is not all rosy for Google. Google has to pay for that revenue. The mechanism is a payment that Google makes to Apple for the prominent and default placement of Google search on Safari.

We don’t know the terms of the arrangement but if we assume $2/device Google needs to shave $2 from the top of the chart above with that money going to Apple (attached as iPhone/iPad service revenues.)[3]

That still leaves a healthy $8.33 in 2011 as operating income from mobile with $1.70 or so coming from Android.

However, to make this operating income into bottom line profit, we have to extract the R&D and SG&A associated with mobile at Google. This would be, therefore, Andy Rubin’s yearly budget.

Andy Rubin has stated in the past that Android is profitable. That is certainly believable. The budget would have to be about $400 million/year in 2011.

Charles Arthur concluded that Google obtains four times more revenue from iOS than from Android. My estimates indicate that in 2011 the revenue ratio was closer to 5 but if we subtract the cost of those sales in the form of payments to Apple then the ratio could well be four to one.

Many of these figures begin to “hang together” as we balance assumptions about costs, revenues and statements made in public. There is a consistency within a comfortable margin of error. If that is the case, then the economics of Android begins to take shape.

My take is that it’s not a bad business. But it’s also not a great one. As long as there is exponential growth in units, Android will improve its position inside Google relative to iOS. But from Google’s perspective, iOS is today a bigger business. And iOS is not standing still. It’s growing not only in terms of units but in revenue per unit.

Strategically, and historically Android was never one thing. P&L considerations were not the only (or even at all) factors in investment for Google. Having a hedge against hegemony of potential rivals, having a means to learn and develop new business and having a role in defining the post-PC computing paradigm are all probably bigger considerations than profitability.

So in terms of returns, Android is sustainable. However, in relative terms the value created leaves much to be desired. Whereas Android generates $1.70/device/year and thus an Android device with a two year life generates about $3.5 to Google over its life, Apple obtained $576.3 for each iOS device it sold in 2011[4]. The economics of Android are nothing like the economics of iOS.

Notes:

  1. This figure is also not conclusive as search is not the only form of revenue on a mobile device but it does imply that Android is not the majority of Google’s mobile revenues.
  2. Clearly this is overstating iOS as the non-Android income is broken up between several platforms. We can only say that iOS is the vast majority of non-Android income.
  3. Assuming a $2/device payment model means Google paid $312 million to Apple in 2011 and $171 million in 2010. This would go toward boosting Apple’s revenue per iOS device. Naturally, if this distribution cost is higher or would be subject to re-negotiation then it could vary widely.
  4. The iOS figure includes accessories and licensing of trademarks but excludes income from App Store, iTunes music, movies, TV shows, iBooks, greeting cards or textbooks.
  • http://www.linkedin.com/in/pixell Roman Pixell

    brilliant arithmetics! considering the volumes needed to get the same level of leverage as on the IOS platform, this all makes me wonder about the future platform of choice for developers. money talks…

  • http://www.noisetech-software.com/Home.html Steven Noyes

    Oddly, this agrees closely to an estimate of about $0.11/device/month I read about 18 months back or so. Based on browsing habits of its users from data published by Google. Using published ad rates, the author calculated a value of 11¢ per month per device or $1.32/year/device.

    The website is no longer active but it is still cached:

    http://webcache.googleusercontent.com/search?hl=en&client=safari&tbo=d&nota=1&biw=768&bih=928&q=cache:KLoIuS3qJwoJ:http://aseidman.com/2010/05/65000-new-android-devices-ship-each-day-how-much-are-they-worth-to-google/+%240.11+per+month+on+android&ct=clnk

  • http://mark.opineapple.com/ Mark Newton

    Horace, I assume your statement “Apple obtained $576.3 for each iOS device it sold in 2011″ does not include revenues from sales of Apps, Music and video media, so the economics of Android are even less like the economics of iOS.

    • http://www.asymco.com Horace Dediu

      That’s correct.

  • Luis Masanti

    I would pick Google’s numbers with a grain of salt: they came from legal papers.
    As far as I remember, the iOS’s revenues data came from a presentation to a federal/court about not being monopolic: son big iOS participation was “good” for Google.
    The Oracle’s number could be made up to soften the payment to be done.

    But I found the article truly correct. Thanks.

    And footnote 4 is missing.

    • http://www.noisetech-software.com/Home.html Steven Noyes

      What is interesting is this revenue value is showing up from multiple angles and sources. In other words, there is little data NOT showing revenue for Android as being different than $0.11 to $0.15 per device per month.

      Many Android bloggers put the value as high as $50/year but that is based on wishful fantasies and not any numerical analysis.

  • Nangka

    although google is now sitting on revenue of $8 per idevice, what impact would it have if google angered apple enough for the service agreement to be altered or terminated – baidu as search in china or siri totally taking over search on idevices?

    with this in mind, android would then prove to be be a very bad business decision.

    • http://wmilliken.livejournal.com/ Walter Milliken

      The question here is how much Google revenue comes from the Google search bar in Mobile Safari, and how much from their ad network being used by app developers?

