revenue

As previously noted, Apple has overtaken Microsoft (and Google) in operating margin percentage. This is an astonishing statistic as Apple is still largely perceived to be a "hardware company" while Microsoft is a "software company" and Google is a "services company."

To suggest that "hardware" could be more operationally profitable than either software or services is akin to heresy in technology analysis. This reversal is newsworthy indeed. However, even the most casual observer would note that Apple does not derive its market power from hardware alone. It is, in fact, an integrated hardware, software and services company (with a few more roles besides.)

So the emergent successful business architecture in this technologically transitional period is of integration and completeness of solutions.

This shift explains at least at a conceptual level Microsoft's tectonic Surface shift.

But what about another point of view? What does integration mean for Microsoft's income, cost and profit structure? Is integration self-disruptive to Microsoft?

Here's a reminder of Microsoft's revenues and operating income by division:

The challenge of devices for Microsoft is that the licensing of software for devices is very difficult to sell.

In 2011 Microsoft received about $18.7 billion in Windows revenues and $23 billion in Office revenues. The chart shows that this is a fairly steady growth business. According to Gartner, in 2011 there were about 336 million Windows PCs sold and that this too is a fairly stable and mature business.

If we simply divide revenues by PCs sold we get about $55 Windows revenues per PC and $68 of Office revenues per PC sold [1]. The total income for Microsoft per PC sold is therefore about $123. If we divide operating income by PCs as well we get $35 per Windows license and $43 per Office license. That's a total of $78 of operating profit per PC.

Now let's think about a post-PC future exemplified by the iPad. Apple sells the iPad with a nearly 33% margin but at a higher average price than Microsoft's software bundle. Apple gives away the software (and apps are very cheap) but it still gains $195 in operating profit per iPad sold.

Fine, you say, but Microsoft make up for it in volume. Well, that's a problem. The tablet volumes are expanding very quickly and are on track to overtake traditional PCs while traditional PCs are likely to be disrupted and decline.

So Microsoft faces a dilemma. Their business model of expensive software on cheap hardware is not sustainable. The future is nearly free software integrated into moderately priced hardware.

For Microsoft to maintain their profitability, they have to find a way of obtaining $80 of profit per device. Under the current structure, device makers will not pay $55 per Windows license per device and users will not spend $68 per Office bundle per tablet. Price competition with Android tablets which have no software licensing costs and with iPad which has very cheap software means that a $300 tablet with a $68 software bill will not be competitive or profitable.

However, if Microsoft can sell a $400 (on average) device bundled with its software, and is able to get 20% margins then Microsoft is back to its $80 profit per device sold. This, I believe, is a large part of the practical motivation behind the Surface product.

The challenge for Microsoft therefore becomes to build hundreds of millions of these devices. Every year. Sounds like they need a Tim Cook to run it.

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Notes:

1. Microsoft accounts for revenues using deferrals due to Software Assurance pre-payment models for many corporate customers so this figure is not a precise value for each license sold.

 

Apple has been releasing data about payments to developers with increasing frequency. Last week's $5 billion announcement was the fifth such update and came after about one quarter since the last.

Knowing the payments to developers and the cumulative download count allows us to get a very accurate revenue point for each download. As the frequency increases we can observe growth and seasonality patterns.

The following chart shows how average revenue per app download and the average payment rate to developers has changed since the iTunes app store opened and given the data points available:

The green area in the chart should add up to $5 billion. The average revenue for all downloads is 24c. 

Although there has been a drop in the revenue and payout rate in the last six months, the cause may be due to seasonal effects. We have not been able to see data that might show seasonality in prior years so we can't be sure it exists. However, it makes sense to me that new buyers are likely to engage in a burst of app buying and there are more iPhone purchases in the second half of the year than in the first.

In any case, the current "run rate" of payments to developers is about $7.5 million per day or $230 million per month. Both are up from last year.

Whether revenues are decreasing or not will require some more data. The last period's 20c is not far below the app store lifetime pricing of 24c.

 

At the 2012 WWDC, Apple released new data concerning its App ecosystem. Namely:

1. 30 billion apps downloaded to date (excluding updates)
2. $5 billion paid to app developers
3. 400 million iTunes accounts

These three data points allow us to update our picture of the app economy. First, the app download rate.

