Google’s Robotic Defense of Android

When a reporter asked Google Inc. (GOOG) Chief Executive Eric Schmidt recently about whether the search engine giant was making money on the Android mobile phone operating system, he had a strange answer: “Trust me that revenue is large enough to pay for all the Android activities and a whole bunch more.”

Of course, Google does not break out revenue numbers for Android, claiming it is all part of the search business so investors have little choice but to take Schmidt at his word.  His boast may have less to it than meets the eye.

Google spent $898 million on Research and Development in the second quarter.  The company is smart enough not to put all of its eggs in one basket, but it’s probably a safe assumption to assume that Android costs were at least $100 million, which for a company that generated almost $24 billion in sales last year is hardly significant.  Even though sales of Android-powered phones are soaring, Google does not make a dime off them since it gives the OS away for free.

So, how does Google make money off Android?  The same way it’s always done it — advertising.  In theory, someone using their Android-powered phone will be more apt to click on contextual ads that appear after user searches.   The more devices that have Android, the more likely users will use Google services. How much it will play out in reality is tough to say.  Google already controls by one estimation more than 98 percent of the mobile search market.

To be sure,  Android has earned legions of fans and has managed to steal some of the iPhone’s thunder.  Google is banking on the massive scale of Android to generate profit what Dan Frommer at Silicon Alley Insider describes as “a bet on the future of mobile advertising.”

iSuppli estimates that Android will surpass Apple’s share of the smartphone market by 2012 with 75 million Android devices to 62 million for Apple. Moreover, Android’s share will rise to 22.8% of the market in 2014, and that Apple’s iOS will decline to 15.3%.

Schmidt recently told the  Wall Street Journal:“If we have a billion people using Android, you think we can’t make money from that?”  He estimated that mobile devices could be a $10 billion business for Google without providing specifics such as how or when.  Google does have a history of creating services that people like.

Gmail and Google Docs are gaining share at the expense of Microsoft Corp. (MSFT). Google Maps probably has overtaken MapQuest.  Google’s instant messaging service Google Talk also is popular.  None of them has added much to Google’s bottom line.  Some competitors such as Microsoft CEO Steve Ballmer have questioned how Google will ever make money with Android. He has a point.

And perhaps further evidence that Google will spend money without a business plan, Direct  TV has announced that the search giant will begin selling ads on channels including Bloomberg, Fox Business, Centric, Fuel, G4, Ovation, Fit, Sleuth, Chiller and TV Guide.

Even though Android is a great product, that does not mean it’s a profitable one.

-Jonathan Berr