How Amazon's Kindle Fire Out-Maneuvered Google & Android

On an open source mailing list I made the following statement in a discussion about the Kindle Fire: “Google screwed itself. For a smart company, giving away Android was pretty stupid. Unfortunately for them, Amazon was more strategic in its thinking.” Some people took exception to this, so I wrote the following long explanation for my statements.

OK, let’s look at this from a business perspective, not a religious one. This is long & detailed, with sources for everything. I’ve been thinking & teaching about these issues for some time, so this was a nice opportunity to put it all in writing.

How much money does Google make in a year? We’re talking revenue. Answer: $29 billion. Where did that money come from? 96% of it came from search & display ads on the Web. 96%.

How much money does Google specifically make from Android? Answer: around $1 billion & change. Most of that comes from … ads. $0 from licensing Android. It’s free, remember?

How much money does Microsoft make from Android? Answer: $450 million or so—around $5 for every Android phone sold.

What’s that, you say? How is Microsoft making money from Android? It’s simple—Android is not unencumbered by patents. You know I don’t like Steve Ballmer, but he was right when he said back in 2010 that “It’s not like Android’s free. You do have to license patents.” It’s just that Google basically had its head in the sand when it came to patents for the first ten or so years, and (a) didn’t apply for that many, especially vis-a-vis other technology companies, & (b) thought it really didn’t need to worry about patents, especially with Android. Then Google bought Motorola Mobility for $12.5 billion to try to shore up its patent portfolio (by the way, do the math—Motorola cost Google $12.5 billion, and Google’s making a bit more than $1 billion each year from Android. Paying off that Motorola purchase is going to take a while.)

Let’s examine the money that Microsoft is making from Android. Look at what Asymco reveals: “Microsoft gets $5 for every HTC phone running Android … Microsoft is suing other Android phone makers, and it’s looking for $7.50 to $12.50 per device” That article was published in May 2011. At that time, Microsoft had made ~$150 million from HTC thanks to Android—at the same time, Microsoft had made only ~$30 million from sales of Windows Phone 7!

What happened last week, on 9/28/11? Why Samsung announced that it was going to start paying Microsoft licensing fees for Android! “Microsoft will receive royalties for Samsung’s mobile phones and tablets running the Android mobile platform”. As Florian Mueller, founded of FOSS Patents puts it, “By taking a royalty-bearing license, Samsung recognizes that Android has intellectual property problems that must be resolved with license fees, and reduces to absurdity the idea that Google is going to be able to protect Android after the acquisition of Motorola Mobility.” And how much money will Microsoft receive for each Android device Samsung sells? No one except those two companies knows for certain, but Mueller said this, which sounds about right: “A couple of months ago, reports came out of Korea that Microsoft and Samsung were negotiating, and those reports suggested that Microsoft asked for $15 per device and Samsung was trying to move the amount closer to $10.”

At this point, Microsoft has gotten the following companies to agree to pay it a fee for each Android device:

Slowly but surely, Microsoft is extracting licensing fees out of all makers of Android devices. Where’s Google in all this? Didn’t Google just buy Motorola Mobility for all those patents?

Unfortunately, it doesn’t appear that Google & its purchase of those thousands of Motorola patents are going to help much. Again, from Mueller: “If Samsung truly believed that Google’s acquisition of Motorola Mobility was going to be helpful to the Android ecosystem at large, it would have waited until that deal is closed before concluding the license agreement with Microsoft. But Samsung probably knows it can’t rely on Google.” Further, some have pointed out that “Motorola sold off its best patents many years ago to General Electric or spun them off as part of Freescale Semiconductor”. On top of that, Mueller makes a telling point: “Motorola Mobility’s portfolio has failed to deter, and it has so far failed to make any meaningful headway in litigation. Motorola Mobility is on the losing track against the very two companies [Apple & Microsoft] Google says those patents will provide protection from”.

[SIDENOTE: And by the way—Google is about to get the stuffings knocked out of it by Oracle, again because of Android. Why? Because Google infringed on Oracle’s IP for Java when it developed Android because it didn’t get a license first. Some incredibly damaging documents & testimony have come out of the lawsuit Oracle filed. To whit:

In fact, the judge summarized his view this way: “Google may have simply been brazen, preferring to roll the dice on possible litigation rather than to pay a fair price.” END SIDENOTE]

Charlie pointed out that Google will make $1 billion in ad revenue from Android (actually, the numbers I’ve seen said more like $1.3 billion, but $1 billion is fine). While that sounds like a lot to you & me, it’s nothing. Seriously.

