They won't; not directly. They don't need to either. Google is in the business of knowing their users. They make money by:
A) Knowing the make-up of your daily online life
B) Presenting ads that are relevant based on that profile
Android keeps you inside the Google ecosystem. Google search, Google mail, Google docs, Google RSS reader, Google shopping. Each of these utilities feed the core purpose of knowing you, which is beneficial to Google's bottom line. The better they know their users, the better targeted the ads can be, and the better they can convert.
I really hope Google goes beyond just advertising. It's great that their services are free but I would still pay a premium for a polished, distraction-free environment. I'd rather pay a fee than to be surrounded by advertisement everywhere I go, especially on smaller screens.
Google's dealsmap acquisition as well as their rollout of Goolgle offers do connect some dots. Also, location and context based ads are going to be important for the mobile ecosystem.
I think the OP is making a good point but direct profits or revenues wasn't the lead motivation for Google to go full throttle with Android and then the $12.5B MMI deal... it was that this way:
With Android, Google accelerated/is accelerating the pace of smartphone adoption (more smartphone = more internets = more Google = more Ads) and at the same time putting their services in front of the smartphone vendors for a undisclosed, but possibly tiny, fee per device. Enabling Google Search as default but not requiring it (as it's been the case of many Android smartphones with Bing by default in the US).
Note1: Android is free. Google Core-Android-Apps are not: Gmail, Market, and so on
Note2: Maybe even the fee is not a monetary one. It could be the option of selling the smartphone as a 'Android' phone (with is trademarked), using the Android logo, etc.
Considering even Apple doesn't get any meaningful profit from its app store, I don't see Android Market being a profit center either. They need Android Market just to be competitive with the App Store.
Apple's app store revenue is around $2 billion. If Android market can generate a similar amount of revenue for Google, it should a good share of the total Android revenue.
What good is revenue with no profit? Apple has said that app store basically break even in terms of profit, so I'd venture to guess Android is similar. Although they don't need an army of approvers so maybe their costs are less. But they most likely don't make as much from paid apps or in app purchases as the app store either.
Agree partly to TC on this.Search is the real big one but Google can't depend on the one trick for too long. Their growth has sort of stalled in the last few years.
They do charge the $25 sign-up fee, which they can increase and follow the AppStore Model. + they are stil lgenerating revenue from Google search results and AdMob, which most of the Apps are using.
I wonder if Google even needs to profit from Android or "keep people in its ecosystem". Given Google's scope, it might be profitable to do any fairly low expense thing which increases Internet use.
A) Knowing the make-up of your daily online life
B) Presenting ads that are relevant based on that profile
Android keeps you inside the Google ecosystem. Google search, Google mail, Google docs, Google RSS reader, Google shopping. Each of these utilities feed the core purpose of knowing you, which is beneficial to Google's bottom line. The better they know their users, the better targeted the ads can be, and the better they can convert.