Investors, and especially detractors of Google and specifically Android, keep asking the question, of how much does Android actually contribute to Google as a whole. They reluctantly point out that while Android is the number one Operating System on the world, and is fives more popular than the number two spot held by iOS - what good does it do for Google's profits or bottom line. Then, they quickly point out that because of Apple's dominance in web traffic, it generates more than a 2:1 advantage over Android and, because of Apple's tight-rein on iOS and its concentration on selling only high-end (read that as high-profit) devices, such as iPhone and iPad, those sales of devices comprise 70-percent of Apple's overall revenue.
Some investors and fanboys seem to think that is a great way to generate long-term income for a company - and now Apple is looking to ink a deal with China that could boost sales of their iPhone by 10-percent; and because Apple customers typically buy more than one Apple product, they are hoping that sales of iPads and iPods may also increase. Sounds more like a one-trick pony to me - I would much rather invest in a company that makes their money because it is diversified and has several avenues of revenue, like Google. Does Google make much revenue directly from its Android Operating System - it "only" contributes about $2 billion of enterprises value to Google, or about .7-percent of the company, however, indirectly Google make billions more from the widespread use of Android.
Most companies follow Apple's path to wealth - they build desirable hardware, supply the software, place a high markup on its selling price, create an air of superiority, and wait for the profits to roll in - total control over their product and thusly, control over their exclusive profits. The problem with this scenario is that your product can become old and stale over time and constant innovation is needed - many loyalists will follow for a while, but eventually they will demand more, or switch platforms.
Google is first and foremost a search engine and advertising giant. From the graphs below, you can see just how much they dominate the search engine market - and every time a search is done on Google, via Android or iOS, they make a profit. When Google decided to get into the Android market, they saw it as a way to spread the Google name around the globe, create a Play Store with apps, and one of the by-products of all of this would be increased revenues from advertising...Android serves as a platform for Google's search engine.
Because Android is not a commodity that is bought and sold, it is difficult to put a realistic dollar value on it - it's the conduit for many Google Services and products, such as Gmail, Google Glass, Google+, Google Groups, Play Store, etc. Every time a person gets on their Android device and uploads a message or picture to Google+, they make money - Google Glass is an excellent example of how Android will help funnel billions of dollars to Google via advertising revenue.
Google had always said they wanted to stay out of the hardware business, but if they do not feel another manufacturer is taking full advantage to spread the Android or Google name, they will, eventually jump in. In the case of Google Glass, no other company could foresee the fortune that could be made, not in selling Glass (it is rumored that Google will sell them close to cost), but in the immense advertising revenue that could be made from their existence.
In the case of smartphones, Google made a move and purchased Motorola Mobility to champion Android's cause - to build the "General Motors" of smartphones that were affordable to everybody...emerging nations as well as those in the U.S., and as a by-product, Google received all of those precious Motorola patents to protect itself from future lawsuits. By selling a high quality smartphone all over the globe, Google is further spreading Android and its ecosystem that makes Google money - advertising.
With Android 4.4 KitKat, Googles latest rendition of the OS, it is firming up its future for selling affordable devices, by structuring it so that only 512MB of RAM is needed for it to run the device smoothly. Google is committed to making Android a fine, polished, and optimized OS - the best in the world - because as goes Android, so does the continued increase in Google's revenue via those precious advertising dollars.