Android device makers stare into profitless abyss

Numbers tell the story. IDC Research says three out of every four smartphones shipped in 2014 used Google’s Android software. ¹

That sounds like success. It isn’t.

Android phone makers taken as a whole lose money. Even the handful making a profit get paltry returns. Most would be better off if they left their money in the bank.

Follow the money

Despite being three-quarters of total phone sales, Android accounts for only 11 percent of phone profits.

Apple is the winner. It has a mere 20 percent share of phone sales, yet this translates into 80 percent of phone profits.

A single Apple iPhone earns more profit than 30 to 40 Android phones.

Two winners: Apple and Samsung

Only two companies make money from phones; Apple and Samsung. Of those Apple makes five times as much as Samsung from each phone sale.

Beyond these two companies the premium phone market is a train wreck. If we are generous, LG breaks even. Sony, HTC and Lenovo, which now includes Motorola lose money on every phone sold.

To be fair to the Android phone makers, things are worse for Blackberry and Microsoft. They lose about NZ$100 each time they sell a phone.

It seemed like a good idea at the time

On paper Android’s economic case seems sensible. Apple, Blackberry and Microsoft have to invest heavily in software.

Apple spends US$2 billion a year on research and development.

There’s understandable confusion about the cost of using Android. Phone makers may not pay a license fee to Google, but Android isn’t free.

Microsoft’s billion dollar Android shake-down

Mary Jo Foley at ZDNet reports Samsung paid Microsoft $1 billion for patent licences that Android allegedly infringes in 2013. That’s half Apple’s entire R&D budget.

Phone makers also insist on adding their own software to the stock Android operating system. They kid themselves they are adding value, mostly it has the opposite effect. This is a waste of money.

There are two versions of Android. An open source version and a proprietary version. Some phone makers choose the open source version and build their own frameworks on top. Most premium Android smartphone makers use the proprietary version.

Proprietary Android

Proprietary Android includes Google’s apps like Chrome as part of the deal. Unlike the bare-bones open source version it includes all the services modern phone makers need: location services; Google Maps; The Play Store; mechanisms for in-app purchases and so on.

Although Google doesn’t charge phone makers for proprietary Android, the deal is that they leave Google’s services intact. This is so Google can track user activity and use that information to target advertising.

That’s where the real money is in Android phones: the phone makers deliver up users for Google to milk. Most phone makers and their customers seem happy with this.

Open source Android hardware

Phone makers could choose the open source version of Android, but they’d have to build all those services and the supporting infrastructure or find partners who can deliver them. There aren’t many alternative service providers out there.

Which brings us back to the question at the top of the story. Why are phone makers, or their shareholders, pouring money into delivering their customers to Google’s advertising machine?

If you ask them, you get mixed answers. Some phone makers, Huawei is one, think they’ll be left standing after the inevitable market shake out and there will be money-making opportunities later.

That’s plausible, but it requires the kind of deep pockets other phone makers don’t have.

What you lose on the swings…

Others expect to lose money selling phones, but hope to get it back from tablets or wrist devices. Good luck with that one. The tablet market is in worse shape that the phone business.

Nor are wrist devices, smart watches and other wearables going to repair balance sheets. And anyway, Android doesn’t seem well-suited to the wearable format.

It speaks volumes that Samsung’s latest smart watches use the company’s own Tizen software in place of Android.

Companies aiming at the high-end of the Android market are between a rock and a hard place. Apple is the rock. None of them can capture the public’s imagination the way Apple does, nor do they come remotely close to Apple’s margins.

China beckons

In the hard place are cheaper phones from Chinese makers like Xiaomi and Huawei. When it comes to hardware quality and features Huawei’s phones are within spitting distance of the would-be posh brands, but at two-thirds the price. Xiaomi models are even cheaper.

There’s also a weariness from consumers. You get some benefit upgrading from say, a Samsung Galaxy S4 to an S6, but there’s little incentive to open the cheque account each time a new model arrives.

Upgrading phone hardware is confusing. If you were a happy Galaxy S4 owner looking to replace your phone this week what would you choose: the S6, S6 Edge, S6 Edge Plus or the Note 5?²

Another problem facing Android phone hardware makers is that the market appears to have peaked. While the market was growing there was always potential for rewards. Smartphone sales ticked up 10 percent in 2015 compared with 2014, Apple captured all the growth and then some. Android sales fell a little.

Market share matters little when the market isn’t profitable. What matters is who is making money? The simple answer is Apple, Samsung and, at second-hand, Google. For everyone else it’s either a long-term bet or a profitless abyss.

1. Shipments are similar, but not the same as sales. A phone is shipped when it leaves the factory for the distributor or retailer. Think of it as the number of phones the phone maker hopes to sell. ↩
2. It must cost Samsung a pretty penny to market four premium phone lines. ↩