As would be expected from an expanding user base, the app download rate has been increasing. It is now at about 49.5 million apps downloaded every day. The history of this rate is shown in the chart below:

I added the same data for iTunes songs and book downloads for comparison. Note that although music and books are available to the same user base (actually higher due to Macs and iPods which do not run apps,) apps are being downloaded at a far faster rate--at least four times faster.

In terms of total, cumulative downloads, the comparison is even more stark:

It won't be long before total app downloads will be double total song downloads. Put another way, in the time it took the App store to reach 30 billion, the song store sold only 3 billion.

On average, songs are more expensive than apps ($1.29 vs. $0.24). What is the difference in value, not just units?

The data shows that apps have very likely overtaken songs as "gross" income. Apple does not book all app income, only the 30% share they keep, but in terms of transaction value, clearly apps are now a bigger business.

What about consumption? Are individual iTunes account holders buying a constant or variable number of songs or apps?

Here again apps show a distinctive pattern of out-performing songs. As far as digital media is concerned, apps are taking the download business by storm.

What about pricing? Is the expansion of the user base into the hundreds of millions leading to a collapse in app pricing?

No. You can see the price as the ratio between the downloads and the revenue to developers. If downloads scale more rapidly than payments then pricing is decreasing. As it turns out the average price of an app has held steady since approximately 1 billion downloads were recorded. That price is now about 24 cents per app (including free).

Finally, how about the content owners? Are payments to the owners of the media beginning to favor developers over music publishers/promoters?

Developers still have a long way to go. We can't be sure about how revenues are shared with music labels, but it's probable that they are still receiving bigger checks than developers. However, under some scenarios this will change quite soon.

The bigger story here is that the iOS app economy has reached a run rate of $4.3 billion per year from a standing start four years ago.

How big will the TV app economy be four years from the launch of an Apple smart TV?

As the chart below shows, the last quarter (first calendar 2012, second fiscal 2012) was robust with 94% earnings growth and 59% net sales growth. Subject to the usual superlatives, the performance was, again, unexpected by many.

Much of that surprise was due to the underestimation of iPhone sales in China during what is a holiday quarter in that nation. Growth this quarter will be more difficult to estimate. The iPhone is still the most important component but the iPad is becoming increasingly decisive in overall performance. In fact, I'm projecting that the iPad will have the equivalent of 73% of the iPhone revenues this quarter.

In this quarter the iPhone is reaching a late stage in its launch cycle but it continues to reach more points of purchase through distribution agreements and it also has a "portfolio" in terms of multiple price points and models available.

The iPad was supply constrained last quarter and may be in balance this quarter. Management has very clearly and repeatedly signaled that the iPad will have a very strong quarter.

So with these clues, here are my estimates for the quarter (with y/y growth in parentheses):

• iPhone units: 28.5 million (40%)
• Macs: 4.5 million (15%)
• iPads: 24 million (160%)
• iPods: 6 million (-20%)
• Music (incl. app) rev. growth: 35%
• Peripherals rev. growth: 20%
• Software rev. growth: 15%
• Total revenues: $41.9 billion (46%)
• GM: 44.8%
• EPS: $11.54 (48%)

This earnings value would imply a trailing twelve months’ EPS of about $44.8. At the current price of $571/share the P/E would be 12.7[1]. Cash and equivalents will probably increase to $118 billion.

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1. Apple's P/E also dropped to 12.7 around Christmas 2008. I did a search for some headlines to recall that time and came across one that seems appropriate: "Unrest Caused By Bad Economy May Require [domestic] Military Action, Says US Report".

A glance at Nokia and RIM's market values today shows that they are both valued below book. With respect to RIM,

The company's share price has collapsed in the past year, and it is now only valued at about $5.4 billion, down from $84 billion at its peak in 2008. Excluding its cash and the estimated value of its patents, RIM's device business and its 78 million subscribers around the world are in aggregate worth less than $1 billion to investors.

