Why Android is Free
To the average layman, Google’s decision to develop Android makes no sense. Every year, Google sinks millions of dollars into the development of the Android operating system and then gives it away for free. Unlike Microsoft which charges for every copy of Windows installed, Google makes absolutely no profit from each installation of Android. So why does Google continue to spend money developing Android?
Android’s value to Google goes beyond traditional sales revenue and is directly tied to the network effect. As Microsoft figured out long ago, once an operating system becomes ingrained in the population, people refuse to switch due to the network effect. Looking back at the birth of the PC era, as more people began to use Windows, more developers developed software for Windows, and that, in turn, drove more people to Windows. This positive feedback mechanism from the network effect drove Windows to become the world’s most dominant operating system, a position which Windows will not relinquish anytime soon. With the rise of the mobile ecosystem, an opportunity has arisen for another company for become the dominant operating system for mobile devices. Learning from the success of Windows in the PC era, Google, Apple, and Microsoft are all vying for the dominant position in the mobile market.
In Google’s case, charging nothing for Android makes a lot of sense as it lowers the barriers to adoption. By providing Android for free to hardware manufacturers, it gives hardware manufacturers an incentive to use Android as their mobile operating system. In addition, due to Android being free, it allows hardware manufacturers to charge less for their devices, which lowers the barrier to consumers purchasing the device. All of these factors have contributed to Android becoming the dominant mobile ecosystem today. By having Android as the dominant mobile operating system, Google is able to benefit in many ways.
Google’s biggest business is its online search business, and by heavily tying in Google services into Android, Google is able to make money from mobile searches. In addition, Google ends up having a significant amount of control over the applications that user’s install on their phones through the management of the Google Play store. Google takes a cut of every purchase in the Play store and the more people use Android and purchase apps, the higher Google’s revenue from Android is.
http://gigaom.com/mobile/why-google-isnt-worried-about-androids-revenue/
-NoNameGiven
Revenue from store bought purchases is just icing on the cake.
You are forgetting the most important reason as to why android is free (although you did allude to it). 99% of Googles revenue is advertising. The reason that its advertising is successful is that its very accurately targeted. Google is able to do this because it maintains a database entry on you. Yup – YOU. It reads your gmail, knows your interests (through the youtube videos you watch) and even monitors your device usage (locations, activities etc).
Forget Oil and Gold, this information is the currency of the future. And Googles in the box seat to own it.