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Android's contribution to Google

Yesterday I presented the estimated Android income statement vis-à-vis Apple’s income statement. In this post I’ll compare Android as a part of Google’s overall business.

Recall that Google has already been compared in terms of overall revenue, growth and profitability to Apple and Microsoft here.  The argument can be made that mobility has not yet had a measurable impact on Google (certainly not noteworthy enough to be reported by management).

The impact on Google of Android can be shown in the following diagram:

I used color coding to identify non-Android (Green) and Android (Brown) segments of the business. Overall, Android could amount to about 3.5% of total Google revenues and about 5% of operating earnings.

It’s important to note that this is not all the revenue that Google obtains from mobility. This diagram represents Android only and there are revenues also coming from alternative platforms and operator deals.

iOS contributes between 3 and 5 times more ad revenue to Google than Android.[1] The contribution to earnings is even more difficult to assess. We don’t know the terms between Google and Apple for search revenue sharing and placement. One analyst suggests that the cost of sales (TAC) for mobile Safari search could be as high as 60%, far above what Android traffic costs.

The other observation is that Android cost structure is quite small (see third bar from the left above.) My estimate is that Android R&D is only about 3% of total Google R&D. I’m projecting $200 million for 2012. That implies between 700 and 900 headcount. It’s interesting to compare that total to the 20,000 or more that came with the Motorola acquisition.

Having these estimates allows one to calculate many ratios and potential valuations. I’ll refrain from putting a value on Android using multiples or sales or earnings, but would come out well below what was paid for Motorola’s $12.5 billion.

Which again compels one to ask what is the strategy at work here.

Notes:

  1. There are various reports of the ratio including congressional testimony and reports to courts. BlackBerry, Docomo and KDDI were listed as significant other sources of ad revenue by Google in 2010.
  • http://www.facebook.com/profile.php?id=741717344 Dick Applebaum

    “Which again compels one to ask what is the strategy at work here.”

    Indeed… I doubt if there ever was one!

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

      Get into mobile.
       ?
      Profit.

      Android was a fear response to WinMo getting all the mobile space. Had Google known the iPhone was going to successful, I think they would have happily let Apple “win” and take the cream from the mobile advertising pie. At the same time, I don’t think iOS 5 and the iPhone 4S would nearly as nice had Zgoogle decided not to step in.

      • Nangka

        I believe Android was initially created to get a foothold in mobile for Google’s search business at the expense of RIM, Nokia & Microsoft. They already owned desktops. They want to be there in mobile too.

        But when Schmidt got to know the iPhone via his position at Apple’s board, Google got greedy and thought they want to have the cake and eat it too.

        Then when things got messy and they sank deeper & deeper into the Android pit (patents & Moto purchases). Now they even face the possibility of OEM’s backlash as well as being dumped by Apple.

        Like many have pointed out, Android so far hasn’t been what Google had hoped it’ll be, from the Oracle court case and Horace’s financial analysis.

        It is likely the reason Schmidt got fired from his CEO position.

      • Tatil

        It ain’t all that bad for Google. Apple will have a hard time displacing Google from iOS search. Microsoft, even though it is down right now, is still a competitor. Wolfram Alpha, online dictionaries and Yelp are niche players and do not offer replacement products. Siri style search that combines information from these sources may reduce some search revenue for Google, but Apple would probably work on such interface apps even if they were on good terms with Google.

        Oracle’s court case is not going all that badly for Google, and Motorola has scored some noteworthy victories against Apple. (Google would be smart to settle with Microsoft once the merger closes though. I am sure MS can escalate and counter sue Google directly, creating an unnecessary distraction and headache. MS has already settled with all the other major phone makers.)

        “Pit” sounds about right though. Android is said to be a moat strategy for Google to protect access to its mobile services. Now, Moto is a $9 billion moat around Android due to its patent portfolio. They’d better start getting more profits out of Android.

      • westech

        I disagree. I believe that Google is losing the battle with Oracle. There are no major decisions that have gone in Google’s favor, and the jury has agreed that Google violated Oracle’s copyright. Still pending is the issue of whether this was fair use. I am betting that in the end they will lose this too.

        The patent trial is yet to come, as is the damages trial.

