Comment by saurik | Hacker News Reader

Comment by saurik | Hacker News Reader

Parent Full thread

Maybe from music or something, but not from app sales...

a) they don't actually get 30% (they get what is left over after giving the developer 70% and then subtracting their fixed costs... small money transactions is considerable in fees, bandwidth for them is cheap but not free, etc.)

b) it is now public (due to the Oracle case) that the Android division of Google actually lost money in 2010

c) despite their massive volume, Apple's App Store makes sufficiently little profit that they don't even break it out as a separate line item on their 10-Q (instead lumping it under "music related products and services", the same category that handles both iTunes and iBooks)

To expand on #C, it is seriously my understanding that Apple manages to only barely stay in in the black on the whole App Store model: their goal is ecosystem control and a competive advantage for their hardware platform, which in turn is where they make their real money.

Looking further at Apple's business model, you get ~$170 margin per iPhone sold; I know many people who have owned 3 iPhones over the last 5 years, but absolutely no one who has purchased the $1700 in apps that would be required for even the full 30% (that Apple can't possibly be keeping all of) to make that same amount of money.

In essence, you just can't subsidize a piece of hardware like this with app sales. I mean, this is going to be ludicrously obvious if you just take the individual device: if they wanted to subsidize it by even $100, and even if they managed to keep the full 30% (and again: they can't and aren't), then the average tablet user would have to purchase >$330 in apps per tablet... that is ludicrously unlikely.

Extremely interesting points. I wonder how the rest of the Google ecosystem factors in.

For instance, they are making what appears to be a pretty hard move into productivity apps (Docs + Gmail). This is a potentially lucrative market, although I doubt they're making much money yet.

These things seem to be able to move from the consumer space to the enterprise (a la the iPhone). So is a subsidy at this point worthwhile in the hope that widespread device adoption will drive business for the productivity offerings, in addition to music and video sales?

I really don't know. Interesting to watch, though.

it is seriously my understanding that Apple manages to only barely stay in in the black on the whole App Store model

This is the elephant in the room of app store hype. It's just not that big a market and for every Angry Birds and Instapaper there are 1000 people breaking even. And it's only going to get worse.

And for every one of them, there are 1000 9-5 employees of some IT department releasing apps in their spare time, where it becomes harder to quantify terms such as "profit" and "loss" :)

How much do they make in search-related ad revenue over the life of a device?

How much is it worth to them to stop people from getting a Surface with Bing or an iPad where Google has to pay to get the default search option set to Google (and the future of the default seems uncertain)?

Search is a much more reasonable avenue, but I'm still not so certain. I've seen "$1bn/yr" quoted as Google's TAC (traffic acquisition cost) paid to Apple to be the default search provider.

However, I've also heard that that deal is tight and carefully negotiated. With hundreds of millions of iOS devices and that kind of TAC, it would then be reasonable to guess that Google's revenue, per iPhone user, on the order of dollars, maybe tens of dollars, but not hundreds of dollars.

Honestly, though, Google has never sold that many Nexus devices before... they might just want to take a loss on the whole thing to demonstrate that the device is reasonable to manufacturers, try to bootstrap the market by getting initial devices cheaply to users, or even just to make friends with Asus.

My guess is that they just want to screw Apple. Apple makes money by convincing people that they need to purchase and then replace expensive hardware. This hardware has a lot of margin in it, enough to provide outstanding customer service and to generally spend time on software improvements.

In the world of PC's, there are tons of competitors figuring out how to drive the price down, but then they don't bother to compete on design. Companies like Dell make almost no money per computer: the margins in that industry don't exist.

So, I contend that if Google occasionally does some "charity" work, maintaining an OS (at a loss) an then partnering with the currently best-scaled lower-margin device manufacturer to inject some reasonable design, they can gut Apple's business "where it hurts", even though they probably get almost no money from it themselves.

This is advantageous to Google as it allows them to keep an advantage over Apple in those negations over TAC, or make it less enticing for Apple to spend a bunch of time attempting to rebuild thigs like Maps.

Put differently: Google doesn't need this market: they have an already bootstrapped and epic profit model. This doesn't need to make them money directly, or even tangentially: it just needs to give them an advantage somehow, somewhere, that can be leveraged to make money.

That's understandable. It'll be very interesting to see how they are going to subsidize (if they do it at all).

I guess there'll be some kind of catch..

It could be a possibility that they are willing to take a loss. The greatest threat that the Kindle Fire poses to Google is the removal of Google's services.

Reply on news.ycombinator.com