A while back Microsoft CEO Steve Ballmer said Google's give-it-away Android strategy was a sure-fire money loser. But today Google's CEO Eric Schmidt says that Android is already breaking even. And he estimates that it will become a $10 billion annual business.
In November of 2008, Ballmer had this to say about Google's plans for Android:
"I don't really understand their strategy. Maybe somebody else does. If I went to my shareholder meeting, my analyst meeting, and said, 'Hey, we've just launched a new product that has no revenue model!'...I'm not sure that my investors would take that very well. But that's kind of what Google's telling their investors about Android."
But Google had a very clear revenue model for Android from the start: Give away Android to smartphone makers, make Google the default search, maps, and email provider, and get lots of money from advertising.
It's already paid off. An excellent Newsweek article about Android notes:
Google CEO Eric Schmidt says Android-based phones already generate enough new advertising revenue to cover the cost of the softwares development.
And, as the article adds, Google may also eventually make money not just via ads, but also by launching a store to sell music and videos to Android users. Such a plan is already in the works. Reuters reports that Google is already in talks with record labels about such a service, and that it may launch by Christmas.
Where does Schmidt get his estimate of $10 billion a year annual revenue from Android? He believes that eventually there will be 1 billion Android phones in use, and that Google can get $10 per user per year from them.
That's not at all far-fetched. The Newsweek article notes that there are currently 1.3 billion Nokia phones in use. Given Android's growth trajectory, getting to 1 billion phones shoud be achievable. And given how aggressively Android owners use their phones to browse the Web and use other Internet-based services, the $10 per user seems quite reasonable as well.