How Does Android Make Money?

Google’s Android operating system is the most popular in the nation. It bests Apple, Nokia, Windows, and RIM when it comes to subscribers. But, aside from the Nexus S, Google does not manufacture the phones on which Android operates. Unlike Apple or RIM, which create their hardware and their operating systems, Google simply created Android and said to the world, “Here. Take it. It’s free.” That’s why we have manufacturers ranging from HTC and Samsung to the OPhone, the Chinese ecosystem’s device that cuts Google completely out of the picture, creating phones running Android.
So, did Google create the Android Open Source Project as a not-for-profit? Not exactly. Android funnels a lot of money into Google’s coffers. And the majority of that money comes from one thing: advertising. Here’s a little break-down of how Google has leveraged Android to make money–and we’re not talking indirect money through brand awareness. This is cold hard cash.
  • Search Engine Traffic – Google gets money by driving mobile users to its search engine. The money derives from advertisements placed on the search engine, and the more people searching on Google.com the greater the company’s revenues. Almost every Android device ships with Google search as the default (iPhone’s do too, via Safari). The average Android user conducts 20 searches a month. Once a user hits Google’s search engine, they are measured as an impression, and the industry standard is $20 per 1,000 impressions. To get an idea of revenues pulled in by Android phones hitting Google, we can take into account that Android shipments reached 32.9 million at the end of 2010. By January, each of those smartphones were generating 20 queries per month. All that traffic translates into big revenues for Google, even though a substantial portion of that revenue is kicked back to carriers. According to Business Insider, Google dominates 91.4% of the $487.3 million mobile search market.
  • Android Market Place – Google takes a 30 percent “transaction fee” for each app sold in its market place (some of which is shared with carriers, but at different amounts depending on the deals worked out). Application developers keep 70 percent of the price of each app. Also, Google recently¬†announced a subscription model that takes 10 percent revenues from publishers within the Android Market Place. For example, if you were to subscribe to a magazine through an app you found in the Android Market Place, Google would get 10 percent of your subscription dues.
  • Display Ads (In-app Advertising) – Smartphones are constantly connected to the Internet, which means users do not have to tap into search engines to see ads. For that reason, ads that make impressions elsewhere on smartphones are projected to cultivate an $8 billion industry by 2015. Google positioned itself well to access this market with a $750 million purchase of AdMob in May 2010, an acquisition that has helped the company launch display ads in apps. AdMob, however, is not solely and Android endeavor, as it works on iOS devices as well. But Android nonetheless feeds Google revenues through impressions made via AdMob. I’m sure it’s a big portion of the 2 billion impressions AdMob networks get a day. But on the off chance it’s not a big portion–it’s still 2 billion impressions. A day.
  • Keeping a Leash on Closed Platforms – The final point I need to make here is that Google had to create an open platform that it could be a part of. Google needs access to consumers in order to stay alive. Mobile is predicted to overtake desktop usage within five years. If Google did not create Android, either the carriers or the manufacturers would have stepped up to create their own platforms. These platforms would have been like Apple, where everything is controlled within Apple’s purview. This would have shut Google’s advertising business model out, rendering Google incapable of tapping the majority of Internet users.
  • The Future of Mobile Advertising – smartphones are increasingly being seen as gateways to consumers. They’re ideal from an advertising perspective for several reasons. As mentioned before, they are connected to the Internet. That means they can access our information, our surfing habits, our social graphs, preferences and the like. Therefore, advertisers can target their prospective demographics. But even more exciting for the mobile ad game is location. Ad giants like Facebook and Google envision a future in which ads are pushed out to consumers as they travel from place to place. If, for example, you were in the mall and you walked into the gap, your smartphone would use its GPS to locate you, and the Gap could send you a coupon, update you on their sales, tell you about their newest line of clothing, etc. This service would be powered by Android for a premium.

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