How does Google make money from Android?

Google made $31 billion in revenue from Android, according to a court filing by Oracle.

Oracle is engaged in a protracted lawsuit against Google, over its alleged infringement in Android of two of Oracle’s Java-related patents. In a hearing last week, Oracle’s counsel claimed that Google not only makes money off Android, it does so on a large scale: $31 billion in revenue and $22 billion in profit since 2008.

It’s important to note that these figures didn’t come from Google directly. It looks like Oracle calculated the profits based on documents provided by Google. Because Oracle wants compensation from Google, it benefits from a higher estimate, so take it with a grain of salt.

On the other side, Google is in a tricky situation: publicly admitting it makes a lot of money from Android bolsters Oracle’s financial claims, while denying it could spook investors worried that Android is a money sink. That’s why Google has always been tightlipped about Android financial data.

Android is, of course, free to use by any OEM. So how is Google able to make billions in profits from it?

We can only guess, but two sources stand out: mobile advertising and app sales.

Mobile advertising

Mobile advertising is clearly the main source of revenue when it comes to Android. We know – also thanks to Oracle’s lawyers – that Google paid Apple $1 billion to be the default search engine on iPhones and iPads in 2014. That’s just the tax that Google had to pay for the privilege, so the actual iOS revenue is likely a few times larger.

iOS users are more lucrative compared to Android users from an advertising perspective, because, on average, they have larger incomes and they are more likely to buy stuff online. But Android users are much more numerous than iOS users. In September 2015, Google said there were 1.4 billion Android devices in use worldwide. Even with a lower average revenue per user, the money that Google makes from ads shown on Android devices is probably significantly larger than the iOS revenue. And, there is no Apple tax to pay.

Google makes money from the ads that are displayed when users search via its app and online. Many people also use YouTube, Google Maps, Drive, Gmail, and Google’s many other apps and services. Google shows ads in some of these services, but it also analyzes user data to improve the relevancy of the ads it serves in other places. And, because every phone user has to sign in with their unique account when setting up a phone, the data is accurate and highly personal.

Google also makes a few cents whenever you click one of those ads shown in many ad-supported apps.

Now mobile advertising makes Google less money than computer searches, because the value of a “click” is generally smaller. But mobile usage increases every year, and thanks to Android and its suite of apps, Google has a network of capillaries extracting money out of the entire ecosystem.

Apps

Apps are the second big source of money for Google. The company takes a cut from every sale app developers make on the Play Store. And it’s a big store, with over 1.5 million apps, out of which a big chunk are paid apps or apps that offer in-app purchases. Google takes a 30% cut out of every sale, offering in exchange the platform and some of the required infrastructure, including a cloud system for delivering notifications.

Android apps tend to generate less revenue compared to iOS apps, for the same reason iOS users tend to be more valuable from an advertiser’s point of view. Revenue from Apple apps is 70% larger than Android apps revenue, despite the fact that Android apps have twice the number of installs. All that considered, thanks to the sheer size of the Android platform, it’s safe to say that Google makes a decent chunk of money out of its 30% cut of app revenue. That chuck is only getting bigger, as Android app installations continue to grow rapidly.

Google said during Google I/O 2015 that in 2014 alone it paid $7 billion to developers.  At a 70% developer share, the revenue from Android apps in 2014 was an impressive $10 billion.

App Annie

Play Store media

Google also makes some money from the media side of the Play Store. Paid music, movies, books, and subscriptions are just a tap away for hundreds of millions of users, so even with a low usage rate, it’s fair to assume that there’s a steady trickle of money coming in from this source.

See also: 10 best Android apps released in 2015!32

Everything else

Mobile advertising and app sales are the biggest sources of Android revenue for Google. The company sells some hardware, but with the small profit margins that hardware allows, that money is largely insignificant. The same can be said about ventures like Android Pay and Project Fi.

Google does not make money from Android in itself. Anyone can take the Android source code and use it on any device. Likewise, Google doesn’t make money from licensing its suite of mobile Android apps. Apps like Google and YouTube are free, even though manufacturers reportedly have to pay third-party testing companies six-figure sums to ensure that their devices meet Google’s compatibility requirements.

$31 billion?

Getting back to the revenues claimed by Oracle, how realistic is the $31 billion figure? Well, we know that in Q3 2012, Google boasted 500 million active Android devices and a mobile revenue run rate of $8 billion (including iOS). In the same quarter of 2011, it was just $2.5 billion.

Since then, the number of Android devices nearly tripled and the number of iOS devices ballooned as well. Plus, in 2016, Android has far more mobile apps and Play Store content. All this considered, the $31 billion lifetime estimate doesn’t look too farfetched. For what is worth, Google did not dispute this figure, it just wanted it to be made confidential. It’s even possible that the sum is actually smaller than reality, depending on how Oracle defines revenues.

At the very least, it’s clear that critics that derided Google for not making any money from Android were terribly wrong.

Google will strip Oracle’s Java code out of Android

Google has confirmed that it will no longer use Java application programming interfaces (APIs) from Oracle in future versions of Android, according to VentureBeat. Instead, it will switch to OpenJDK, an open-source version of Oracle’s own Java Development Kit. While you might ask, “Who actually cares?”, Google says the change will simplify app development by creating a common codebase for Java. It’s hard to imagine that such a huge change (8,902 files are supposedly affected) isn’t related to Google’s ongoing legal dispute with Oracle, though. That dispute, depending on how it’s resolved, could adversely affect Android development and app coding in general.

The epic dispute started when Oracle sued Google for copyright back in 2010, claiming that Google improperly used its Java APIs. Google argued that the APIs in question were essential for to software innovation, and therefore couldn’t be copyrighted. In 2012, a jury found that Google didn’t infringe Oracle’s copyright, but a Federal court mostly reversed the decision in 2014. The US Supreme court didn’t want to touch the case and sent it back to a lower court, where it currently sits.

Users on Y Combinator’s Hacker News who first spotted the code have theorized that it may mean that Google and Oracle have settled the lawsuit out of court. However, Google told VentureBeat that the legal dispute is still ongoing, so it couldn’t comment on whether the code change is related. As for how this affects you or me, the new code should make it a touch simpler for Android N developers, possibly resulting in better apps and quicker updates. However, the court’s upcoming decision could have much wider ramifications. If they decide that API’s from the likes of Java can be copyrighted, it could turn the patent wars into even more of a cluster-you-know-what.

Source: VentureBeat