Inspite of Android being free, it still makes money for Google: Here’s how? 6 reasons

Yesterday afternoon, i and a friend were discussing Google’s Money making strategy. We both agreed on the fact that YouTube is possibly Google’s next big money maker. The discussion was then about How Android inspite of its impressive stats was not making money for Google.The strategy was that Android with its Open source architecture was possibly Google’s pipeline for pushing a larger bouquet of services and making money on those services. The obvious reference is to Mobile Ads in prime.

In an Fortune article by Sein Weintraub, Weintraub emphasizes that Scale, search, apps and telcos are all critical to Android’s success.

Google CEO Eric Schmidt stated that scale was a key to making Android a big profit center.

“If we have a billion people using Android, you think we can’t make money from that? All it would take is $10 per user per year.”

Just how could Google reach the $10 average per handset?

Goldman Sachs’ James Mitchell notes the following ways in which Google can make money on Android:

1. Android accelerates smartphone and mobile search usage, boosting Google’s operating income by $300 mn, or 2%, per year.
2. Use of Android rather than iPhone reduces TAC payments to hardware manufacturers and carriers, which is estimated to protect Google’s operating income by $500 mn, or 3%, per year.
3. Google collects a 30% share from Android market app purchases, which ends up being low margin.
4. There is an estimated 40% share from mobile in-app advertising via AdMob.
5. Google could use Android to evolve into a virtual telco, providing a single contact number and popularizing its Internet-based calling services, helped by its stake in Clearwire.
6. The last point hasn’t been talked about much, and deserves some attention. With Google Voice, Google is able to circumvent the telcos and deal directly with customers. If they enable their GoogleTalk VoIP service on telephone lines, they could offer a lower cost voice service to their Android customers, who would only need to pay a carrier for data.
Typical smartphone data plans average around $100/month, but unlimited mobile data plans are $40/month. Google could take that another step further by becoming an MVNO and billing their customers directly. Their stake in Clearwire and their relationship with all of the carriers help in this regard.