Android Hardware Profits Tanked in 2014

While Android continued to gain market share in the global smartphone market, it saw a significant drop on another key metric: Profits.

Analyst Chetan Sharma estimates that global profits in the Android hardware market for 2014 were down by half from the prior year — the first year that there has been any significant drop.

A lot of that is due to the big drop in profits at Samsung, the largest player in the Android market. China’s Xiaomi gained significant market share, but is only modestly profitable thanks to its slim margins. Meanwhile, other players like Sony and Motorola lost money in their Android-based mobile businesses.

That’s obviously of concern to the hardware companies, but it should also be worrisome for Google.

“It is important for Google that the ecosystem stays healthy and balanced,” Sharma told Re/code. “Without profitability, some of these players will eventually disappear and it will primarily become a Samsung + Chinese OEMs ecosystem, which is probably not what Google wants.”

Google, which makes Android, doesn’t profit directly from the operating system, but reaps enormous benefits as its many services are adopted. That, in part, helps explain the significant TV ad campaign that Google has been running touting Android and those that make devices using both the Google operating system and services.

A significant chunk of the global market uses the open source version of Android, meaning that the devices use much of the Google-developed code but not its suite of services. Open source Android is particularly strong in China, but is also at the heart of devices like Amazon’s Kindle Fire line.

Sharma looked primarily at the hardware side of things, but said that app makers are also seeing greater profits from iOS than from Android, despite the fact that the number of Android devices is greater than the number of iPhones.

Accel Partners’ venture capitalist Rich Wong, who has been a big backer of Android, said the profit issues represent more a changing of the guard than a long-term concern.

“In our experience, Android momentum in the broader startup ecosystem continues despite some of the near term profitability questions of the manufacturers,” Wong said.

Apple, meanwhile, was on pace to have its first $100 billion year from iPhone, Sharma said, in his roundup of 2014 highlights.