Analysis: RIM's new woes seen speeding loss of BlackBerry users - Yahoo! Finance

With respect to Nokia,

MKM: We are downgrading Nokia to Sell from Neutral following our U.S. retail Lumia model checks. We assume no value for the handset business and no value for the roughly four billion euros [about $5 billion] in net cash.

Nokia Suffers From Hang-Ups - Barrons.com

Three years ago the situation was dramatically different. RIM's share price was six times higher and Nokia's about four times higher. Here's what the market looked like in Q1 2010:

This summary view shows individual competitors in the phone market as well as their combined total volumes. The profitability/volumes/pricing can be visualized as well as margins and revenues.

The same visual summary is presented for the first quarters of 2011 and 2012 below:

The change may be subtle to the untrained eye, but it can be summarized as contraction for most vendors and expansion for Apple and Samsung. RIM and Nokia not only contracted in terms of revenues and volumes but also, crucially, lose money.

I've written about this before (many times.) But it's important to repeat again that this is a very short time span. Only three years separate the top chart from the bottom right. The "shape" of the market participants has not changed much but a tipping point has been crossed. This is the point where some participants are disrupted enough that they cannot recover.

Did it happen in 2010, 2011 or 2012? We're only looking at data which results from hundreds of decisions and thousands of actions. It's improbable that there was a single moment when the shift occurred or a single decision that caused it. But it's equally improbable that the disrupted could have countered any of the actions that got them to this point.

The cause (and remedy) for disruption is never found in a single act. It's a process and a way of operating and thinking. Is management to blame? That's always the answer. But how did management go from being smart to foolish so quickly and why did all managers in a firm, even an industry, conspire to become foolish at the same time?

If you study the decisions on a day-to-day basis, management consistently applies all the lessons they learned that led to success in the past. But these lessons lead to decisions that end up with exactly the worst result possible.

The crux of this dilemma is that doing the "right thing" leads to the wrong result. In a comment I questioned the possibility of management in a public company solving the dilemma.

Some have argued that public companies with professional managers entrusted with fiduciary responsibility are inherently incapable of solving the innovator's dilemma and are thus doomed to be disrupted. I'm starting to believe the argument. Whenever you as a manager try to work out the solution to the dilemma, you encounter a value destroying obstacle that cannot be surmounted while maintaining your position in the company. [As you attempt to solve it, you lose your position] Your successor won't make the same mistake and [thus] the whole enterprise collapses.

There are counter-examples however. The reason Apple should be studied is that it gives hope that they have cracked this problem.

Last year we sold ... 2.8 million Apple TVs. This year, just in the first six months of our year we've sold 2.7.

Tim Cook at D10 1:45.

I note the "our" in "our year". This implies fiscal year (that and the fact that he spoke in the past tense before six months had passed in the calendar year.)

Given the public information we have so far, it's now possible to estimate with some confidence the sales history of Apple TV. The following chart is my estimate. It includes all the known data so far with some interpolations to fill in the gaps.

Assuming average revenues per device of $100, we can get an estimate of about $344 million in Apple TV hardware revenues for calendar 2011. This is not a large amount relative to Apple's other lines of business. It is, for example, only 14% of the overall Peripherals revenues and only 5% of the iPod.

However hardware revenues are not the whole story. The business model for the device is in many ways the polar opposite of the business model of the iPhone. Whereas the iPhone employs "break-even" iTunes App Store (and the Music and Video and Book stores) in order to sustain its high hardware margins, the Apple TV business has low hardware margins that sustain content.

The complete picture therefore has to include an assessment of the content attach rates and the agency fees that Apple gets for that content.

Let's assume that each Apple TV is used to generate $10/month in content sales. This is not a lot. It's equivalent to 5 TV shows or one movie purchased or two movie rentals per month. The model I have shows that the installed base of Apple TVs was about 10 million by the end of 2011. That means that the run rate is $1.2 billion in content sales for the Apple TVs in use.

Now Apple does not book all that. They book only about 30% as revenues as their agency fee. That means that Apple TV could be generating revenues at a run rate of $360 million (to Apple.)