      I suspect Apple could at least substitute a different default search engine, but taking Google entirely out of the supported search engine list, or prohibiting use of their ad network on apps would likely raise anti-trust issues, and in the ad network case, probably developer ire as well. I’m guessing the most that would happen is dropping them from their privileged default position in search. That could still hurt a lot, though.

      • Joe_Winfield_IL

        Apple could also replace Google Maps as a system app, and link Siri to a different search engine.

      • Walt French

        I wonder what anti-trust issue would arise if say, Apple rejected Google’s $2 per iPhone in favor of Microsoft’s $3 to have Bing be the default search engine? Google is clearly the #1 search provider; this (extremely hypothetical) move would seem to favor competition.

  • poke

    If we’re to believe Google and they’re acquiring Motorola for patents to protect Android, then Android’s overall costs include not only ongoing development (and $50 million for the initial acquisition), but $12.5 billion for IP. It’s hard to see them breaking even on that anytime soon. Was it really worth it?

    • Joe_Winfield_IL

      I was thinking the same.  At $400MM annual mobile budget, the acquisition is no small line item.  To be fair, the net cost is only $9.5B because MMI has around $3B on its balance sheet – but something tells me the cash did not exactly play a role in the decision.

  • http://www.yannicklaclau.com yannick

    I would be skeptical of that number because it appeared in a legal context as part of a negotiation. Google has every incentive in that context to make android look as paltry as possible to avoid paying out anything more than the strict minimum.

    • KirkBurgess

      Generally it’s a bad idea to lie about these sort of things in these trials – intentionally trying to mislead the court could make a judgement against you much much worst.

  • Henry

    Great post. However, I’m wondering if these calculations only highlight the significance of the threat from Android. In Google, Apple has a competitor that may not be interested in profiting directly from mobile device sales. Instead, Google seems to want to protect its advertising business by capturing maximum mobile device market share by purposely selling high quality devices at cost (the non-Apple handset hardware market must be close to competitive, which I imagine is part of Google’s plan to keep Android device prices low).

    Going forward (e.g., 2013 and beyond), how successfully can Apple compete against a rival that is not interested in profits? Apple’s financial success relies on its huge margins. Using your terminology, this seems like asymmetric competition and not in Apple’s favor.

    Apple’s defenses include various economies of scale (e.g., in production but also in attracting app writers, etc), some supply chain advantages, consumer lock-in to the Apple ecosystem, strong branding, and slightly though not significantly better quality. Are they enough to protect Apple?

    Would be very interested in Horace’s and readers’ thoughts.

    • http://www.asymco.com Horace Dediu

      Asymmetric business models must still be sustainable. A competitor that chooses to destroy value in order to gain share cannot sustain that strategy for long.
      Google devices are not free or even profit free. They need to sustain the OEMs. What you need to watch for is not price but commoditization. The threat to Apple would be that iPhone’s ecosystem becomes commoditized. That usually happens when it over-serves. As long as it’s not good enough, then the product (in its entirety) can continue to capture outsized profits.

      • Henry

        Thanks for responding.

        Sorry, for clarification, what do you mean by “A competitor that chooses to destroy value in order to gain share cannot sustain that strategy for long”? Google seems to be creating a lot of value in the sense of facilitating the availability of “Apple-like” products to the market for a fraction of the price. Google protects (indeed grows) its advertising business. OEMs make 5-10% profit margin. Isn’t this a sustainable (and potentially highly successful) strategy?

        You seem to be saying that Apple’s risk comes from rivals catching Apple on quality – i.e., many firms offering devices rivaling Apple on quality, which commoditizes the product and kills margins. Am I understanding your point?

      • http://profiles.google.com/larry.davis Larry Davis

        I’m not really sure I see the “fraction of the price” that you mention.  A user can get a “free” iPhone today just like they can a “free” Android phone.  Until a carrier actually pays a consumer to use Android then it’s not really cheaper, save for the discount or monthly carriers.

      • Henry

        By “fraction of the price,” I mean the price of the phone upon leaving the HTC, Samsung, or Apple warehouse. At this stage, it appears that the retailer (e.g., Radio Shack, Verizon, etc) captures most of the price difference, and consequently makes much larger margins per unit on Android phones compared to iPhones, even if the retail customer pays the same price.

        My understanding is this is why Verizon, Radio Shack, AT&T, etc heavily push Android over iPhone.

        So my point is that it doesn’t matter so much who in the value chain (retailer or end customer) captures the surplus after the phone leaves the manufacturer in determining Android vs iPhone market share. If retailers make larger margins selling Androids, they will do what they can to sell more Androids. Based on how recent history, retail outlets have been very successful pushing Android.

      • http://wmilliken.livejournal.com/ Walter Milliken

        I wouldn’t say the carrier sales people have been very successful pushing Android. The latest US smartphone sales figures, now that iPhone is on three of the four major carriers, seem to show a recent-term 50/50 split, a substantial iOS share gain from a year ago. Some of that may be due to the iPhone 4S launch, but some of it may also be due to the 3GS and 4S being cheaper. It may also be related to the fact that early Android users may be becoming disillusioned — their “will switch brands” metric is fairly high for many Android makes, now.