        It will take quite a while for this to be resolved. I am sure that appeals will follow appeals. The problem with this is that the longer it goes on for Google, the more they infringe, the greater the damages and the more they have to lose.

      • Ravi

        As you can see now, the patent phase turned out well for Google.

        I’ll also predict that Google isn’t going pay any meaningful damages on the API copyright front. Either the APIs will be found non-copyrightable or re-implementing them will be found to be fair use (in the end). The alternative is too horrible to contemplate for the technology industry.

        Microsoft could go after Apple, Google et al for every non-standard IE-invented feature ever implemented in WebKit. AOL [Netscape] could do the same with Microsoft over IE. Microsoft could squash WINE and go after Oracle [Sun] for WABI (another reimplementation of the Windows API). IBM could go after HP [Compaq] over the IBM PC BIOS. Whoever ended up with Digital Research’s copyrights could go after Microsoft for the CP/M system calls they re-implemented in MS-DOS.

        And, in the most ironic twist of all, IBM could go after Oracle over SQL Oracle sold an unlicensed implementation of IBM’s research for *years* before it was standardized. I suspect the only appropriate damages in that case would be… Oracle.

  • asg749d

    I don’t think there is not strategy here. The strategy here is to enable Android as a conduit to more searches -mobile searches. These searches are the kind that people are performing more of these days. Whether the strategy is being monetized as intended in another matter, as explained by these graphs.

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

      That strategy is clear. My question was about the Motorola purchase.

      • JJ

        I believe your question will be answered soon. I bet those 20K will be significantly reduced soon.

  • http://twitter.com/e_orione Emilio Orione

    Android started before apple to enter the mobile market dominated by nokia, rim and microsoft. The idea of having a proprietary os in the market was not a bad one.
    Apple is not angry with google for android, it is angry because google shifted the whole project from a blackberry clone to an iPhone clone as soon as the iPhone entered the market. In apple’s vision google should have promoted iOS and maintained android as an alternative to rim, windows and symbian phones.
    From the economic point of view this would have made sense, the income from iOS without risk of loosing apple partnership, and a foot on the other side if the iPhone wasn’t as successful as it has become.
    The strategy has blown out when they decided to compete against apple and the motorola acquisition as been a defensive move.
    They have acquired patents to defend android and they are now able to offer a complete android experience the same way apple does for iOS devices, designing both hardware and software. They sensed they needed something more to win at the end, spending whatever necessary.
    We will see if they succeed in making a product really alternative to iPhone. For now they are loosing both apple and oems with this move and they not seem to me a company able to create really great products, but only time will tell.

    • Jonshf

      I think Google started work on cloning the iPhone before the iPhone came out. This implies that Eric Schmidt, then the CEO of Google and also on the board of directors at Apple, had seen or had inside information about the upcoming Apple device. Dubious ethics but nevertheless a mistake by Apple.

      • Walt French

        Let me encourage you to bone up on the timelines here. Jobs and Schmidt obviously had business dealings before his board membership, so it’d be unsurprising if Schmidt didn’t know of the iPhone. But it was not exactly deceptive, either. Many of us saw rumors (although we must have had less idea of how it would turn out).

    • Mike Wren

      “For now they are loosing both apple and oems with this move…”

      Since Apple likes to control all the technology it uses and Google knew that, Google was probably concerned that Apple would eventually replace Google apps on IOS. Apple is now in the process of replacing Google Maps data with OpenStreetMap for instance.

      Google just announced that they will now work with multiple vendors on the Nexus phone with early access to each new Android version. Up until now they have just picked one vendor for each release. This will keep the OEMs happier. And it might reduce fragmentation.

      • http://twitter.com/e_orione Emilio Orione

        On the other hand new fork of android without google are emerging, this is keeping oem happier, they can do without google. The move of the nexus can be a defensive one, do not go without me, but oems have always personalized android and samsumg have won because its personalization is the more apple like.
        It seem to me a move like: why not if the nexus get traction we are in it, but their effort is in other directions.

        “Google was probably concerned that Apple would eventually replace Google apps on IOS”
        That was not a concern, now apple is replacing google because they are in competition, but apple moves have always been to make by themselves when they can do things better, they made their own map app (it has always been an apple app, only data where from google’s servers, now they will use apple’s servers. There is no need for such a move if not the competition with google.