If we add that to the $344 million in hardware revenues we get about $704 million for 2011. This is still not a huge business. It is about equal to the revenue from iPad Smart Covers[1]

Looking forward, if Apple TV units sell at double the rate of last year and we increase the footprint accordingly, we could see a revenue rate of $1.2 billion for 2012.

Now this is not a high margin business. The margin on the content may be less than 50%--depending on transaction costs and hosting/traffic fees. The margin on the hardware is also likely to be below 40%. So the business is not wildly profitable. But it probably is profitable. Which means it makes sense to keep it running while waiting for other pieces to fall into place.

As Tim Cook repeated, they are very interested in this space. However, any discussion of the future must include an analysis of the business model and the sustainability in terms of profit that keeps long term development focused on getting the product to be good enough for the right jobs to be done.

What we should think about however is this "polar opposite" business model. Apple is running this as a "hobby" or as an internal experiment. Sales are (relatively) tiny but it generates some profit. Volumes are small but they are growing. It's taking a heck of a long time. It's asymmetric to the prevailing model the company relies upon. It's beneath contempt from all observers. Sounds familiar?

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Notes:

1. In 2011 there were about 40.5 million iPads sold. If we assume half of those purchases also resulted in a Smart Cover purchase and if the average revenue per Smart Cover was $35 then total Smart Cover revenues were $709 million.

“Clearly this stuff isn’t selling,” said Monga [an analyst at Veritas Investments Research in Toronto.]...

RIM took a $485 million pretax charge to write down the value of its PlayBook inventory in December, after shipping just 150,000 of the tablet computers in the quarter. Then in March, the company recorded a $267 million expense for BlackBerry inventory. RIM said at the time that it would stop giving sales and profit guidance because of “ongoing weakness” in the U.S.

via RIM Writedown Risked With $1 Billion Inventory: Corporate Canada - Businessweek.

RIM has just entered what I call the Post-traumatic period of a phone maker's life. This period is defined as beginning with a loss-making quarter and ending  with the company's exit from the business. These post-traumatic periods were visualized first here and the pattern was first discussed about a year ago here.

I've updated the chart with the current data and added the bar chart below to illustrated the "post-traumatic life expectancy" for the companies shown. Companies still operating are shown with bars without color while companies that have exited are shown with solid color bars.

The pattern may be that companies either have short post-trauma lives of about two to three years or relatively long post-trauma lives lasting 4 to 5 years. What determines this life expectancy and how long do RIM, Nokia and LG have?

There is precious little data, but perhaps one hypothesis I could offer could be that the bigger the commitment to the industry (in terms of having no fall-back options) the longer the post-traumatic period lasts. In other words, as there is no easy way out, the fight lasts longer.

This can also be interpreted using Porter's "barriers to exit" force analysis where companies which can liquidate a division see it as a low cost of exit whereas companies that need to restructure (usually more than once) and then seek either a buyout or rescue may interpret exit as a very costly endeavor.

Long exits compile larger costs of distress and can cause more pain for stakeholders, especially if the end is inevitable.

Given this hypothesis, as both Nokia and RIM depend largely on mobile phone sales, it's likely that they will not exit quickly. (Ironically perhaps, LG has a better shot at a quick exit given its diversified conglomerate status.) It might imply that there are at least two more years before Nokia and RIM call it quits.

 

Markets are difficult to measure. Mainly because the information is not easy to obtain and that which is obtained is not made public. Collecting, analyzing and filling in the gaps is big business with many firms involved in selling it.

However, with all the analysts and companies selling and promoting their "numbers" it's important to understand the difference between the methods used. There are for instance at least the following measurements:

1. Units sold to end users. For example NPD or GfK data of retail transactions. Also Gartner's estimates for phone units sold.
2. Units sold to the channel. For example units recognized on income statements usually reported by companies. Also IDC's estimates for phone units sold.
3. Units in use. For example comScore and Nielsen survey data.
4. Units "activated". The measurement Google uses to describe Android performance.
5. Intent to buy. For example ChangeWave surveys of early adopters.
6. Utilization rate. For example browser statistics.

Each measurement tells a different story about the market but the best story is told when all data is analyzed in a combined integrated market review.

Before diving into that it's important to understand the difference between the first and second measurements or the difference between shipped and sold.

