Google Makes $1.4 B a Year, and Probably a Lot More, on "Free" Android

Last Updated Aug 8, 2010 6:49 PM EDT

Google (GOOG) CEO Eric Schmidt said that the company now sees 200,000 Android device activations a day. The growth rate should make your eyes cross, because it's 25 percent over June's numbers, which were 60 percent over May -- and that's with the introduction of Apple's (AAPL) iPhone 4.

In other words, my estimate that Android devices (more than just phones, to be fair) hitting 18 million by the end of this quarter is overly conservative. Split the difference and round down to get 40 percent. At 40 percent month over month growth, that would be 26.2 million units this quarter. Many critics wag their figures and say, "Sure, lots of units, but all free." Yeah, all free -- and all on a rate to easily make a billion dollars in revenue a year, with no end in sight.

That's right -- Google has hit a rate at which it makes at the very least a billion a year from Android users, and that number will only continue to climb. As Schmidt said, "Trust me, that revenue is large enough to pay for all of the Android activities and a whole bunch more." Let's go through the conservative estimate:
  1. Should sales flatten out after this quarter, that's still over 100 million Android units a year. Yup, Android is going to blow even the iPhone out of the water -- no fandom here, just math.
  2. As Schmidt told the Wall Street Journal last month, making $10 a year per user would be a pretty low estimate. I'd say that $20, which would mean $1.67 a month worth of ad views, with multiple ads a page, is easy.
  3. Although most of the units are phones, not all are, and not all purchases are by new users. So say that only 70 percent of the purchases will be unique users who will be capable of seeing ads. I'd argue this is low-balling it, but that's fine for now.
  4. That leaves Google with 70 million users generating $20 a year, for $1.4 billion.
I'm not counting the existing customer base. I'm not counting continued growth. I'm not counting other forms of revenue generation. That sum is already larger than all of Google's non-ad businesses combined, and it will continue to grow.

The real intriguing idea here is that competitors will never know unless Google explicitly says something, because the money is in ad revenue. All that goes into the giant pot that is more than 96 percent of what Google makes. It enables stealth growth in two ways. First, competitors could assume that the undifferentiated pool of money is the normal search and display ads. Second, even a sudden jump comes in comparison to a much bigger number. Revenue at the end of last year was $23.7 billion. Even 96 percent of that number is $22.8 billion. So say that suddenly Google sees $2 billion this year from mobile ads. That's 8.8 percent growth -- significant, sure, but not such an increase that suddenly everyone suspects something funny is going on.

It's essentially a huge incremental stealth revenue stream. No wonder why Schmidt smiles so often.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

Comments

CBSN Live

pop-out
Live Video

Watch CBSN Live

Watch CBS News anytime, anywhere with the new 24/7 digital news network. Stream CBSN live or on demand for FREE on your TV, computer, tablet, or smartphone.