        Remember that *Verizon* had to capitulate to Apple’s terms to stop hemorrhaging customers — just having and pushing Android wasn’t enough. And that problem immediately stopped once they got the iPhone.

        The situation does seem a bit different in some of the European countries, but how much of that is due to economic woes is unclear. The pre-paid market also seems to be another case, but one where there is little profit to be made, apparently (see also Nokia and RIM).

      • Henry

        This is what I mean by successful:
        http://gs.statcounter.com/#mobile_os-na-monthly-200910-201203

        You are right that the Android tide seems to be turning (or perhaps flattening). Still, much of this would have been Apple sales, and these market shares hide the huge unit sales growth from expanding overall smart phone sales.

      • http://wmilliken.livejournal.com/ Walter Milliken

        I’m not sure what you’re referring to, exactly, the link you embedded doesn’t work for me. Poking at their graphs for recent data seems to show iOS picking up its (slight) lead in North America, while both iOS and Android are still behind Symbian worldwide.

        Yes, Android has been “successful” to a fair degree in market share over the last year or two. But it doesn’t seem to be holding all that well. We’re not seeing those “Android Grows Market Share 287%” headlines anymore, either….

        I don’t think Android is going away, even if Google drops it, but its heyday may be over soon. I suspect the next big thing will be not-quite-Android forks, especially Amazon’s — not something that helps Google at all.

      • Rob Scott

        I thought iPhone outsold Android at Verizon in the most recent reported quarter. And if Nielsen is correct, this might still hold in Q1 2012.

        Carriers might not like iPhone subsidies, but when you do the analysis the iPhone make the same contribution margin as other phones, mainly because higher ARPU. Also, customers who can afford iPhones demand them, there is nothing Verizon can do short of stopping selling the iPhone.

      • Walt French

        “My understanding is this is why Verizon, Radio Shack, AT&T, etc heavily push Android over iPhone.”
        Let’s be clear: Android was basically a proof of concept (a “hobby”) until Google, Motorola and Verizon got together to create the first Droid. At the time, Verizon knew that at best, it would be years until it could offer the iPhone. AT&T had successfully used the iPhone to turn around its bad churn statistics and was apparently gaining sales from Verizon. Verizon pretty much HAD to build and push its Droid® brand.Once Android had a competitive offering, other carriers also ran with them. But AT&T still had the advantage of promoting iPhones, which would draw customers uniquely to them.

        Verizon still promotes its Droid brand (as built by various manufacturers); many consumers don’t associate the name with Google, and therefore, other carriers’ Android phones, at all.

        This is all very telling as to why no carrier is particularly pushing Windows Phones. In a nutshell, carriers are happy to use whatever phone will bring business to its network, and WP hasn’t built the cachet. The carriers still want to have a diversity of products to cater to niche buyers, and to keep any one company from achieving the power that Apple is legion for, but mostly they are just trying to sell what customers want. Gaining a few dollars on sales price pales against the loss of data revenues from a non-sale.

      • http://www.asymco.com Horace Dediu

        I was responding to the idea of Google ensuring low pricing regardless of what OEMs need to be paid–i.e. subsidizing the hardware directly. I don’t think that would be sustainable. On the second point, matching on quality for products that are not good enough is not commoditization. Commoditization happens when the product is more than good enough. Let me suggest an example. If cars were generally unreliable, slow, hard to drive and expensive, the least worst car would not have to worry about others catching it in quality. As long as the leader in the field can improve his cars then he’ll easily capture the vast bulk of profits. On the other hand if cars were reliable, fast, easy to drive and cheap, the leader in the field could not offer a better car for higher prices and it would be easily commoditized by those keen to copy it. The question you have to ask is whether mobile computers today are like Model T’s or like 1960s muscle cars.

      • Henry

        Thanks Horace. I understand your point now. You are doing great work with this blog.

      • Joe_Winfield_IL

        It’s also worth pointing out that shareholders don’t necessarily love asymmetric pricing models.  They love a startup and give most innovative companies “growth” type valuations in the early years, but as businesses mature, investors want profits.  Nobody wants to own a business that “is not interested in profits.”

        Android is in an odd position because the parent company has seen this transition occur already.  The multiple has come down considerably over time as search has settled into a steady growth phase.  Android gets a pass BECAUSE it’s been marginally profitable to date; it doesn’t mean much to the bottom line so investors don’t value it.  But as mobile becomes a bigger piece of the overall company, Android won’t be allowed to hide forever.  I would posit that continued exponential growth will lead to increased P&L scrutiny from major shareholders.  As market share and market saturation reach a tipping point, management will lose the ability to kick the can down the road in regards to profit.An exception to the rule is Amazon; for some reason, AMZN investors seem to have infinite patience.  For a decade and a half, the company has been able to talk about investing for the future, extolling the virtues of delayed gratification.  Unless Andy Rubin learns to channel Jeff Bezos when the time comes, I still believe that Android/Google is in for an awakening.

