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(Bloomberg) — Since Google Inc. introduced its Android operating system in 2007, the company’s strategy has been simple: Give it to developers for free and make money when consumers click ads on the Web or through apps. That model is hitting a snag.
Amazon.com Inc. and Chinese Internet giants Baidu Inc. and Tencent Holdings Ltd. are using Android as a building block for their devices, skipping preloaded applications such as Gmail, Google Maps and YouTube that generate ad revenue for Google, as well as its app store. Amazon’s Kindle Fire tablet, which is gaining ground on Apple Inc.’s iPad, comes with none of those apps.
“The Fire may be the best Android tablet out there, even though it’s the least Android-y of all of them,” said Noah Elkin, an analyst at New York-based research firm EMarketer Inc. “The Google experience is very much in the background.”
Mobile advertising is one of Google’s fastest-growing markets, with industrywide revenue projected to rise to $20.6 billion in 2015 from $3.3 billion in 2010, according to Gartner Inc. With online traffic increasingly coming through apps instead of mobile browsers, Google’s push to wring mobile-ad revenue from Android could be impeded if more device makers emulate and succeed with Amazon’s scaled-back approach.
“Part of the reason Android is so important as an operating system is that it lets Google put its mobile services front and center,” said Ken Sena, an analyst at Evercore Partners Inc.
According to Flurry Inc., a software company that tracks usage of apps, the average smartphone owner uses a mobile app—for example, seeking a restaurant by clicking on the OpenTable Inc. icon on a phone, instead of using a browser to access the website—94 minutes a day, compared to 72 minutes accessing websites via a browser. A year ago, time was almost equally split.
“This may be small potatoes now, but increasingly it’s going to be way search gets conducted,” Sena said.
Many buyers may not know that the Kindle Fire, estimated to be the best-selling Android tablet ever, thanks to strong holiday sales, is even an Android tablet.
Amazon uses its own app store instead of Google’s Android Marketplace, and, like Apple, tightly controls which programs can appear there. The Fire also features Amazon’s one-click e-commerce shopping experience, already familiar to millions of Amazon customers.
The device’s success—with 5.5 million sold during the holiday shopping season, according to Anthony DiClemente, an analyst at Barclays Capital—shows that many consumers are looking for such seamless interplay between software and hardware.
“Apple has taught everyone that people value an integrated ecosystem that just works,” said Michael Gartenberg, an analyst at Gartner. “There’s a real possibility that Android could succeed, but not deliver what Google hopes it will.”
Google executives say it’s more important for the company to expand the Android ecosystem currently than it is to profit from it. The more devices run on Android, the more people will do mobile search and the more likely app makers are to develop programs for the platform.
“We’re in the early stages of monetization” of Android, Google Chief Executive Officer Larry Page said on a Jan. 19 earnings conference call with analysts. “We see a lot of potential for us to make money on Android.”
Google’s main source of revenue is advertising on its search engine. Like Apple and its App Store, Mountain View, California-based Google takes a 30 percent cut on sales of apps from its Android Marketplace.
Of an estimated $44.6 billion in sales this year, $5.8 billion will come from mobile, according to Cowen & Co. Less than half of Google’s mobile revenue comes from through mobile apps, according to Sena. Google’s mobile business could expand to more than $10 billion in four years, said Mark Mahaney, an analyst at Citigroup Inc. That would outpace the 66 percent total sales growth expected for Google from 2011 to 2015, the average estimate of analysts surveyed by Bloomberg.
