The Android paradox: lots of smartphones, little money

Smartphones are big business, but it doesn’t necessarily mean OEMs are making money off this massive platform. In fact, most companies are actually coming up short, with the exception of one major player. It was recently asserted that Apple is consuming around 93 percent of the smartphone industry’s profits, which doesn’t leave much space at the table for its competitors, mainly Android OEMs. Despite having the biggest market share of global smartphone shipments, manufacturers building phones based on Android are fighting for scraps. But why is this happening and how is Apple making so much money?

It all starts with the beginning of a device’s development. Unlike its competitors, Apple is pretty much a one-stop shop. Just about everything is being done in-house. The California-based tech giant produces its own software and only releases one to two new smartphones each year. This practice definitely keeps expenses down compared to rivals like Samsung and LG. Toss in some high margins and things start to become somewhat clearer.

So how can Android phone producers make the move from appetizer to entree? Here’s a few ideas that might help struggling OEMs earn a place on a more profitable menu.

Understanding the Problem

Unlike Apple, Android phone makers such as Samsung, LG and HTCuse third-party software offered by Google. While Android is often referred to as a “free to use” platform, this age-old statement is only partially true. The platform’s core software can be installed and even changed by just about anyone, however this excludes the applications that make up Google’s Mobile Services (GMS). Apps such as Gmail, Google Maps and most importantly Google Play are attached to expensive licensing agreements. And while it’s not entirely clear how much these licenses cost, it’s estimated that they range from $40,000 to $75,000 depending on the number of devices being shipped.

Expenses such as GMS licensing, along with hardware production and the development of in-house software quickly drives up costs. Again, Apple only releases a couple of handsets each year, but a company like Samsung cranks out well over 15. Factor in annual marketing expenses for such a heavy roster of equipment and the opportunity to make some serious cash becomes even more elusive.

So What’s an OEM to do?

OEMs produce countless Android-powered smartphones each year, with hardware ranging from top-shelf to the bottom of the barrel. This approach covers just about every market, but it’s certainly not the most cost effective. In order to shake some of the unnecessary expenses that come with producing smartphones, companies need to drop the dead weight in their catalogs taking away from potential profits.

If the most profitable smartphone maker is only releasing a couple of phones each year, should its competitors really be countering with 10 to 15 different handsets? This definitely needs to change. Major companies like LG, Samsung, HTCand Sony need to pare things down to around four different phones or less each year. Just imagine if Samsung only released a Galaxy S6 and Galaxy Note 5 in 2015. This would drastically reduce the amount of cash being spent to market and produce unnecessary and (arguably) unwanted devices. Remember, even smartphones of the lowest quality require costly materials, production facilities and teams of people in order to be released. 

Two phones a year may sound a bit extreme, but in addition to a lighter balance sheet, such a change in direction could result in better products being made. Instead of wasting resources and talent on a phone that will likely only receive one software updates during its lifespan, manufacturers could focus their efforts on providing the best equipment support possible.

Other Possible Workarounds

Another possible way that Android could become more profitable for OEMs would be the release of a platform like Google’s rumored Android Silver initiative. Under this program, Google would’ve paid OEMs and wireless carriers to sell handsets that adhered to Mountain View’s strict specifications. This meant near-vanilla builds of Android, with very little bloatware. In addition to handling the majority of OEMs’ software needs, Google was reportedly ready to invest as much as $1 billion to cover marketing expenses for Android Silver devices. The program was never formally announced and Google reportedly shelved it due to internal doubt about its ability to be successful.

Even if Google has placed such a promising idea on hold, it doesn’t mean OEMs can’t do something similar by themselves. For example, HTCis often praised for its first-class hardware, but the Taiwanese firm regularly struggles to make its smartphone business profitable. If the outfit retired its homegrown Sense software in favor of stock Android, it might prove beneficial for the company. Not just limited to HTC, this idea has the potential to work for any OEM funneling large sums of money into the development of its own third-party UI.

The Flipside

Since Android is a “free” open source platform, anyone can use it and modify it. This opens up opportunities for companies to produce their own mobile operating systems based on Android. Not exactly a new idea, startups such as Cyanogen Inc have already went this route, however it does come with a few tradeoffs. Remember those Google Mobile Services we talked about earlier? Due to licensing restrictions, Google-branded apps are absent from most official CyanogenMod releases. Without Google Play or a proper medium for users to purchase and acquire applications, alternative Android-based operating systems continue to struggle for relevancy.

Not just limited to startups, corporate juggernauts like Amazon have used Android to power its Kindle tablet line. The biggest difference here is that the mega-retailer has managed to launch its own Appstore. Although it may not be as popular as Google Play, Amazon’s offering is one of the few alternative places to buy legitimate Android applications safely. Samsung also has its own Galaxy Apps store, which is currently restricted to its own devices, however the platform has yet to really catch on. Perhaps it will take more time, or even OEMs working together to produce a reliable Google Play substitute. But if such a thing came to fruition, smartphone makers would be able to explore more low-cost software ventures.

The Bottom Line

Android isn’t going anywhere, but its lack of profitability could cause major smartphone makers to notice alternative mobile operating systems. Samsung is already working on Tizen and Microsoft’s Windows Phone is another possible option for OEMs looking to diversify their portfolio.

In the meantime, manufacturers that decide to stick it out with Android will need to make adjustments to their current business models if they desire to operate for profit. I really think scaling back the number of devices released in a year is the best starting point and it’s really not that hard to do. But until this starts happening or Google pulls the trigger on Android Silver, OEMs are invited to a free all you can eat buffet, where cutlery sets cost $40,000 to $75,000.