      • Henry

        It’s not clear that Google is interested now or ever in profiting directly from Android. It seems Google just wants to protect it core (and only real) business, which is selling ads. An Apple-dominated mobile device market represents an existential threat to Google’s business model since Apple (e.g., via Siri, Baidu, etc) can bypass Google search/ads.

        So Google investors should prefer Android market share over Android profits. 

      • Henry

        It’s not clear that Google is interested now or ever in profiting directly from Android. It seems Google just wants to protect it core (and only real) business, which is selling ads. An Apple-dominated mobile device market represents an existential threat to Google’s business model since Apple (e.g., via Siri, Baidu, etc) can bypass Google search/ads.

        So Google investors should prefer Android market share over Android profits. 

      • Joe_Winfield_IL

        That makes sense, but it’s a very tough message to communicate.  The company is spending a lot of resources on Android if it’s purely defensive.  And the budget appears to be growing in line with the installed base.  My opinion is that as a percentage of sales, Android will eventually be significant enough that investors will not want to hear about fear of iOS hegemony as reasoning for breakeven results.

        Also, if you read the recent corporate communications, the company is trying to tell users that search advertising is NOT the business Google is in.  They are building Google as a platform, a suite of applications and services.  The goal is to keep users engaged as much as possible throughout the day between messaging, search, maps, social networking, shopping, entertainment,  and work/productivity.  In order, the Google products to achieve these goals are Gmail/Google Voice, Google.com, Google Maps, G+, Google Shopping, Youtube/GoogleTV, Docs/calendar.  This list leaves out Android, which really functions as a landing platform for everything else.  There are plenty of other Google projects, but all will serve the common goal of attracting and keeping eyeballs on Google.  The master product is Google itself, not advertising (or so they say).  

      • Henry

        Ok, I think I understand your point. You are suggesting that Google hopes medium-term to transition from a pure ad model to some kind of model where they also significantly profit from selling hardware/software/OS/subscriptions (some or all) revolving around this suite of services…

      • Joe_Winfield_IL

        Yes, exactly.  Or a new version of the existing ad model, but one that is much less dependent on search results.  

        The problem is that Siri really killed search for Google.  It can’t even come close to what Google does, but it is what’s known as semantic search, based on delivering answers to questions rather than links to relevant sites.  Siri will continue to evolve and improve, but more importantly it has spawned dozens of “me-too” products that have the same goal.  IBM’s Watson has been years in development, and it’s essentially a very high end version of the same tech.  Google has already integrated a fair amount of semantic search in its results (math equations for example), but has a massive disincentive to pursue it further – if Google delivers real results there’s no reason for advertisers to buy placement on the landing page.  

        Despite this disincentive, Google is steaming ahead with increased semantic search results because where it works, it is far superior to a page of links.  The company is slowly killing its cash cow in a classic if-you-can’t-beat-em-join-em move.  The only way this works is if the company can replace the eventual loss of revenue with profits somewhere else.  The company isn’t likely going to start charging for core products, so it will instead simply target ads to all aspects of Google usage.  Between G+ and search, the company will still have enough user data to serve relevant ads, they just won’t necessarily be the result of a search query.  I’m skeptical that it will work, but Google doesn’t have much of a choice.

      • Henry

        That makes a lot of sense. In other words, Google is potentially in big trouble.

      • Joe_Winfield_IL

        Potentially, but to bring it full circle – Google is in no position to run Android indefinitely as a breakeven business.  The company needs a hit outside of search. The hit needs to be profitable, not just widely used.  Shareholders will eventually notice this and lose patience with the marginally profitable strategy for Android.

      • Walt French

        I was just today reminded that Google went public in August 2004, and bought Android Inc just a year later. A decision to attack mobile, then find a good vehicle and acquiring it could take quite a time; since I’m not aware of any evidence, I’ll guess that Google could have decided to make the move even before they went pubic. Android may be a little closer to Google’s heart than I have been thinking.

        But companies hold on to bad investments for about the same reason that individuals do: mostly, to avoid recognizing a mistake and especially not wanting to risk seeing it zoom in value after a spinoff. However it is seen internally, the recent decision to buy Moto (about 7+ months now) indicates they want to continue to leverage mobile synergies rather than cut Android loose now that it’s met its goals of preventing Google from being locked out of mobile.

    • disposableidentity

      Sure, Google is a determined competitor who’s not super concerned about short-term Android profits. On the ther hand this analysis shows that Google’s pockets can’t be all that deep in this market.

      Sure they can subsidize R&D, or a ‘hail marry’ like the purchase of Motorola. But if these numbers are even somewhat close to the truth (and Horace has a good track record in this regard), we’ll never see Google-subsidized handsets (or even a strategic pulling of the plug on Google services for iOS). The gulf is just too wide.

      • Joe_Winfield_IL

        We may see the strategic plug pulling, but it’s a decision that’s much more likely to be made in Cupertino than in Mountain View.  Apple can’t eliminate Google search (the devices are web enabled after all), but they can make it less important to users.  

