Kirk Lennon

Android: Google’s Multi-Billion Dollar Boondoggle

Published by Kirk on .

Android is, ostensibly, a resounding success, installed on around 80% of the world’s smartphones, and still growing fast. And while it’s certainly an achievement to have its software distributed so widely, that doesn’t necessarily mean it’s been a success for Google. By the standards most applicable to a business, Android has been a disaster, as evidenced most recently by the complete failure of Motorola. So why did Google develop Android in the first place? Who are the winners? The losers?

Why Does Android Exist?

Google is a web advertising company; despite various side projects and “moon shots”, online advertising is consistently responsible for well over 90% of their income. Internet access had been available on phones for years, but in 2005, it was still largely a novelty. Google adroitly recognized that it would grow in the future, and that they would need to be present on mobile devices if they were to maintain their ad revenues. And so, acting on that insight, that year they bought Android Inc., a startup working (at the time) on a knock-off of the BlackBerry, complete with a physical keyboard and no touch screen. In 2007, of course, Apple announced the iPhone and established a new standard for smartphones. Google changed course on Android, modeling it on the new conventions established by the iPhone, though they initially avoided some of Apple’s patented user interface elements, such as pinch-to-zoom. As the smartphone wars heated up, patents became increasingly valuable, and bidding wars broke out to secure valuable portfolios from fading companies. The patent portfolio of bankrupt telecom company Nortel Networks was auctioned off. Despite bidding pi billion dollars ($3.14159 billion), among other curious numbers, Google lost to a $4.5 billion bid from the ad hoc Rockstar consortium, comprising Apple and Microsoft, among others. It what can only be considered another failure of Google’s management, they rejected the previous offer to join with the consortium, which would have erased any risk from the patents being used against the company, and at a fraction of what they bid. The loss left Android extremely vulnerable to patent litigation—and not just frivolous patent troll suits, but legitimate complaints against Google and its licensees.

Why did Google Buy Motorola?

In 2011, Motorola was floundering. The storied company (Neil Armstrong spoke his famous line into a Motorola transceiver) was losing money and marketshare, and things looked grim. But it did have a trove of tens of thousands of patents from its better days. The company began threatening to sue other Android licensees, while at the same time offering itself for sale to Google. Presumably out of fear over what would happen to its platform if Motorola made good on its threats, Google quickly purchased Motorola—for the sky-high price of $12.4 billion.

When we back out Motorola’s $2.9 billion in cash, Google paid $9.5 billion for the company. They also quickly sold off Motorola’s set-top box division for $2.35 billion, for a net sale price of $7.15 billion. Since the acquisition, however, Motorola has gone on to lose around one billion dollars annualy. To make matters worse, Motorola’s patents have proven themselves worthless in litigation (actually they’ve been fined for abusive litigation, making them actually worse than worthless), so their only value is in whatever pittance they earn from straightforward licensing deals. Motorola as a phone-selling business has been a total disaster. It's consistently lost money and their strategy of selling quality phones essentially at-cost doesn’t really bode well for their profit prospects going forward. The news that Google is unloading Motorola to Lenovo for $2.91 billion then is really surprisingly only for its timing. In just over two years since officially taking ownership, Google managed to lose over four billion dollars on Motorola.

One could argue that Motorola itself didn’t need to be profitable, as long as it was strategically beneficial to the larger Android platform, but Android itself is also a money-losing venture for Google, so Google in effect made one bad purchase whose sole purpose was to prop up another disaster.

Who is Really Winning With Android?

Android has been enormously beneficial to Samsung and many cellular carriers, but I can’t see it as anything other than a colossal mistake for Google. A Google optimist could hope that somehow, one day, Android would be successful enough to make it the right decision, but Android’s popularity is hardly secure. By a very large margin, the most successful Android manufacturer is Samsung, who has taken Google’s software and ridden it to billions of dollars in hardware profits. At the same time, Samsung is aware that sharing software with its competitors limits its ability to lock in customers. If it’s commodity hardware and identical software, why choose Samsung over any of the hundreds of other brands? And so Samsung has worked to build its own customer layer on top of Android, known as TouchWiz. Part of TouchWiz is a suite of apps that, at the moment, duplicate functionality with many of Google’s own system apps. While selling Android phones, Samsung has also been one of the chief backers of an alternative open source phone operating system called Tizen, which could function as a drop-in replacement for Android, if Samsung feels it needs to escape from Google.

The project is still in development, but the largest and most difficult component missing was, until recently, a viable map service. HERE maps, an offshoot of Nokia, announced in November that they’d be supporting Tizen, making an eventual replacement that much easier.

Does Android Make Anything for Google?

Not a lot. Android's major selling point for manufacturers is that it’s “free.” This isn’t entirely accurate, because while the open source project may be free, if you want to include any of the Google Apps, you have to license it, but the license is very cheap, and not itself any significant source of revenue for Google. So what about Google’s cut from Google Play? Unsurprisingly for a “free” OS, the overwhelming majority of Android phones are extremely cheap, low-end phones. Also unsurprisingly, people who buy cheap phones continue to be cheap when using them, and buy few apps and media. Oh, and there’s also the awkward fact that Google has literally no presence on one-third of Android devices.

What about ad revenue, the original goal? Since most Android phones are basically used as upgraded featurephones, the platform is massively underrepresented in web share, relative to its apparent installed base. But, as before, even those who are searching and browsing with it trend towards the less-affluent users, who are less desirable to advertisers. IBM studied the Christmas-season shopping behavior of users and on December 25, 2013, iOS was responsible for five times as many sales as Android, and the average purchase for each of those sales was almost twice as high. The result of this massive discrepancy in spending is that iOS users are much more valuable to advertisers than Android users.

Google could have never bought Android, and would likely be making more money off the iPhone than it already is. It also wouldn’t have lost $4.24 billion on Motorola, or any of the other billions it has spent on miscellaneous purchases and staffing to develop Android. Meanwhile, Google turned Samsung into such a successful smartphone maker that it seems poised to abandon Android completely, which seriously damages Google’s prospects of making it up in the long run. Last week Google released their quarterly earnings, which were just over $3 billion. Indeed, their quarterly earnings have consistently hovered near $3 billion for years. Growth since the first Android phones were introduced has been rather modest, and mostly a result of desktop advertising. As a reference point, in the same just-reported quarter, Apple announced earnings of over $13 billion, which doesn’t even include the $7 billion in profits they used for stock buybacks. The profits are clearly in selling hardware over ads.Android has been great for Samsung, but Google’s revenues from it are minimal, and they managed to make enemies with Apple, which has reduced their profits from much more lucrative iPhone users. If Google had never bought Android, they’d almost certainly have much more money today. Instead, they’ve made enemies and captured the absolute lowest-value segment of the market. Android itself is a strategic error on Google’s part.