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Android crushes iPhone, makes Google $5 billion

COMMENTARY Only a few years ago, Apple's (AAPL) iPhone clearly ruled the smartphone roost. Recently, it's been clear that Android has taken over. Google (GOOG) just released, as it periodically has, its most current claim of Android activiations: 700,000 a day. To save you the trouble, that's 255.5 million units a year.

To be reasonable, that's the current rate, not historic, so it's not as though that many Android devices will sell in 2011. However, they will next year -- and the number doesn't include anywhere near all the Android devices shipping. Google is starting to leave Apple in the dust, and the unit success casts great doubt on whether Microsoft's (MSFT) strategy on Windows Phone has even the faintest prayer of succeeding. Oh, and Google is likely also making a bundle on its "free" product -- about $5 billion by a reasonable estimate.

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One really big number

To get a sense of scale, compare the 255.5 million to the number of iPhones and iPads that Apple sold in its fiscal year 2011, which ended in September: 104.7 million. Add in about half of the iPods sold (the touch version also uses Apple's iOS operating system) and the figure rises to about 126 million.

Yes, there will be a jump this quarter, as Apple finally released the iPhone 4S, but that jump won't possibly catch up to where Google already stands. Not that you can necessarily trust the numbers from Google. There are unanswered questions. There have been apparent contradictions in what Google engineering VP Andy Rubin has said in the past, and there's also no way to know whether the number of activations has ever dropped in a quarter, because Google presumably only provides happy news.

But Google has finally addressed one question that the late Steve Jobs raised about Android activations -- what they actually include. Google only counts each device once, and activation means "go into a store, buy a device, and put it on the network by subscribing to a wireless service."

Whoa. If you don't subscribe to a wireless service, then Google doesn't count the activation. That means Amazon's (AMZN) Kindle Fire won't get added into the number because it only uses Wi-Fi, not 3G. Neither will Barnes & Noble's (BKS) Nook e-reader.

Microsoft's strategy hammers...Microsoft

Once again, Apple is getting beaten by a license-the-software-to-everyone strategy -- the same one Microsoft used to win the PC market. It comes down to math. If enough vendors come up with enough variations on a product, chances are they take market share from the company that does both hardware and software.

Not that Apple is hurting. It will continue to sell many millions of devices, especially as the global smartphone market is still rapidly expanding. Who really gets hurt here is Microsoft and Windows Phone. Its main partner, Nokia (NOK), apparently isn't selling as many units running Microsoft's new operating system as hoped. That led at least one analyst to cut his forecast by 75 percent.

Google is making lots from Android

Good thing Microsoft is getting all those royalty deals from companies selling Android handsets. Maybe it can make some money in mobile that way. One company that is making money off Android is Google itself. Last year I did an estimate, based on 200,000 devices activated a day, which came to $1.4 billion.

That assumed $20 a year per user in ad and other revenue. I also just calculated that, overall, Google makes $27.30 per customer in annual revenue, so $20 a year seems reasonable.

The total estimate seemed conservative, and given that we now know not all Android devices get counted in the activation numbers, it seems even more so. Not that you can ever know for certain, because it's advertising revenue, and Google provides only limited breakouts of where the revenue comes from. However, given the new activation figures, Google is probably looking at almost $5 billion in indirect revenue from Android.

To put that into context, last year Google had $29.3 billion in revenue. In the first nine months of this year, the company brought in $27.3 billion, so its final revenue will probably be in the $36 billion to $38 billion range. So, at Android's current rates, it might represent around 13 percent of Google's total revenue.

No wonder Google calls Android the future of the company. The magnitude of the revenue generated would also explain how Google manages to maintain its high growth rate even as many other parts of the advertising industry, such as Yahoo (YHOO) and AOL (AOL), don't. From 2009 to 2010, Google's revenue rose 24 percent. Android is the company's growth machine.