How Does Android Make Money?

You’re part of a billion mobile phones. And not just any part. You’re the software. The brains behind it all.

But you are given away for free.

Even worse, the handset makers who use your software have to pay Apple and Qualcomm royalties.

Does that mean you’re not making any money?

Does it F**k.

android make money

Image: Aiden Asgw, flickr commons

The Oracle Lawsuit

Oracle bought Sun Microsystems back in 2009. Oracle is the granddaddy of the relational database space. Sun were big in servers and high end workstations. Initially many analysts missed that Oracle had picked up the programming language Java for peanuts.

Java’s big breakthrough was its virtual machine, which separated code from its need to have a finely detailed understanding of the underlying hardware.

Java was perfectly suited to mobile phones which came in all shapes and sizes. Android called its virtual machine ‘Dalvik’.

In Hollywood speak, you could say that Android was ‘inspired by Java’. This led to Oracle suing Google for copyright and patent infringement in 2010. The case is ongoing.

As in any serious lawsuit, both sides have the right to root around in each others’ emails. In January 2016, this led to Oracle’s lawyer mentioning that Android had generated $31 billion in revenue and $22bn in profit.

Unfortunately they gave away no indication of how this was calculated. I wrote a paragraph about how they MIGHT have calculated this, but it is not that interesting. Instead, let’s just sketch over the business model and go straight to how it SHOULD be calculated.

Android’s Business Model

  1. Provide world class smartphone software for free.
  2. Free is always cheaper.
  3. Gain 80% market share of smartphones.
  4. Tightly integrate these with Google search and Google mobile applications like Gmail, Play, and Maps.
  5. Earn money on applications purchased through Google Play (small contribution).
  6. PREVENT mobile phone makers from demanding high revenue share on searches carried out on their Samsung, Sony, or LG smartphone.

Apple

Apple have done an exceptional job of vertically integrating the delivery of a mobile phone, from the processor, to the delightful ergonomics and the iOS interface.

Apple likely charges Google 60-70 cents on the dollar for every bit of search revenue that goes through the iPhone, iPad or Safari.

Think about that.

Goldman Sachs estimates that Google’s mobile search revenues were $12bn in 2014 and $15bn in 2015. If Android didn’t exist and the only smartphone anyone could have was Apple, then $10bn of that $15bn would go straight to Apple.

You could say that Android makes money by not being Apple.

If you’re wondering how this indicative number of $10bn relates to the $31bn revenue number Oracle’s lawyer used, its because Apple have 50% market share of US smartphones, and consequently likely dominates high value American searches.  I mostly reject Goldman Sachs estimate that almost all mobile search revenue goes through the iPhone. Android was released in September 2008, and Oracle’s data likely will end in 2014. 2009 to 2014 is 6 years. $31bn divided by 6 is an average of $5bn. It is plausible that Google estimated its own Android revenues at $5-7bn in 2014.

Sometimes You Should Look a Gift Horse in the Mouth

This is a great example of how nothing is ever really free. Samsung and Nokia tried to create alternatives, but they just were not good enough.

Chrome exists for a similar reason as Android. Google are quite simply the unparalleled experts in providing “free” software and services. I doubt anyone except Google could have saved YouTube from its copyright issues.

Should users like you and me look at these free products with suspicion?

I don’t think so. We get top quality search results, web browsing and video for much less than their real value.

On the other hand, large, medium and small businesses should always be cautious when investing in a model that depends on Google. Almost inevitably you will be paying for lunch.

OnePlus are a handset company trying to collapse the profits on smartphones. Go here to read more. Android even flows into what went wrong at Nokia.

Whereas another business model that fascinates me is Credit Karma, who are trying to do good some in finance.

Yuen Lo

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