Looking at the Results of Google’s “Negative Cost” Business Model Employed Through Android

The mobile computing field is growing by leaps while potential casualties are already limping across the battle field before the second round of ammunition has been fired – see Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute! We all know of Apple’s spectacular performance, but the media still seems to allow such to overshadow the amazing progress of Android and those entities that have embraced it over the last year or two. Let’s take a look…

Google employs the “negative cost” business model through Android where manufacturers and carriers are actually paid to use and sell it after getting it for free (before any customization or special app licensing). The result of such is a very compelling business proposition, a business proposition that (shockingly) many people who would be expected to know better believe does not make anyone money. Well, the carriers seem to make better money on Android than they do  on Apple products – reference AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free? and Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability. If one were to review My Thoughts on Roger McNamee’s View of Google and Mobile Computing, you can see where I am coming from. I answered his comments in detail in the following posts:

1. Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google
2. A Realistic Look At The Success Of Google’s Investment History

Part of the answer is simply tracking the success of the companies that have went nearly full Android, such as HTC. Take a look at the historical picture, pre and post- Android…

Android through nearly all price points, geographic markets and carrier platforms – therefore Apple has no choice. Apple has always thrived as a niche company, and entering a space that is being rapidly commoditized by Android is dangerous and at the very least guarantees margin compression. It is not as if money can’t be made in the space, but it is much easier to make money in the commoditized space when you don’t have to pay for the OS development, you know like the Android adopters. Witness the success of my historically favorite (at least for now) handset maker, HTC after they invested full on into Android and benefited from the commoditization of the high end smartphone…

The Android drives revenue/profit scenario is not endemic to just HTC. Notice Samsung, LG, Motorola, etc. – all have made a bundle on Android. Reference the carriers who sell more Android devices than anything else, and get kickbacks from revenue shares. I simply disagree with Mr. McNamara’s observations, as do these charts above.

The HTC story actually gets better, much better. Taking a look at how they performed in the most recent quarter, they actually make Apple’s results look tame. HTC ships 9.7M units in Q1, revenue up 174% year-over-year, reporting Q1 earnings that sported outrageous growth in practically every metric that mattered:

1. 9.7 million units shipped, a 192% increase from the same quarter last year and a 6% increase from the previous holiday quarter,
2. Revenues of NT$104.16 billion, up 174% year-over-year and 0.1% quarter-over-quarter,
3. Gross profits and total assets also blew up by 162.2% and 75.1% respectively year-over-year.
4. The company expects shipments to be between 11 million and 11.5 million units in Q2, which would represent a 100+% increase year-over-year.

HTC actually makes the smartphone that I personally use for business, the HTC EVO, and I have been using HTC phones for about 8 years or so. The Evo was the first phone that was widely accepted as being a better product than Apple’s iPhone. Of course, widely accepted doesn’t mean universally accepted. A technology refresh is due next month with a fresh dose of Android which includes processors faster than desktop processors from just a few years ago as well as 720P HD, glasses-free 3D video (and still pics) record and playback, as well as 1080p 2D record and playback. We’re talking some heaving doses of tech and functionality here. Apple’s biggest suppliers (the most important parts vendors for the products that contributes about 75% of Apple’s profits) and the companies that Apples is currently embroiled in global litigation with (no wonder why) also produce similar products, ex. the LG Optimus 3D and the Samsung Galaxy S II.

Speaking of the Samsung Galaxy, this newest refresh is nearly universally thought of to be the best smartphone available, including the Apple iPhone. I haven’t found a single review yet that has said otherwise. This is an impressive feat considering how “Apple-centric” the media currently is. Reference this snippet from Endgadget:

For a handset with such a broad range of standout features and specs, the Galaxy S II is remarkably easy to summarize. It’s the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. Of course, a 4.3-inch screen size won’t suit everyone, no matter how stupendously thin the device that carries it may be, and we also can’t say for sure that the Galaxy S II would justify a long-term iOS user foresaking his investment into one ecosystem and making the leap to another. Nonetheless, if you’re asking us what smartphone to buy today, unconstrained by such externalities, the Galaxy S II would be the clear choice. Sometimes it’s just as simple as that.

Be aware that Samsung builds the chips for Apple’s iPad and iPhones, is embroiled in a 4 or 5 country IP lawsuit with Apple, and also happens to build their own proprietary chip for the phone above and most likely the chips for their new (thinner, faster, lighter and possibly less expensive) tablets as well. It appears as if the stuff they build for their own Apple-competing products are cheaper and faster than what they produce for Apple. This puts Apple in a bind as they not only compete directly and sue Samsung, but will have a problem as they cannot quickly jump to another vendor that can produce the volume and tech that Samsung does. What happens when your biggest and most valuable vendor becomes your biggest biggest competitor and you start suing them? What happens when they produce superior tech for their own competing products? Well, we’re about to find out. We may also find out what happens when your second largest and most valuable supplier does the same, for LG is going full steam ahead with high end Android tablets and phones as well, supplying equal or superior screens for their devices as well.

This also begs the question, “What happens when the market tightens up on either the supply or the demand side?” I anticipated this several months ago when I penned, “Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!“. Well, in the news (due largely to the issues that Japan has faced), “Component shortage to hit tablet makers“. When things get scarce, whose products and enduser customers do you think LG and Samsung will cater to first? Their own or Apples?

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