What does "Sold" mean?

Let’s say that you sell a phone to another party. What constitutes a sale? The sales agreement? That you shipped it? That he wanted it? That you were paid for it?

What if he changes his mind and returns it? Is it still a sale? What if a manager's bonus depends on these sales? What if the company’s share price depends on these sales? Is there a way to rig the accounting?

As it turns out, yes there are; many ways. Unethical and fraudulent practices happen surprisingly often. A classic instance would be: A customer is shipped ten phones, though he only wants one, and he gets paid to ship the other nine back, after the close of the year.

The sales manager records ten times the sales he actually made, making ten times the commission and the company’s stock price rises. To compound the offense, the manager could also tip his friends to short the stock at the end of the year, leaving investors “holding the bag” when the inevitable correction follows.

There have been so many cases of this kind of accounting fraud that the FASB (GAAP), SEC, and IFRS have placed a very stringent definition on “revenue recognition”. This means that although you can sell all you want, the company can only recognize the proceeds and profit in the financial statements according to strict rules.

In the case of hardware (Sales of Goods), the customer must receive it (“delivery has occurred”), and like it enough to not return it (“amount to be refunded”), and be able to pay for it (“collection is probable”). If some are projected to be returned or unpaid, that percent is subtracted from total revenue. In the case of software (Sales of Services), it is generally accounted for over a time period. And because it is customary to send the customer upgrades, the revenue must be spread out over the time the service is provided. (“upgrade rights … 24 to 48 months.”)

It gets complicated when a piece of hardware has upgradeable software. The rules used to stipulate that the hardware, in its entirety, must be accounted for as a service and have subscription accounting. This is how Apple had to report sales during the first few years of the iPhone. It still defers some revenues for its hardware, mainly on account of iCloud, but the vast bulk of hardware revenue (96%) is now accounted upfront, recognized upon the product's acceptance by customers. 4% is for software upgrades and is accounted for over a specific lifetime of the product (24 months in the case of the iPhone).

What does "Shipped" mean?

The discussion so far implies that if a product that is accounted for as "Sold" on an income statement does not mean that it's in the hands of an end user. These "revenue recognized" products are sold to a distributor, typically for a phone that's an operator.

These sales satisfy the requirements for financial reporting as revenues booked. But they are not in the hands of users. Nor are they "activated" and they don't generate page views that are measured by web analytics companies. Most analysts and companies now use the phrase "Shipped" to describe these revenue-recognized units though it's also common to hear "sold".

When a product sells to end users it's sometimes called "sell-through". It's counterpart is "sell-in" which is sales to the channel distributors.

A big gap between sell-in and sell-through might imply large amounts of in-channel inventory. This is product that is sitting either in stores or in warehouses or on trucks in transit. If sales are steady, the inventory is measured in time as in "weeks of inventory". This means that the excess is expected to be sold within a fixed time frame if shipments were to end. The smaller this amount, the better or "tighter" the operations are. Inventory, as Tim Cooks says, is fundamentally evil. It eats capital and erodes profitability.

Sometimes miscalculation of sell-through could result in vast amounts of inventory that has to be returned by distributors. That inventory is either written off or sold at fire sale prices resulting in a "write-down". This happened recently with both the HP TouchPad and with the RIM PlayBook. This special charge against income is a one-time (usually) incident but it can also affect a firm's reputation with channel partners for a long time. This type of failure is very costly.

Therefore what matters most is to keep the difference between Sell-in and Sell-through as small as possible. However, it can't be too small. Sometimes if Sell-through is too fast, you get stock-outs which means that there is more demand than supply and sales opportunities are missed. This has happened many times with iPhones and iPads. This is also an unwanted situation (unless there was too much inventory in the channel during the previous period and thus it was being drained in the current period.)

The chart to the left shows how the phone market looked for various vendors last quarter. I compiled the data based on Gartner's "sales to end users" and IDC's "shipments" data. Two vendors had higher sell-through than sell-in (Nokia and LG) probably because they were draining excess inventory. The others had channel inventory of between 5% and 10% of units shipped.

This ratio is shown below in a chart comparing the largest phone vendors.