        The first step is in mapping; Apple has bought no less than three mapplication companies in the last couple of years, and the only reasonable justification would be to punt Google Maps from iOS.  This is the only product in the relationship between Google and Apple where the cards are held by Google, and Apple wants very much to change that dynamic.

    • http://profiles.google.com/larry.davis Larry Davis

      Very good questions.  However, the impact of iOS on Google is far greater than the impact of Android on Google.  Apple wields a lot of power in this equation.  If Apple were to pull out of any deal with Google, their revenues from mobile will tank.  How do they make up for that?  The same way they currently make money, advertising.  So Google must significantly increase ads, a user annoyance, to maintain some level of current parity should Apple ditch them entirely (not entirely possible as Apple doesn’t control all advertising on their devices).

      Does Google care about profits?  Absolutely, though probably just so much so that they aren’t losing money.  But they can’t continue to lose money should that situation arise.  Apple, on the other hand, has two orders of magnitude to figure out how to continue to make money.  They can lower the price of their devices, for example, and squeeze out the desire to buy an Android device.  Apple has the margins to do this, Android makers do not.  So their devices get worse, the Google experience gets worse, and users have less and less reason to go with Android.

      I don’t see this working well short term or long term.  I’m not quite “getting” the strategy of Google yet with Android.  Perhaps smart TVs will somehow pay off, but that has been an abysmal failure this far as well.  And they have to pay that $12.5bil for Motorola somehow, putting them further in the hole.

      • Walt French

        “Does Google care about profits?”

        Let’s recall that Google developed search, originally its sole service, into a major resource before figuring out that they could monetize it thru ads. A couple of years, IIRC, and the venture money was patient despite a monstrous burn rate thru their money.

        It’s conceivable, of course, that its business plan even called for it to become so dominant before showing a monetization strategy, so that Lycos and other competitors wouldn’t have the user or capital base left to copy an AdWords-like capability. (Google’s ad auctioning was, after all, licensed, not their own, and could’ve been used by others with a little time and money.)

        If this little conjecture is correct (or if it factored into Google’s business plans much at all, even), Google would be happy to duplicate that success on Android: happy to bide its time while starving out the competition, then to become a major money-maker. To knock out three-fourths or more of all the competition, at which point it could update the business plan for higher profits. 

        I personally don’t see that scenario playing out; all the OHA members understand the risk that generic AOSP will be cut loose and Googorola will become the premium set of services without which OHA members’ phones will go nowhere; none more so than Samsung, the one with the most power and alternatives to survive. Certainly, Microsoft is sweating bullets to prevent it, and Apple keeps acting like it wants more and more business, not to retreat into some sub-10% niche.

        But that’s not to say Google isn’t angling for just that. Long range investors would be quite happy; the only people who’d get upset are those who claim that Google is all about open, or who assume that Google just does things for some greater good without expectation of profits.

    • AC88

      ”  . . . a rival that is not interested in profits? ”

      Google is very interested in profits, just not off the sale of hard wear.   
      Google is cautiously fearful of losing profitability as desktop search continues to go mobile, hence Android; similarly Google is hopeful that  Android will serve as the nexus through which it can connect all of its services and thereby create a mobile version of its desktop self.  

      To-date, it would seem that it’s shy of reaching that goal of $10/ device.  

    • http://www.noisetech-software.com/Home.html Steven Noyes

      “Going forward (e.g., 2013 and beyond), how successfully can Apple compete against a rival that is not interested in profits?”

      Apple would love that since that competitor would soon be out of business.

      • Henry

        The question I raised in my comment was whether Google is interested in profits from Android directly, or instead on remaining profitable in advertising, for which large Android market share might be a necessary condition. If so, Google’s interest might be in having Android phones sell at close to cost (in order to capture market share), which could make the industry landscape challenging for Apple.

        The discussion above from some of the other comments and Horace have helped clarify this issue for me. (Thanks!)

    • Bernard Sangil

      “slightly though not significantly better quality”? We probably live in parallel universes…

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  • jfutral

    I want to know what counts as “Android revenue” since Android OS is not sold.

    I’m beginning to think, for Google, Android isn’t a product, per se, it is a feature, a way for google to be more in control of where their customers access Google services rather than be at the mercy of other mobile vendors.

    Joe

    • http://www.asymco.com Horace Dediu

      Android revenue is what Google wants to call Android revenue. Presumably it’s revenues which can be attributed to services running on Android devices. Google counts activations of Android as devices which run their services hence I assume that is what they are measuring.

  • http://profiles.google.com/larry.davis Larry Davis

    mispost…

  • Jimmy

    Curious – how does this information look to Microsoft and Nokia. Does it validate the license model or does it perhaps indicate that unless you can obtain significant market share, the moble platform business as isn’t such a good one.

  • Joe

    It would be interesting to know what this implies for Google’s revenues if Android were to decisively win the smartphone competition (at 90-95% of phones sold). While I don’t see that as a likely scenario, is it in Google’s best interest to maintain diversity or is it in their interest to win?