      • Ravi

        Amazon wasn’t competing with Apple on iOS at all before the iPad / iBooks. Even Amazon MP3 was clearly about serving non-iTunes users, not trying to pry users out of Apple’s ecosystem (Did they even have import/migration tools pre-Cloud Player?).

        How did *not* competing with Apple work out for Amazon again?

        Google clearly had way better foresight than Amazon in this area. In fact, without Google’s foresight Amazon, B&N and Kobo would all be completely screwed right now. It’s not an accident that *every* major ebook retailer other than Apple (including Google now that the Motorola acquisition has closed) makes an Android tablet. Consider how secure they would be in the iOS ecosystem if they didn’t.

  • gprovida

    As I recall Google [and orig with Steve Job’s support] strategy was to provide applications [Mozilla, Safari, and Chrome] on the desktop and Android competing with WinCE in mobile to ensure Google had access to customers for its core search business. Therefore, these efforts were not money makers on their own, but strategy investments [sort of like iTunes] to protect Google from the hegemony of Microsoft.

    At some point Google lost their focus and elected to be a direct competitor to Apple in Mobile with their Android copy of iPhone 2.5G in 2007. This lost the relationship with Apple [sort of seen as a betrayal] and due to Android’s success a free OS [and i suspect their vanity or pride] set them onto a new path without a real long term strategy or certainly not one well thought out or articulated.

    Compound this situation with major intellectual property suits from Oracle, Microsoft, and Apple that will undoubtedly have a profound effect on their Android and perhaps general IP approaches [media, SW, and hardware] putting this area at serious strategic risk. Complicated by the Motorola buy and its “train wreck” on FRAND with US and EU courts.

    Finally, their lack of success with Facebook and social, Google+ [sort of like MS Bing and Search], is also being distracted by Android. Ironically, Facebooks poor presence in Mobile created an opportunity for Google, but its best partner to make that work,
    Apple and iOS has been poisoned and they can only depend on Android [Windows 8 mobile is also DOA for them].

    So in the end, their reasonable and clever strategy to ensure access on desktop and mobile morphed into a trap that consumes a lot of resources, poisons partnerships [including Android OEMs], is a legal and IP nightmare, boxes them out of competitive opportunities in on line retail [Amazon], mobile social with Apple and Microsoft/Nokia, etc. for chunk change.

    Business history will have a wonderful time going this as a case study of good idea overwhelmed by vanity and pride.

    • Walt French

      Christensen has a piece out today about the perils of excessive short-term emphasis, so maybe this is a good opportunity to say that I agree with your points, but it’s reasonable to invest in efforts that don’t pan out within 24 months. Wonderful if you get obvious results that way, but no shame to plant trees that take years to bear fruit, either.

      The charts above show that Android is NOT very expensive in Google’s overall strategy, and as an add-on channel for Google advertisers (its paying customers), it delivers a trial mode for dealing with ads in mobile.

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

        But the charts do not account or M&A costs and expenses. If you take those into account, Android is much more than just a testing ground.

      • Walt French

        Well, pre-MMI Android, then. As Horace is intimating, the MMI deal doesn’t jump out at me as having any strategic rationale. I don’t see a single thing that Google can do WITH MMI that it was seemingly trying to do without it.

        But Google is a “fast pivoting” organization, and the future of advertising, their 99% revenue source, is cloudy because the small screens and low bandwidth are NOT very effective for casual enticement by ads. (I.e., they’re incredibly more intrusive and annoying than in print, but less effective.) They’ll keep iterating until they find a solution that deals with the new realities.

      • westech

        “I don’t see a single thing that Google can do WITH MMI that it was seemingly trying to do without it.”

        Google leadership believes, in part, that they are smarter and more competent than the hand set manufacturers that use their OS, so they will show them how to do it right, and if their customers don’t learn from them then they will take the handset business for themselves.

      • Walt French

        In this note, you’ve done a great job in writing without betraying whether you’re enamored of this aspect of Google’s genius, or smirking at their foolishness.