Management is often rated for performance on this metric, as they should be, since it's a measure of operational skill. However, there are many factors that affect overall performance.

New product launches, windows of opportunity related to seasonal buying patterns, anticipating macroeconomic slowdowns, even natural disasters and legal challenges can affect this metric.

Understanding the overall market requires an appreciation of this distinction but also an understanding of all the other metrics listed above and what stories they tell.

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Notes: My thanks to Michael Dediu for input on this discussion.

My thanks to Bruno Ferrari of Exame magazine Brazil for asking the following questions. My answers were written two weeks ago on April 2nd.

Based on financial data of the first fiscal quarter, it is possible to confirm that 2012 will be the best year in Apple's history?

Actually, it's possible to confirm without looking at first quarter data. Every business line Apple has except the iPod is growing and is likely to keep growing during this year. That means that sales will increase over 2011, which was Apple's biggest year. You can see historic sales growth data here:

 What are your predictions for the second fiscal quarter?

I published my predictions here.

The iPhone number seems to be higher than consensus. It's aggressive but I'm basing my opinion on the launch of the iPhone 4S in China and the Chinese New Year and new carrier agreement there. Also the iPad will do quite well.

Do you think Apple will hold the iPhone 5 launch to September in order to open 2013 with an extraordinary result?

The next iPhone will launch between June and September. It might be earlier due to the 4S being the "wide end of the egg". Think of the iPhone as an egg rolling down the hill. There is a sharp end and a wide end and the speed of rolling depends on which end is down.

Besides the iPhone 5, which products that Apple could announce in 2012 you think may help them to maintain this extraordinary growth?

I think the iPhone is becoming more predictable. What I'm more curious about is what they will do with the iPod. Apple takes its brands seriously. I am watching the iMac, MacBook and iPod for clues of a re-fresh or replacement as they have aged.

Do you think we will see the “iTv”? Do you think it could be “the next iPad” of technology market?

Apple TV is in waiting mode. It's like an airplane circling, waiting to land. Something will happen but not sure when. Fundamentally, the opportunities are still there but the entertainment industry is very complex. The more complicated it is the more necessary for an entrant is to create a parallel version of it. That takes time.

The building blocks are all there however. See additional thoughts here.

If we analyze the growth of Apple in recent years, it is supported by the launch of new products, especially the iPhone and the iPad. Do you think Apple can lower your rate of growth in coming years since we don’t see in its roadmap new innovative products like a new smartphone or a new iPad?

New products created new growth but iterations of those products also created and will continue to create growth. Of all of Apple's products only one product is not growing today, the iPod. And that is after 10 years in the market and with a "dominant" market share. In addition, Apple has a lot of room to expand internationally and into enterprise and professional sectors.

I do agree that 100% growth is hard to maintain without new products. I believe there might be a few products still waiting for launch. TV is one area (along with game-based entertainment). New user interfaces might be enabling new categories of products. Intelligent assistance and companionship are open problems that software can solve but which have not been productized.

When do you think we’ll stop to see Job’s legacy in Apple new products. And what then?

Jobs' legacy is not in specific products but in how products are built. He also taught the importance of putting products first and markets second (this is, at its base, an artistic principle, not a commercial one). I think that legacy can last forever, if managed properly.

How do you analyze the dividends pay and the buyback made this month?

I wrote some thoughts about it here. I believe the impact will be mostly psychological for investors.

And finally, I was reading at Asymco some analysis of Apple’s share price. Do you think $600 is enough? Do you think in a 1 trillion dollars company in 2014 as some analysts are saying?

The share price depends on the psychology of people. I like to say that Apple is the same exact company today as the one that was priced at $78/share three years ago. When I look out the window of my office I see the same view year-to-year. When I look on my computer screen at Apple's financials I also see the same view year-to-year. I don't know how people can see Apple differently one year to the next. To me it's like looking out the window and seeing mountains instead of the sea.

But this is how markets behave. I can't say what the price will be. It may be $1000 or it may be zero. But the company will not change in either case. It won't change because it does not need to change.

