There are plenty of reasons wireless carriers tend to prefer Google (NASDAQ:GOOGL) Android over Apple (NASDAQ:AAPL) iOS. There's more hardware competition within the Android ecosystem, putting downward pressure on pricing -- and device subsidies. Carriers are able to pre-install their own bloatware in an effort to promote their own services, and frequently get branding on the devices.
On top of all that, Google has always generously shared app revenue generated from Google Play, and before that the Android Market, with the service providers. Those days may be numbered, though, as Big G reportedly now wants to keep more for itself.
The current arrangement entails splitting 70% of revenue with developers and 25% with carriers, while only 5% goes to Google. Macquarie analysts Eugene Jung and Ben Schachter believe that Google is negotiating a higher cut of Google Play revenue, hoping to keep upwards of 15% of content sales. The search giant is supposedly in negotiations with South Korean carriers, but Schachter thinks the same is true in other countries.
The analyst estimates that Google Play generated approximately $350 million in gross revenue last month, based on data from app analytics specialist Distimo. Distimo's latest public report is here (link opens a PDF). That translates into just a $17.5 million cut at the current 5% rate. The higher rate would triple that figure to $52.5 million. Schachter believes the change could result in roughly $500 million in Google Play profits next year.
For now, Apple still dominates the global app economy, with ABI Research separately estimating that the Mac maker will grab $18 billion of the $27 billion market this year. Developers get the same 70% cut on either platform, but iOS users have demonstrated a higher propensity to pay for apps as a whole.
While Google has never disclosed Android-related revenue directly, investors have always figured it wasn't a major profit center, since the operating system is open source and Google also shares search and ad revenue with its partners (much like the traffic acquisitions costs it pays for distribution on the desktop). That's particularly true when considering Apple's claim that it operates the App Store near breakeven. If a 30% cut just covers operating expenses, what can a 5% cut pay for?
An extra $500 million in annual profit wouldn't move the needle -- the Motorola subsidiary would blow through that in operating losses in less than two quarters at the current run rate.
Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends and owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
CES 2018: 5 Developments You Need to Know About
CES always promises exciting new ideas, and this year’s event was no different.
Is Energy Storage the Key to Unlocking the "Smart" in Smart Homes?
Tech companies have had a hard time making the smart home a reality, but energy storage could change the dynamic.
How Big Tech Is Profiting by Selling AI-as-a-Service
The nascent technology of artificial intelligence is more widely used than you may think.