You understandably suffer from the mistaken impression that Android is 'free.' when the reality is that the kernel is 'free' but the 'Apps' which most phones have (mail, dialer, appstore, browser, maps, etc etc) are actually licensed for actual cash. It's not entirely clear how much that costs (and it benefits Google for that not to be clear).

In terms of business advantage, Android seems to me to be fairly unique. Google created a lower barrier to entry into the 'smartphone' market than either Apple, Microsoft, or RIM. Folks who took advantage of that were people early on were people who had the most to gain (low end carriers like T-mobile, Chinese ODMs who wanted to move up the value chain like HTC). They captured a large (if somewhat chaotic) developer market by making much of the source code for the system available for download, and they did create the ability for an individual to create a nearly complete phone 'stack' for certain types of hardware.

The established players greatly underestimated the impact of capturing the 'hobbiest' phone market. (Much like the established data processing players missed completely the impact of the hobbiest computer market).

Google generates anywhere from two to three billion dollars a quarter in free cash flow, which accounts for any and all R&D investment in Android, so its a classic example of being able to take huge profits from your cash-cow market (Search advertising) and disrupt a different market (smartphones) which is the fastest growing channel for advertising (Mobile ads).

Not to mention that Google probably has a better network than any phone carrier today, and they have a voice calling product (Google Voice), its entirely possible at some point for them to create a 'phone' system based entirely on WiFi (like, maybe something with this new whitespace bandwidth that is available or a bunch of hotspots) which gives you a device which can replace AT&T or Vodaphone or whomever.

Ultimately Google understands that nobody bought a smart phone because they 'wanted to be a customer of AT&T', rather they bought it because as a tool it made them more productive. If Google can back into owning that whole stack then their company becomes just that much more valuable.

Worth throwing a bit of pocket change at is it not?

Android pays for itself, in lots of different ways, among them and by far most importantly: Being the default search provider on 550k additional phones/day. That's worth a billion $ to Google any day.

Isn't Google the default search for iPhones as well?

And not the default on Verizon Android phones.

I don't think it's just about search. I think sometimes Google does things Because They Can and then try to figure out how to make money later. Android's most realistic reason for existence, IMHO, is to ensure that Google users can take their data with them. If there was no Google phone, then the world would stick with Exchange, and GMail is not Exchange.

I always thought that Android's raison d'etre was to prevent any other company from dominating the smartphone business (Apple having apparently the best shot at this, but would still apply if Microsoft or RIM seemed likely to) because they would then have a huge opportunity to cut Google out of the loop - they could use Bing for their default search engine, have a built-in mail app that's not Gmail, etc.

Yes, but they pay for that privilege. I haven't seen any public figures of how much that is, but it did get extended for a year or two recently.

There's money back and forth between these companies all the time. It's just behind closed doors for 90% of it. Patent suits are the equivalent of tabloid coverage of a public argument. It could very well be resolved behind closed doors like many other suits.

If Google controls the platform, then Google's other products will never go out of style ; do some reading on micro-economics / complementary products.

Android may be cheaper for Google than having to develop apps on a multitude of mobile OSes, the largest of which is controlled by a competitor.