In the iPhone cost structure analysis I showed how revenues and costs for iPhone are probably allocated. The revenue per iPhone was shown to include $29 for revenue items "above" the price of the phone to the channel. This total includes Apple's own iPhone accessory sales plus revenue from licensing the "Made for iPhone" trademark to third party accessory makers. Apple also receives some revenues from cloud services. But, pertinent to our recent discussions on the Android business model, Apple also receives revenues from Google.

Wouldn't it be nice to know how much? Here's a way we can estimate it.

I've read an estimate that 50% to 60% of ad revenues from Google search initiated via iOS are paid to Apple. This is believable because the TAC for Google overall is about 40% and Apple probably drove a hard bargain to get a premium for its, presumably, premium traffic.

So if we knew the revenue run rate for Android search on a per device basis we could perhaps guess how much of each phone's revenue comes from Google. What we've heard last year in Congressional testimony is that two thirds of its mobile revenues come from iOS devices. This would imply that the run rate for iOS would be 2x the run rate for Android.

Having a model of Android revenues helps at this point. Assuming Google obtains $4.4 from Android (excluding AdMob and App sales) and assuming negligible other mobile revenues from other platforms gives a possible Google revenue per iOS device per year of nearly $9.

Taking the lower bound of the revenue share estimate above means that half of Google's revenue goes to Apple or $4.4/iOS device/year or $9 over the two year life of the device.

That would put revenue from Google at about 1.4% of iPhone revenues (see average revenue per iPhone here). And that revenue comes without any costs and so flows straight to the bottom line. That, in turn, would imply that 3% of Apple's operating margin is provided by Google. Not a bad deal considering that some phone vendors can't get that for their entire product line.

The interesting factors at work here are that this contribution by Google to Apple is higher than the contribution by Android to Google. In yesterday's post, I calculated that in 2011 Android contributed about $590 million to Google's operating margin (5% of total).

If we consider that Google pays Apple $9[1] for every iOS device and since Apple sold 156 million iOS devices in 2011 then Apple received $1.4 billion from Google, all of which went to the bottom line.

$1.4 billion from Google to Apple vs. $600 million from Android to Google. Three percent contribution of Google to iPhone profits vs. 5% contribution of Android to Google's profits.

This sets up all kinds of game theorizing which will undoubtedly entertain and enrich us all.

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Notes:

1. Perhaps this $9 value is not valid for all devices. Perhaps iPod touch does not get a lot of traffic and is less valuable. Perhaps iPads get more traffic and are worth more. On average, this may be plausible.

Yesterday I presented the estimated Android income statement vis-à-vis Apple's income statement. In this post I'll compare Android as a part of Google's overall business.

Recall that Google has already been compared in terms of overall revenue, growth and profitability to Apple and Microsoft here.  The argument can be made that mobility has not yet had a measurable impact on Google (certainly not noteworthy enough to be reported by management).

The impact on Google of Android can be shown in the following diagram:

I used color coding to identify non-Android (Green) and Android (Brown) segments of the business. Overall, Android could amount to about 3.5% of total Google revenues and about 5% of operating earnings.

It's important to note that this is not all the revenue that Google obtains from mobility. This diagram represents Android only and there are revenues also coming from alternative platforms and operator deals.

iOS contributes between 3 and 5 times more ad revenue to Google than Android.[1] The contribution to earnings is even more difficult to assess. We don't know the terms between Google and Apple for search revenue sharing and placement. One analyst suggests that the cost of sales (TAC) for mobile Safari search could be as high as 60%, far above what Android traffic costs.

The other observation is that Android cost structure is quite small (see third bar from the left above.) My estimate is that Android R&D is only about 3% of total Google R&D. I'm projecting $200 million for 2012. That implies between 700 and 900 headcount. It's interesting to compare that total to the 20,000 or more that came with the Motorola acquisition.

Having these estimates allows one to calculate many ratios and potential valuations. I'll refrain from putting a value on Android using multiples or sales or earnings, but would come out well below what was paid for Motorola's $12.5 billion.

Which again compels one to ask what is the strategy at work here.

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Notes:

1. There are various reports of the ratio including congressional testimony and reports to courts. BlackBerry, Docomo and KDDI were listed as significant other sources of ad revenue by Google in 2010.