  • Echotoall

    Danny Sullavin wrote up an interesting breakdown of the Gaurdian’s, and questions the validity of the claim. It’s worth a look considering your using these numbers as ur baseline.

  • http://www.facebook.com/profile.php?id=695639193 Stephen Campbell

    The $544 million may have also been adjusted for the time value of money (money is worth more in the past then it is today), so that number may be artificially inflated after the fact for the same reasons why you assume they would pay the same percentage for previous years as for future ones.

  • http://kaizenity.blogspot.com/ FalKirk

    In my opinion, Google is losing more than it is gaining from Android. It provides very little return on investment. It hasn’t proven to be an effective “moat” at all. It’s alienated key strategic partners. It’s opened Google to patent liability. It’s fragmenting and growing weaker as it grows larger. It’s a huge distraction.

    Google’s initial decision to launch Android was a strategic mistake and their ongoing commitment to Android is a mistake too. They should be focusing on how to diversify their portfolio of products. Instead they’re devoting time, resources and attention to a strategic cul de sac.

    • Joe_Winfield_IL

      I’m surprised that Chrome OS has been as quiet as it has.  To me, it’s a much better strategic fit for the rest of what Google does well.  Everything about Chrome is cloud making it truly device agnostic.  But more than that, cloud forces users to stay logged in to Google.  With their suite of online products, Google has the potential to more than match iCloud’s simplicity.  Chromebooks, re-imagined as tablets, could very closely resemble the “pure Amazon” experience of the Kindle Fire and run on similarly inexpensive hardware. This seems like exactly what Google wants – namely users who live in an all Google world for not only access to information but also content consumption and creation.  

      I’ll throw out a wild speculative guess.  Maybe Chrome is the real reason for the Motorola acquisition.  Think about it; Google would be able to maintain its neutral position toward Android OEMs while simultaneously building an integrated competitor to its own OS.  Eventually, they could orphan Android and make it truly open source.  Just a thought, but framing the acquisition in this light is the only way I can make it make sense.  It would also explain the odd quiet period following the splashy release of the first Chromebooks. Maybe Google is waiting for the deal to close before stepping up Chrome in a big way.  

      Or maybe they are just reckless and disorganized, and had an unnecessary pile of cash burning a hole in the company’s pockets.

      • http://kaizenity.blogspot.com/ FalKirk

        If Google follows yours or some similar theory regarding Motorola, I will be very impressed.

        Instead, I think – but don’t know – that Google is going to try to replicate Apple by improving their store and their ecosystem and then producing both the hardware and the software for an upcoming Android phone/tablet.

        I hope I’m wrong, because if they do, I believe it will be a disaster of monumental proportions.

      • http://wmilliken.livejournal.com/ Walter Milliken

        I like the “reckless and disorganized” theory, myself….

        I will also point out that the Chrome strategy is subject to the many of the same problems that killed “thin client” computing, which it is basically just another version of. Depending on constant net connectivity for everything is dangerous. While they’ll probably do some client-side caching of both application and user data in the Chromebooks, that’s not really Google’s model of how the world works.

        The problem with the “guts in the cloud” model is exactly the sort of thing that causes people to complain about Apple’s Siri — sometimes it’s there, and sometimes it’s not, and it’s therefore not reliable. This makes the user experience of thin-client devices variable in ways outside the user’s control, and generally makes them inferior to models where most of the work is done locally, using the cloud only to access data that’s most effectively stored in the cloud. Note that the latter appears to be Apple’s model for iCloud — it’s more a data distribution/backup mechanism than implementation of main application services.

        Ultimately, I expect Chromebooks to fail due to the user experience issues, and the fact that the cost savings of the thin-client model tend to be minimal. In the last iteration of the thin-client model, the client devices had to have about as much CPU and graphics power as a regular desktop computer to give a satisfactory experience, and about all that was missing from the design was the disk drive and an OS, which wasn’t a big fraction of the system cost to start with.

        I don’t see this as being much different in Chromebooks — they still need all the graphics horsepower to drive all those pixels in the UI, *and* they need to interpret all the Javascript code for the applications, which is unlikely to be any more efficient than native application code (just smaller), and very likely less efficient to some degree. Basically a Chromebook is nothing more than a netbook with less mass storage and a minimal native OS and application set — sounds a lot like the old Palm Pilot, actually. I can’t see where it will do anything any better than existing alternatives, nor is it likely to compete on price other than by using cheaper components like the netbooks did. About the only advantage a Chromebook has over a netbook is not having to pay Microsoft for a Windows license. I.e., Chromebooks are just a re-branded retread of the early days of the netbooks, when they were based on free Linux software.

        Repeating history and expecting a different outcome is not a known success strategy…

  • http://wmilliken.livejournal.com/ Walter Milliken

    I think it’s also worth looking at the flip side of these numbers. Google’s offering a 0.5% royalty on Android earnings. But they also have a stated position that Googorola’s *FRAND* patents are worth 2.24% of *overall unit sale price*, take it or get sued. Thus, they should be on the hook for that percentage of *all* their cloud revenue, since Google/Motorola doesn’t accept patents as applying to only the part of the value of the system that they directly apply to….

