The Amazing Economics of Android—Devices Without Profits

I was talking with some friends over the weekend about Android which, as they were noting, has been a runaway success as a mobile telephone operating system product. Tons of people use it, in other words, and it seems likely that it’ll pick up another billion or so users very rapidly. But what’s amazing about this is that except for Samsung, none of the device-makers are making any money off it. Everyone’s got the same free operating system, and there aren’t enough barriers to entry in the handset business to stop all the profit margins from being competed away. Google itself is barely making any money off Android. And here’s a staggering fact from Farhad Manjoo’s enthusiastic review of the new Android Nexus 7 tablet:

But there’s one big problem with Google’s small tablet: It lacks a business model. As Amazon did with its Fire, Google is selling the Nexus 7 at cost. Amazon could afford to do so because the Fire is a gateway to its online store. After you get the Fire, you’ll buy a lot of books and movies from Amazon, and you might even become a subscriber to Prime, Amazon’s highly profitable subscription service.

This is obviously not a problem for consumers. Indeed, it’s part of what makes it an appealing product for many classes of consumers. Amazon has a razors-and-razor-blades business model with the Fire, where the tablet is the subsidized razor and the content is the profitable razor blades. Google wants to compete with that, so it needs to offer consumers a comparably excellent deal on the razors. Except in this case Google’s razor blades are more or less limited to the fact that the more cool tablets people own, the more people will use Google Web services. That may or may not work out as a sound business strategy in the long term, but for as long as it lasts, it means consumers will reap a bounty in the form of discount hardware products.