How Can Google Profit From An Open Source Android Phone?

The blogosphere is abuzz in speculation about the upcoming open source release of Google's platform for mobile phones. It came to many as a complete surprise and disappointment that rather than releasing a gPhone ( ala iPhone ), Google instead released open source software. For many who have to wait till November 12th, this was for all intents and purpose akin to a vapor-ware announcement ( handsets expected to be available in the second half of 2008 :-( ). However, there exists some cunning logic on why this strategy may make perfect sense.

One first always has to remember that Google doesn't necessarily know how to make money when it develops a product. This is unlike conventional companies that require a business case to proceed with the allocation of company resources to a pursuit of a venture. However, let's suspend judgment for a moment and assume that Google does have an inkling on how to make money out of open source. This is possibly the first time Google is releasing an open source project with the full intent of monetizing it. Projects like GWT leverage open source solely to enhance the quality of the software.

Google unlike most other normal companies makes the assumption that of an environment of abundance and that success involves out engineering everyone else. This is in stark contrast to everyone else, most particularly the mobile operators, that assume that success is achieved by erecting barriers of entry and monopolizing the scarce resources that exist in an environment of scarcity. This corporate culture was best summarized in the New York magazine article YouTube Versus Boob Tube:

Nerd logic holds that smart ideas deserve to trump dumb ones. Indeed, nerds are fierce believers in meritocracy. This is somewhat self-serving, of course: Nerds love the idea of intellectual Darwinism because they think they’re smarter than everyone around them, thus fated to win every contest. But at Google, nerd logic is a particularly potent force because the technology that made its executives rich—the very equation reproduced above—is a living embodiment of that culture.

The Android video highlights the fragmented nature of mobile software development. Mobile software development continues to be an expensive endeavor that typically leads to marginal returns. The mobile software ecosystem with its foundations built on a culture of scarcity is truly inefficient and out right broken. The telco's tight reign over their domain has not only stifled but has strangled out all innovation. It isn't surprising that the most frivolous of patent lawsuits emanate (i.e. NTP vs RIMM, FreedomWireless vs BCGI, Verizon vs Vonage)from the telecommunication space. In such an environment, it is easy to find Android's software infringing on a multitude of patents.

The key to appreciating how Google and its partners will make money on an open source mobile platform resides in one of the most prominent of beneficiaries of Google's advertising business. One only has to look at how the Mozilla project makes money. The Mozilla project rakes in a whopping $67 million dollars last year. Mozilla gives away its browser for free, however reaps its revenues primarily from the search bar. This fact lead to Opera eventually abandoning charging a fee for its browser in favor of advertising based revenues.

Google's Android software would just like Mozilla with a twist. Mobile software tends to be firmly intertwined with the handset that it's delivered with. Therefore, the handset manufacturers are in a solid position to get a share of Google's advertising revenue. This however assumes that the device be allowed to connect to a wireless network, unfortunately the wire area wireless network are controlled by the incumbents that insist on extracting value by promulgating a atmosphere of scarcity. That is why, Google's expected bid for the 700MHz spectrum is absolutely critical to the success of this strategy. The remaining question then to this puzzle is this, "Who is going to build and maintain the cell towers for Google?"