    Okay, so that’s insane, but the costs of Android could rise significantly with an Oracle win. And Oracle’s most successful line of attack on Android IP isn’t even these patents, it’s the Java API copyright. For those interested, I recommend reading the posts on the Oracle/Google case over at http://www.fosspatents.com/

    What happens to Android costs if (as seems at least plausible), Oracle wins an injunction or a significant royalty on Android? Google could wind up with treble past damages and Larry Ellison holding a gun to Google’s head about being able to distribute Android *at all*. At that point, it might be sensible for Google to cut its losses and put everything behind Chrome-based devices. After all, webOS was such a phenomenal success, Google should clearly copy their model….

  • Hugh

    I think the 544 million figure is incorrectly computed. Google has fought Oracles’ damage claims on a large number of grounds. Two are: 1. any patent damages to Oracle can only be for the US, since US patents do not allow for damages on product sold overseas; 2. patents that have not been marked cannot accrue damages until the date the infringer has been notified of infringement, rather than the date infringement began. Insofar as these two features are relevant to the case, then 544 million would be a substantial underestimate of Google’s revenues.

  • Walt French

    I think Mr. Arthur made a very thoughtful interpretation of the information that he had when he wrote the article. But some of the assumptions were critical, and I understand from private communications with him, that he’s had some knowledgeable pushback on his logic. I don’t know whether he would want to comment here, but I wouldn’t rely on the published logic too much.

    Even if the information was more in line with Schmidt’s revelation of a majority (was it 60%?) of mobile income coming from iOS (at some point in time), the benefit of Android could be OK despite a very modest revenue per device. First, it accomplishes its original goal of blocking Microsoft from allying with all the lower-cost smartphone providers, since Microsoft was the original (2005) concern in acquiring Android, and the two firms compete directly in many areas. Second, they might think that OHA members will yet disrupt Apple, or will at least serve many hundreds of millions of users worldwide who could not have purchased iPhones over the past 5 years. And third, it keeps Apple on notice, should it want to re-negotiate terms for iOS usage and who splits the revenues.

    Against these benefits are the opportunity costs that have been discussed here. Consistent with a “throw it against the wall and see if it sticks” model that has generated so many Buzz or Wave products, Google seems to be reacting quickly, but haphazardly and with very little introspection, to opportunities. At this point, every OHA member suspects that every dollar they spend to promote Android as a system will find its way into a Motorola product, which will compete with them. Notably, as part of its settlement with Microsoft, Samsung agreed to develop future phones; it has also been closely allied on tablets (building a developer  mule/prototype). And of course, Apple got a wakeup call that must have informed their interest in developing Siri, their choice of maps and Baidu.

  • redoak

    I would be surprised if Apple was not receiving at least 70% of the search advertising revenues from Google. All major publishers are greater than 50% and Apple has tremendous leverage here

    I bet Apple is making more in mobile search advertising revenues then Google (on a net revenue basis)

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  • Sandeep

    @asymco:disqus : How do you think iAd stacks up against Google’s revenues from iPhone. I think this would be a key indicator to the upside that Apple has in deriving continuous revenues from its ecosystem.

    • BoydWaters

      Is there any indication that iAd matters at all? My impression from far outside this business is that iAd is perhaps a useful technology demo but otherwise irrelevant.

      • disposableidentity

        I think iAd is Apple playing a long game. Learning about advertising. Finding the opportunity in it. Finding a way to make it work in an “Apple TV context” one day.

      • Bernard Sangil

        I have no evidence to back up this claim, but I think iAd matters for iOS App developers, which seems to be the sole objective from Apple’s perspective. Apple clearly has no interest in having a large ad business. iAd is merely an additional incentive to sustain the iOS App ecosystem.  

    • http://www.asymco.com Horace Dediu

      I have not looked at iAd lately. What I do remember from its launch was that it was targeted at brand managers and budgets. It had little in common with adMob (which was untargeted and hence mostly attracts app developer budgets). The challenge for brands is that mobile audiences are difficult to engage and iAd was an attempt to solve this problem. I don’t know if they did.

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  • westech

    This is an article about revenue, not profits. The costs to Google to support Android are opaque to the outside world (and maybe to Google, too).

    I would not be surprised if the Android venture is operating at a loss, all things considered. I would also not be surprised if Google doesn’ t have a good grasp of what their costs really are.

  • Timo Tervolin

    Horace,
    in your analysis, did you consider the fact that a some part of Android volumes is in China & developing markets, where to my understanding Android monetization is more challenging? If that share is large, it affects the ability to make US/Western Europe conclusions.

    • http://www.asymco.com Horace Dediu

      This analysis did not account for distribution of audience. One version which did not get published weighted the earlier adopters of Android as more valuable (i.e. higher revenues/device/year in 2008,2009) but I felt that there were enough assumptions to try to defend. Generally, my guess would be that late adopters will attach lower rates to Android but overall growth will make up the difference. One data point that came out today was that 70% of Android users in the US never use WiFi (vs. 30% of iOS users who don’t). I believe it says a lot about the consumption differences in the two platforms.

