Windows is Cheaper Than Android

I have written quite a few posts on the topic of how Android hardware OEMs are losing their position inside the value chain.

  1. Android OEMs and The Law Of Conservation Of Attractive Profits
  2. What Happens When Hardware Makers Can Make No Profit
  3. Will Attractive Profits in the Android Ecosystem Move to Component Makers?
  4. Understanding Hardware Modularization in the Android Ecosystem
  5. Samsung Mobile’s End Game

What we are currently witnessing is a macroscopic trend that is working out almost exactly as Clayton Christensen’s disruption theory would predict. The way that Samsung is losing both market share and profits is typical disruption. However at this point, it is still not clear where the attractive profits will shift to.

As I discussed in the second article (What Happens When Hardware Makers Can Make No Profit), hardware OEMs tend to do funny things (crapware) when they can no longer make direct profits. You can’t blame them because they are fighting for their survival. What Google is doing with Android One is quite extreme because they are effectively preventing OEMs from doing crapware. They are basically saying that we’re not letting you pull the tricks that you need to survive.

What makes this situation even more convoluted is the fact that although Google does not make any direct profit from Android, Microsoft makes huge amounts of money. In fact, Samsung paid Microsoft 1 billion USD last year for using Microsoft’s patents in their Android phones (based on the number of Android devices sold). This amounts to 1% of total handset revenues. It is well known that Microsoft has similar patent agreements in place with many other major smartphone manufacturers. This is almost all pure profits and hence it is almost certain that Microsoft is making more profit from Android than Google itself.

Adding a further twist, Microsoft is now handing out Windows for free for devices with a display that is smaller than 9-inches. This will no doubt include the right to use Microsoft’s patents as they are included in Windows. Hence compared to Android, Windows will be 1 billion USD cheaper for Samsung. For OEMs, using Windows is much much cheaper than using Android.

Now let’s look at this from a hardware OEMs viewpoint.

  1. They cannot make money through hardware differentiation and are now scrounging for pennies.
  2. In the PC-era, they would have added crapware and bloatware because of the pennies that it would bring in. This was more important than any sales lost due to a worse customer experience (customer experience wasn’t the main concern).
  3. In the smartphone-era, Google is stopping them from placing their crapware in prominent locations on Android. OEMs will be more desperate for pennies.
  4. If OEMs decide to use Windows instead of Android, then they can save pennies. Microsoft might also be less strict with crapware. Windows might be significantly cheaper for OEMs compared to using Android.

The current situation is very complex, and it is hard to say whether Windows will manage to grow through its price benefit. It will no doubt be fascinating to watch as the knots get untied.