Why Android can never be a closed platform

April 25, 2012
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Google-Motorola

Ever since Google announced it was buying Motorola,¬†industry watchers have speculated¬†if Google was going to make Android a closed source platform exclusively for Motorola’s devices. That will never happen and here’s why.

The Financial Perspective: Revenues & Gross Margins

Google’s revenues from the mobile segment are currently¬†derived from advertising, while¬†Motorola’s are from device sales through carriers and retailers. So let’s compare how much money Google can possibly make over the next few years by following its open source strategy versus a Motorola-focused proprietary strategy.

For the purpose of this analysis, I have taken very conservative estimates for Android revenues, to emphasize my point. I have also restricted my analysis to smartphones, so the numbers are even more conservative.

First, let me list out my assumptions for this analysis:

Proprietary Strategy

Proprietary Strategy - Assumptions

Average Selling Price¬†– Motorola’s average selling price has been¬†estimated by Forbes as $226.30. However, this most likely includes sales of feature phones as well. So I have considered the average selling price for smartphones in the US, which is¬†about $135, added to the average carrier subsidy¬†of about $280.

Gross Margin¬†– Gross Margin is essentially the difference between the price at which¬†Motorola¬†sold a smartphone and the manufacturing cost of the device. Motorola’s gross margins over the last few years have consistently hovered¬†around the 25% mark, so that was a safe estimate to take.

Annual Growth in Gross Margin¬†– This annual increase in gross margin would be driven by increased prices, as following a proprietary strategy would most likely put Motorola’s devices at a premium in the market.

Open Source Strategy               

Open Source Strategy - Assumptions

Average Revenue Per User (ARPU) РThis is an estimate of the advertising revenue Google makes per year on every Android user. The details of this analysis are mentioned here.

Annual Growth in ARPU¬†– This is an extremely conservative figure, given that growth in ARPU is driven by growth in user base. An ARPU growth of 10% is probably more realistic, but I’ve taken this figure to be on the safe side.

Average Daily Android Activations for 2012 РGiven that android activations have already reached 850,000 per day, it is a fairly safe assumption that they would surpass the 1 million mark this year. So I have considered an average figure of 1 million for the year.

Annual Growth in Activations РThis is an average growth rate in daily activations from 2012-2016. This, again, is a fairly conservative figure, as daily activations have grown by more than 100% over the last year. This growth should be driven by a sharp increase in global smartphone penetration, which is currently around 30%.

Active Android smartphones discarded¬†– This is an estimate of the percentage of active Android smartphones from the previous year that are discarded in the following year. This excludes refurbished, reused, or re-sold phones since those would still be active Android devices from which Google can earn advertising revenue. Just to add, although I’m sure this is fairly obvious, this number is much higher than any reasonable estimate. I have taken this figure to get an even more conservative estimate of advertising revenue.

Comparison of Revenues & Gross Margins

Based on the assumptions highlighted above, let’s first have a look at Google’s mobile advertising revenues from the Android platform, only considering smartphones sold from 2012-2016.

Open Source Strategy - Chart

Wow, that is considerable growth from Google’s current open source mobile strategy. Now let’s have a look at the sales volume¬†Motorola¬†would need to achieve (taking into account both device sales revenue & advertising revenue from those handsets) to meet these revenue targets.

Proprietary Strategy - Chart

This volume growth is much higher than any reasonable expectation from¬†Motorola, considering their revenues over the last 3 years have mostly been flat. In addition to this, Motorola’s marketing and distribution expenses (Motorola’s operating margin is currently negative) would far outweigh Google’s running expenses (including a mobile advertising revenue share with carriers and OEMs). Therefore, the actual expected volume growth could be significantly¬†higher¬†than this.

Expecting Google to turn Motorola into another Apple, to just match a conservative estimate of their mobile advertising estimates is asking for too much. Google is many things, but a great consumer marketing company, it is not.

Google’s Options

At this point, it is clear that Google did not buy Motorola to convert it into the manufacturing arm of a proprietary Android platform. Rather, Google primarily bought Motorola for the following two reasons:

1) To acquire Motorola’s patent portfolio, to defend the Android platform against frequent attacks from Apple and Microsoft

2) To prevent Motorola from using its patent portfolio to attack other Android manufacturers

Now, Google has a couple of options in front of it:

1) Sell Motorola’s Hardware Business

It would make sense to sell Motorola’s hardware business, as it would put other Android manufacturers at ease. There have been rumors of¬†Huawei being an interested acquirer, and the deal would make sense as long as the valuation was acceptable.

2) Hold on to Motorola for now

It might make sense for Google to hold on to Motorola for now, because Motorola owns some significant distribution relationships with retailers, carriers & cable TV operators, which could come in handy for Google. Google is making a major push into tablets and television, with the Nexus tablet and Google TV, and Motorola could help with that. This strategy carries the risk of alienating other Android hardware vendors, but considering the success and market penetration some of them have seen on the Android platform, it is not a very big risk. OEMs could always fork Android, like Amazon did, but there are some considerable risks with that strategy.

Conclusion

This analysis is not exhaustive in any way, but it does highlight the fact that even though Google has a few options in front of it when it comes to¬†Motorola, using Android as a closed platform on Motorola’s devices is not one of them.

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