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  • JP

    Great post. Next step would be to estimate the draw down likely to google as iOS moves away…maps (see iPhoto developments) & search (Siri)

    • http://www.asymco.com Horace Dediu

      Rumor has it that Apple was toying with handing the Safari search placement to Microsoft. Because they didn’t I believe Google must have been taken to the woodshed on price.

  • beidaren

    It doesn’t really matter how much Google makes from mobile vs desk tops, the size of pie from which google gets its revenu is pretty much tied to world GDP. Google gets paid by advertisers and advertisers have annual ad budgets. Those budgets don’t change much YOY ( they may grow a little as the world economy grows). If advertisers spend more on mobile devices, they will spend less on desktops. Google is not going to get more money even if all ad money is spend on mobile devices. Since google is already a dominate player the in Internet ad market (except in China), there is not much room for google to grow revenue. Just look at google’s stock chart, it’s pretty much range bound in last 5 years. google is no different than my local ConEdson in terms of revenue growth. The electricity usage and ad budgets both grow as the rate of world GDP. googgle had a chance to grow its market in China, but it committed suicide there by making the Chinese government it’s enemy. Google is well aware of this and this why they are desperate to throw dart at anything hoping something will stick to the wall, self driving cars, wind farms, broadband services, …..

    • http://wmilliken.livejournal.com/ Walter Milliken

      A quick search suggests Google’s total 2011 advertising revenues were a bit more than the Q1 2011 advertising spending in the US alone, so there’s plenty of advertising money that Google currently doesn’t capture. Whether they can capture it is another question, but it’s not clear that any of Google’s other services are intended to do more than hold more people’s eyeballs, longer, rather than make money on their own.

      I think Google’s foray into the cable TV business is probably more interesting than their internet services, as a means of increasing their advertising share, though. TV ad rates are a lot higher than Internet ones….

      • beidaren

        “A quick search suggests Google’s total 2011 advertising revenues were a bit more than the Q1 2011 advertising spending in the US alone, ” you lost me here. If that was not the case, google would be in even worse shape than I thought.

      • http://wmilliken.livejournal.com/ Walter Milliken

        My point is that they are definitely getting less than 25% or so of US advertising spending, which gives them a fair amount of headroom to grow ad revenue — though not necessarily in online advertising.

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  • kankerot

    Yawn

    The big hole in this piece is that this is Google first offer which will be lower or are you so naive to believe they will offer their best offer first. So based on the opening offer you fiddle around with some number and the fools lap it up.

    • Kizedek

      What has what Google is offering in settlement got to do with anything? If the percentage, whatever it is (in this case 0.0515%) has any meaning in relation to *Android Revenues*, and if Google isn’t deliberately trying to obfuscate what *Android Revenues* actually means and whether it has any basis in reality, THEN certain deductions can be made about what “Android Revenues” *actually are*.

      This is what Horace has done, made certain deductions based on the data, and provided certain caveats (mostly around the transparency or lack of it in any information that can be gleaned from Google). The offer Google has made, or the amendments they may have to make to the offer in the future, has nothing to do with it.

    • http://www.asymco.com Horace Dediu

      I presume that an increased offer would be a higher percentage of sales. Re-defining what “Android sales” means would open them to Oracle negotiating on that basis as well.
      If the definition of Android sales is not variable then this analysis does not change, regardless of the offer.

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  • M Rogers

    You mention Google’s payments to Apple, but what if Google also makes payment to Andriod phone manufacturers? The “better than free” business case. They may pay a bounty to each manufacturer based on click revenue per device.

    • http://www.asymco.com Horace Dediu

      That is possible, but I have not heard any suggestions that this is happening.

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  • davel

    These numbers brings to mind the question of why Google wanted to go against Apple to begin with? Schmidt was on the board and so knew what Apple was doing and how they were going to attack the market. Presumably he was given a demo unit to play with.

    Considering the revenue numbers why does Google want to anger its former partner. Surely they would benefit more with a friendly Apple where they produce ‘insanely great’ apps for the iPhone and reaps the benefits of prime placement and access to a revolutionary device.

    I understand the strategic issue of controlling your platform, but as you have demonstrated over the years Google has hands off control and just provides a platform for others to design around.

    Is it as simple as Google throwing stuff over the wall to see what happens? Did they really want to piss off their mentor and create an enemy because they thought they were smarter?

    It seems to me that Google would have benefited more by building infrastructure ( ads, maps, search, etc ) and making money that way rather than the incessant fights with Apple that is the result.

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  • Timothu Russell

    Regardless of profitability for Google, android is good for consumers.

    • http://www.asymco.com Horace Dediu

      Isn’t that a bit tautological? If a product is not good for its customers it does not stay a product for long.

  • napata

    mmm ..what about the elephant in the sitting room? The one word that has not been mentioned? Microsoft? the point of android might well be that .. to make MS unmentionable in these discussions!!!!

    • theNewDanger

      how u figure?

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