Why does Google fund Mozilla to develop Firefox when it competes against Chrome?

For one simple reason: money. While it’s true that Mozilla strongly relies on Google’s royalties, don’t forget that Google is completely reliant on search traffic: of the $8.58 billion revenue earned by  Google in the first quarter of 2011, 97% of it is derived from  advertising. In other words, Google’s status as the default search  engine for the majority of 450 million Firefox users directly translates  into millions — and possibly billions — of dollars of revenue. It’s the  same story with Opera, which regularly holds an auction for its default  search engine: search traffic is worth big bucks.

Of course you could argue that Google would be better off spending its $85 million on advertising Chrome or Android,  but you have to remember that $85 million is the tiniest drop in  Google’s sales and marketing bucket. In the first quarter of 2011 alone,  Google spent over $1 billion on ads, almost double what it spent in the  first quarter of 2010. If you extrapolate that out to a total of $4  billion for the year of 2011, Mozilla’s $85 million makes up 2% of  Google’s total sales and marketing spend. In all likelihood, Firefox is  probably the cheapest source of traffic that Google has.

Google’s  other problem comes in the shape of Microsoft Bing, which might be  making a huge loss ($2.6 billion last year!) but it’s also gaining  significant traction both in the US and worldwide territories. If Google  fails to renew its contract with Mozilla, do you think that Microsoft  would blink an eye at spending $85 million for the majority share of  Firefox’s 450 million surfers?

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Microsoft has spent billions on scraping  away just a few percent of Google’s massive share to land itself with  under 4% of the global search market. For $85 million — or whatever  Mozilla decides to charge, because it could charge almost anything — Bing could bolster its global share to 10, 15, or maybe 20%. Google,  in return, would lose huge swaths of its market and millions — or  billions — of dollars in advertising revenue.

To conclude, Firefox has absolutely no need to  worry about its revenue stream. It is Google’s single biggest source of  search traffic, and one of the most important components of its entire  business — losing Firefox would be a massive blow for Google, not the  other way around.

1. It could lead users towards services that compete with Google's, such as Bing, Vimeo or Yahoo!
   
2. It could suck, making its users feel less comfortable with the Internet at large and thereby less likely to use Google's services.
3. It could provide poor support for web technologies (e.g. HTML), making it more difficult for parties such as Google to deliver the intended experiences.
   

Google succeeds (and makes money) when the web succeeds and people use it more to do everything they need to do.