Google recently announced that it’s purchasing Motorola Mobility for $12.5 billion. While the companies’ press releases don’t mention anything regarding patents, most are reporting that the main purpose of the acquisition is to provide Google with a larger patent portfolio to use to defend itself against lawsuits from Apple and Microsoft. Apple, Microsoft, and Google each have their own competing mobile operating system in the market. The smartphone market is certainly a fast-paced, extremely competitive industry.
Each of these three big players have their hands in several other industries–desktop and server software for Microsoft; advertising and search services for Google; and desktops, laptops, and accessories for Apple. Within the smartphone market, the strategies of these companies differ. Microsoft licenses its Windows Phone 7 software to OEMs, Google’s Android OS is free (although main selling points are licensed), and Apple designs both the operating system and hardware for its smart phones.
Despite the different strategies of monetizing (or not monetizing) the operating system, the main profit pools for these participants in the market probably comes from the sales of applications through each platform’s mobile application store. When the first iPhone came out, there was no “App Store”. This changed fairly quickly, however, and the success of the App Store on the iPhone, iPod Touch, and iPad has led to it becoming a feature of Apple’s desktop operating system. Apple takes a 30% cut of each app purchase made through the app store (which is the only way to load programs onto the phone without breaking Apple’s protection system). When HP recently decided to get out of the consumer products market, it announced it would no longer produce any Web OS (HP’s recently acquired mobile OS) devices and liquidate the stocks it had left. HP said, though, that it would be keeping Web OS around, perhaps to license to other manufacturers (probably retaining control over the software marketplace with that ecosystem). Microsoft, knowing the success of their platform would rely on the number of useful applications in its application store (which is smaller than Apple’s and Google’s stores), offered to send a free Windows Phone 7 powered smartphone to any publisher with an app in HP’s app store. Amazon has even started its own Android application store, competing with Google’s app store (and will be releasing a new version of the Kindle with a color screen that will run a modified version of Google’s Android OS). Apple sued Amazon for using the term “App Store”, which Apple claims to have a trademark for.
Similar to how auto manufacturers have better margins on services (like financing), all of these activities and announcements point to the fact that smartphone vendors/OS providers get better profit margins selling data (software, music, videos, etc) than they do selling hardware. In fact, the sales of digital products are so important, that many say Amazon will sell their new Kindle at a loss in order to attract customers to their digital stores.