        Alas, even taking it at face value, I’m still bewildered— the OHA has done a GREAT job of achieving market share; what more could Google want enough to expend a few billion and the valuable time of its management? I think I’ve previously expressed my own sense that Google had to buy Icahn’s and Jia’s silence re: widespread patent suits; I haven’t yet seen a more logical reason.

      • Walt French

        In this note, you’ve done a great job in writing without betraying whether you’re enamored of this aspect of Google’s genius, or smirking at their foolishness.

        Alas, even taking it at face value, I’m still bewildered— the OHA has done a GREAT job of achieving market share; what more could Google want enough to expend a few billion and the valuable time of its management? I think I’ve previously expressed my own sense that Google had to buy Icahn’s and Jia’s silence re: widespread patent suits; I haven’t yet seen a more logical reason.

      • westech

        Well, I am not particularly enamored of do no evil as a cover to do whatever they want to do even if it is blatantly stealing other company’s IP.

        I note that MMI is running interference for Google. Google is not yet a phone manufacturer so they are not directly infringing Apple’s patents. Their biggest infringement is of Oracle’s Java.

        Also, I note that the MMI acquisition was to happen in January. If Google acquires MMI and the attempt to use FRAND patents fails, then Google would be in the direct line of fire. Google mat never complete the acquisition. The $2.5 billion might be a small price to pay for staying out of even more trouble.

        I don’t believe that Google took the Oracle suit too seriously. Big Mistake.

      • Ravi

        @westech:

        > I don’t believe that Google took the Oracle suit too seriously. Big Mistake.

        Really? What’s your estimate of the financial impact of (presumably) losing the few bits left in the Oracle suit? How has that changed in the last few weeks?

    • westech

      Well said. I believe that the egos of the Google executives, believing that they are the smartest around, leads them into ventures without thinking through the consequences. I don’t know how deeply this will hurt Google in the long run, but it will hurt. They will regret the Android venture.

  • http://twitter.com/qazwart David Weintraub

    Some of the commentators made the point that Google’s Android purchase was pre-iPhone. It was sort of a Blackberry clone, and the purpose was to get a standard web browser that could correctly use Google’s services. That had nothing to do with Apple.

    The problem is that Google should have quietly dropped Android once it realized that their mobile web dilemma issues were solved with the iPhone, and that this device would soon relegate PalmOS, RIM, Windows Mobile, and Symbian to the dustbin of history. No need for another RIM/WinMo/Palm device. Let others copy the iPhone touch interface and feel the wrath of Jobs. Google will merely remain on the sidelines making gobs of money providing Google services for all comers.

    Without Android, WebOS would have been much more viable. Other Linux based open source solutions were also out there and could have easily filled in that Android niche. And, there’s nothing to say that Googler couldn’t provide help for those other open source Linux based mobile OS projects in their “20% free time”.

    If Google played its cards right, it could have had all the benefits of Android (leading development in a Linux based open source mobile OS which provides an excellent platform for Google’s services) with non of the drawbacks. (Threat of competition from a company with billions in the bank and the technical knowhow to quickly produce a competing product). Their relationship with Apple would still be excellent, and their relationship to the various phone manufacturers wouldn’t be so tense.

    • Ian Ollmann

      Imagine an alternative future where current Android marketshare was instead Windows phone. Microsoft would not have left mobile advertising and search to Google. Follow the money.

      • http://twitter.com/e_orione Emilio Orione

        Microsoft is still late in the modern touch os for mobile. OEMs without android should have gone with obsolete os and not compete with apple.
        Google would have had the whole market in is hands since iPhone would have been the only relevant product.
        If and when microsoft could catch up (too late in any way) google would have been in a better situation to compete with microsoft than today.

      • http://twitter.com/qazwart David Weintraub

        OEMs may have settled on other operating systems. WebOS may have been licensed to other companies (although WebOS was apparently internally a mess). There was also MeeGo, Maemo, Badia, Tizen. All having viability issues in the face of Android. If Android was not there, it would have been very possible that one of these would have taken over — especially if Google had their employees help one of these Linux projects out in their 20% free time.