So I mean, $1 billion for Google from ad revenues from Android? Big deal. Especially since they give it away for free and will therefore never made money from licensing. In fact, it will most likely end up COSTING Google money if they have to pay Microsoft and Oracle (in the case of Oracle, that’s a “when”, not an “if”; in the case of Microsoft, they’re at least going to have court costs to deal with the inevitable litigation).

Heck, think about this: Android is on roughly 130 million devices, and Google will make $1 billion in revenue from ads (pretty much the only major source of money for Google from Android). iOS is on 180 million devices and Apple makes around $20 billion in revenue from device sales, media & app sales, and a teeny tiny amount from ads. I have no doubt that Android will be on more devices than iOS. But so what? Apple makes FAR FAR FAR more money from iOS than Google does from Android. And it always will, because Apple makes money in several ways, while Google makes almost everything from ads.

Now, let’s turn to Amazon’s new Kindle, the Fire.

It’s easily going to be the best-selling Android tablet. Easily. No contest. Why? Because Amazon gets it—it’s not enough to just have the hardware. You have to have the full ecosystem of apps, music, movies, and other media. In fact, Jeff Bezos said this when he rolled out the Kindle Fire: “In the modern era of consumer electronics devices, if you are just building a device you are unlikely to succeed. Today it is about the software, the software on the device and the software in the cloud. It is a seamless service—this is Kindle greeting you by name when you pull it out of the box. Some of the companies building tablets didn’t build services, they just built tablets.” (Note that this is also true of the iPad, & one of the biggest reasons it’s been so successful; note also that this does not mean that the Fire is going to “kill” the iPad at all, as they are complementary, not exclusive, devices).

When it comes to that full ecosystem, Amazon has it, in spades. They have over a decade of experience in usability, marketing, content, and, as a result, they already have tens of millions of accounts & credit cards. Couple that with a great price—$200—and you’re looking at a potential blockbuster. Oh, and don’t forget the power of Amazon’s front page either. The new Kindle is going to be in front of millions of eyeballs, and that’s going to be invaluable.

But here’s the interesting part—Amazon is downplaying the Android part of their Kindle. How many times is “Android” mentioned on the new Kindle site? Once—mentioning the Amazon Appstore for Android. That’s it. Result? Google will gain next to no mindshare from the Kindle Fire, because 99.99% of buyers won’t have any idea that something called “Android” is connected with it.

In fact, Amazon can’t use the word Android to describe the OS on the Fire because they’re not including any of the Google apps that Google requires for an “Android” device. Amazon has forked an earlier version of Android and altered it to fit its needs—not Google's—so, in other words, Amazon gets something from Google (an OS) while Google gets … what, exactly? A bit of search revenue from web use, but that brings us to Silk, Amazon’s web browser for the Kindle Fire.

(By the way, here’s another data point to ponder—has anyone seen any word from Google welcoming Amazon’s Kindle Fire to the Android family? Press release? Blog post? Tweet? Anything? Nope. Nothing. Now why do you think that is?)

Silk leverages Amazon Web Services to speed up Web browsing for its users; as the page at Amazon for Silk says, “All of the browser subsystems are present on your Kindle Fire as well as on the AWS cloud computing platform. Each time you load a web page, Silk makes a dynamic decision about which of these subsystems will run locally and which will execute remotely.” Who knows what Amazon will do with Silk going forward? You can be sure that it will tie Silk to its properties more tightly (right now, for example, the top option on the Kindle Fire itself is a search field that—taadaa!—pulls up items from the Amazon store), again helping Amazon. And what about when Silk expands to desktops? Another benefit for Amazon. Another loss for Google, especially the more Amazon pushes its own services.

So, to sum up:

So yeah, I think I was pretty accurate when I said in a previous email that “Google screwed itself. For a smart company, giving away Android was pretty stupid. Unfortunately for them, Amazon was more strategic in its thinking.”

PS—I use Google every day, for searching, email, calendar, & more. I use Amazon constantly. I use Apple’s stuff as my main computing environment. I like (most aspects of) all three companies. I also depend upon Linux & other open source software for my business. But I will also criticize wherever I feel it’s appropriate, as I have done here.

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