http://www.businessweek.com/articles/2013-05-16/google-makes-android-but-samsung-makes-all-the-money

Consumer Electronics

Google Makes Android, but Samsung Makes All the Money


To quote Björk (back when she was with the Sugarcubes): “This wasn’t supposed to happen.

That’s what Google must be saying when it looks at this:

According to Neil Mawston at Strategy Analytics, Samsung captured almost 95 percent of all Android profits in the first quarter of 2013. It pulled in $5.1 billion, leaving only $200 million for LG (066570:KS), Motorola (which, let’s not forget, is owned by Google (GOOG)), HTC (2498:TT), Sony (SNE), Huawei, ZTE (763:HK), and several others to fight over.

(Sidenote: If you look at the total smartphone market, across all operating systems, the profit situation is even more dramatic: Apple (AAPL) has 57 percent of all smartphone profits to Samsung’s 41 percent, according to Strategy Analytics. Every other smartphone maker—from Nokia (NOK) to BlackBerry (BBRY) to Lenovo (992:HK) and so forth—has to divvy up the remaining 2 percent.)

This is obviously bad news to any Android maker not named Samsung. It is also troubling news for Google. When Google first started giving away Android to manufacturers, it was counting on a number of equally matched hardware companies to divide the market. No one would get too big, leaving Google in control.

These numbers show that this scenario is far from the case. “Samsung is the tail wagging the dog,” says mobile analyst Horace Dediu. “It’s the OEM that was meant to be the commodity.” Mawston casts it in more specific terms: “We believe Samsung generates more revenue and profit from the Android platform than Google does,” he wrote in his report.

Besides money, Samsung’s domination of Android may yield other benefits. “Samsung has strong market power and it may use this position to influence the future direction of the Android ecosystem,” Mawston wrote. “For example, Samsung could request first or exclusive updates of new software from Android before rival hardware vendors.”

This isn’t the first time Google has been forced to reckon with a mobile strategy that is still clearly a work in progress. The company’s first acknowledgement that change was afoot came in 2011, when Google announced it was acquiring Motorola Mobility. Google had long said it wasn’t interested in making phones, but after the lackluster performance of its Nexus line of handsets (made in partnership over the years with HTC, LG, and once, with Samsung), it decided it needed to bring manufacturing in house.

The second time happened just yesterday, when Google announced it would sell unlocked versions of Samsung’s Galaxy S4 smartphones with a “pure” Android experience. All of Samsung’s apps and marketplaces would be stripped out, leaving only Google’s services.

Reselling one of your customer’s phones but removing their ecosystem in favor of your own is aggressive, to say the least. It’s also a tacit admission that Google still hasn’t figured out its hardware operation. After all, Google already sells a phone with a “pure” Android experience—the Nexus 4, which is made by LG. It also has an entire smartphone manufacturer of its own—Motorola. If Google is selling one of Samsung’s phones, doesn’t that suggest Google doesn’t think its own phone is good enough?

“I don’t think Google understood that designing a handset is extremely complex,” says Alekstra analyst Tero Kuitten. Given Samsung’s runaway success with Android, handsets may be only part of what Google has to rethink.

Grobart is a senior writer for Bloomberg Businessweek and the managing editor of Bloomberg Digital Video. Follow him on Twitter @samgrobart.

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