  • http://twitter.com/antoinef Antoine Frange

    The one thing that is clear from this : financial analysis and strategy are different things, and looking at current accounts and financial statements will not tell you what a good strategy could be. This is exactly why Yahoo never took search seriously back in 2000 : not enough money in it…

  • tlwest

    Would it make sense for Apple to offer a long-term steep discount to keep Google as the main search engine in iOS in exchange for Google stopping further Android development? Or would the current Android share simply end up as Windows share?

    • http://twitter.com/e_orione Emilio Orione

      Nope, apple wants best user experience and will substitute google services only when a better solution will be available. For now google search have to be on iPhone. If google says no, they could change the default.
      Second they don’t need to stop google development, android latest development is not adopted by oem that continue to issue new products with older android version and most important all operator are forking their version on android to be able to cut the cord with google as soon as they will have to.
      If google stops developing they will go their way, if they continue they will still go their way.
      Google could annoy apple only by making their own great android/motorola product.

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

      It’s not clear to me that Android has done any damage to Apple worth repairing with real money.

    • http://twitter.com/fivetonsflax fivetonsflax

      Perhaps this is naïve, but when has Apple bribed anyone not to compete with them? It seems they prefer to out-compete, or to sue. :-)

      • Ravi

        Jobs did offer to “divide the galaxy” between Apple and Amazon. Bezos, insightfully, didn’t take him up on the offer.

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

        Can you provide a reference to this conversation?

  • http://fahrenheit98.wordpress.com/ VrDrew

    “My estimate is that Android R&D is only about 3% of total Google R&D. I’m projecting $200 million for 2012. That implies between 700 and 900 headcount. ”

    If this figure is accurate (and there is nothing to suggest to that it ISN’T) then the question becomes:

    What are Android’s long- and mid-term competitive prospects against iOS and Windows Phone?

    Lets just say that the “low-hanging fruit” of mobile operating systems development work has already been done. That in order to provide additional functionality and/or value to consumers will require geometrically increasing amounts of engineering time and talent. How many engineers does Apple (and Microsoft) have working on enhancements to their 2014 and 2016 releases? Answer: Probably several thousand.

    Android has enjoyed phenomenal growth over the past two years. Its quickly garnered a significant share of the smartphone market. But its also spectacularly failed to make an appreciable contribution to Google’s P&L statement. If Android hasn’t shown a real profit on its first 300 million users, how does it expect to show one on the next 300 million – on whom marginal revenues are likely to be appreciably lower; and fixed costs are likely to be significantly higher?

  • James Saldana

    Apple seems to be the only company focused on profits.

    Even with the economic downturn over the past 4 year, Apple’s profit has skyrockected.

    Yet it’s stock suffers more than companies who are making less, with less growth too.

    Too many stupid investors out there running Quicken on Windows 95, I guess.

  • Per Esmann Jensen

    I don’t think Google is expecting much direct revenue from Android at this point. I see it purely as a defensive play. Anticipating the shift away from desktop computers to mobile devices, Google was afraid it would lose it’s foothold as new and uncontrollable gatekeepers would have full control over browser defaults. The answer: Offer Android as an open source present to the world and combine this present with strong enticements to keep the built in browser in place. All in all, Android is simply about securing search traffic. As always, revenue is to be built in at a later point.

    • vladiim

      Agreed, this maneuver was replicated by Facebook’s purchase of Instagram… both channel plays.

  • JoshPritchard

    I’m enjoying this analysis. That said, I can’t help but point out that the $12.5B acquisition price for MMI is really misleading.

    MMI has over $3B in cash AND tax assets worth at least several billion dollars to Google. Goldman Sach’s Simona Jankowski valued the tax assets at $2.3B in May 2011 (http://goo.gl/3zWC9 ). Shortly after the acquisition, Reuters cited a NY tax expert saying the tax assets would actually be worth $1.7B to Google in 2012, then $700M annually through 2019 ( http://goo.gl/DDWuI ).

    • JoshPritchard

      … so, after netting out the value of the cash and the NPV of the tax assets, you’re left with less than half of the headline acquisition price to justify with the remaining assets. If you believe the value of MMI’s patent portfolio is anywhere near what Apple et al paid for Nortel’s portfolio, Google’s getting a pretty cheap opportunity to experiment with the hardware businesses.

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