Google Could Generate $10.5B in Profit by Aping Apple

What if Google were to take Android and make it proprietary, offering it solely on Motorola phones, copying Apple's current closed software and hardware stack? Piper Jaffray's Gene Munster crunched some numbers, and this is what he found.

Google (NASDAQ:GOOG) could build as much as $10 billion in operating profit by closing its Android operating system for use by Motorola Mobility (NYSE:MMI), following in Apple's (NASDAQ:AAPL) footsteps.

That's the back-of-the-envelope math from Piper Jaffray analyst Gene Munster, who calculated the success Google could have if it acquires Motorola and transitions Android from an open-source model to a proprietary position for its phone maker.

Google Aug. 15 agreed to purchase Motorola Mobility for $12.5 billion, a deal that many industry watchers agreed is a bid to gain the company's 17,000-plus patents, with over 7,500 more pending. Google needs the intellectual property to defend itself against lawsuits from Apple and Microsoft and against potential future suits.

A less popular theory is that Google could remove Android from open source and make it the primary, proprietary platform for Motorola.

While Munster holds the majority opinion that Google wants Motorola purely for the patents (and will sell Motorola's hardware and set-top box assets), he also outlined how Google could enjoy success with Motorola and Android if it follows Apple's model, which is to construct and control its phone from the iOS software to the iPhone.

Suppose Google makes Android exclusive to Motorola by 2013, cutting the platform off from Samsung, HTC, Huawei and the legion of other hardware OEMs all over the world.

Due to the loss of distribution from other Android partners, Android would drop to 15 percent market share in 2013 from 43 percent in 2012. 

As Google/Motorola build more products to make up for phone distribution lost by going proprietary, Munster believes Android could get back to 20 percent market share by 2015, which could be about 172.5 million handsets, at an average selling price of $350.

With all of these stars aligning, Munster believes Google making Android proprietary could result in $60.3 billion in smartphone revenue and $12 billion in operating profit in 2015. This compares to Munster's model estimates for Apple, which are $54.4 billion in iPhone revenue and $26.8 billion in operating profit. But it would have a ways to go to get there.

"We believe it could take Google close to five years to catch Apple, pursuing the same integrated hardware/software strategy with a proprietary OS. If you assume a 22 percent tax rate (average over past two years) and 326 million shares (current count as of Q2), the rebuilt Motorola business would contribute $28.89," Munster concluded.

However, thanks to the natural, reduced footprint of Android, Munster also expects Google could lose $4.5 billion in Android ad revenue at $10 per user and $1.6 billion in Android ad operating profit in 2015.

This correction, which would knock revenue down to $56 billion and $10.5 billion in operating profit, and $25.16 per share in earnings, is something Google would likely not be comfortable with, the analyst said.

"We do not believe Google is willing to weaken its position as the likely ultimate leader in mobile search and advertising to try to aggressively monetize Android through an Apple-like model, even though it could be extremely lucrative," Munster added.

Moreover, disrupting the Android ecosystem would impact market share, with Microsoft (NASDAQ:MSFT) moving in to reap the rewards for its Windows Phone 7 (WP7) platform.

WP7 could well pick up the bulk of the 20 percent-plus share Android would lose, assuming Apple's iPhone doesn't gobble the lion's share.