By Stephen Schenck | November 7, 2012 7:50 PM
I hate how expensive smartphones are. For products that are so easily damaged, see such short windows of software support, and are so quickly replaced by newer, fancier models, it’s mind-boggling just what we pay. When Google announced the Nexus 4 a little over a week ago, my jaw almost hit the floor. Three hundred dollars? For a top-shelf model? With no service agreement? Now that I’ve come to accept this bargain-basement pricing as reality, and not some wild fever dream, I can’t help but wonder if we’ll see more phones arrive with such sensible price tags. Could the Nexus 4 signal the beginning of a new era in how we think about smartphone pricing?
I would absolutely love that to be true, but it’s going to be a whole lot more complicated than “one guy is selling cheap phones, so let’s all follow suit”. Before I can even start wondering about how this pricing could affect phone pricing across the board, I’ve got to consider just how the Nexus 4 got to be so affordable.
I’m not the only one who’s been curious about that; one of the big questions that’s been going around lately has been just how Google’s able to sell the Nexus 4 for so very, very little. Some theories have claimed that Google is heavily subsidizing the Nexus 4 out-of-pocket, pointing to the off-contract pricing for the LG Optimus G (essentially the same hardware as the Nexus 4) running over twice as high, closer to $800.
That would be a very interesting development if it turns out being true. Smartphone users in the US, at least, are well familiar with subsidized pricing, regularly signing away a couple years of choice in order to save a few hundred bucks on their phones. If Google really is subsidizing some of the Nexus 4′s cost, that’s going to be a very different situation compared to what’s going on with the carriers. What benefit would Google have to make such an expenditure worthwhile?
As we were just discussing, Android can be a tough platform to move away from. Once you’ve got your documents, your music, your movies, your apps… heck, your whole life tied-up in Google’s various services, it can be a royal pain to try jumping ship. It only stands to reason that Google has a financial interest in not only getting you on-board with Android, but keeping you there. It feels a little less nefarious than what the carriers are up to, since you always CAN leave if you choose to, but we shouldn’t kid ourselves that Google’s not benefiting from us sticking around.
Let’s say that Google really is counting on those future advertising dollars offsetting the cost of subsidized Nexus 4 sales. If that’s the case, why should the Nexus 4 be so special? Surely, Google’s going to benefit similarly regardless of which device an Android user chooses to access its services with, so why shouldn’t it be able to offer similar discounts for other Android models?
Maybe that’s not what’s going on, though. Perhaps there’s no real subsidy, but Google is simply eating the profits and offering the Nexus 4 for sale at cost. If LG’s not willing to do the same, that would explain the pricing discrepancy.
While I fully support a manufacturer’s right to earn a profit on its device sales, a 156% markup is just cuckoo bananas highway robbery. Sure, the LTE radio’s going to make a small difference in the actual cost to manufacture these two models, but that alone wouldn’t explain these figures.
That idea that we’re looking at a hefty markup isn’t totally unreasonable. Let’s take a look at the iPhone 5 for a moment, just because of the level of attention that’s been paid to the hardware’s components, and what they’d all cost to put together. Estimates place the actual cost for materials and the manufacturing of a 64GB iPhone 5 at around $230. Without carrier subsidies, the same hardware sells for just about $850 – that’s a 270% markup. Sure, this is Apple, so it can demand a bit of a premium, but the idea that LG could still be trying to get away with a 156% markup doesn’t sound so far-fetched.
Could Google have realized that it can sell a whole lot more phones, and make up the difference in terms of volume, by simply profiting less per-phone? Maybe it’s not even selling the Nexus 4 at cost; could it be making a comfortable 20-30% profit and still be able to offer the phone so cheaply?
Mind you, we’re deep into speculative territory here, but if that’s what’s going on, and the Nexus 4 ends up being a runaway hit, I think it could get some other companies thinking long and hard about their profit margins. Maybe some will crunch the numbers and similarly realize that it can ultimately be more profitable to bring in less money on a larger number of units.
There’s a downside to that, though, as that sort of market may not be able support quite so many different phone options, from so many manufacturers. I’ll admit that I’m no economist, but the basics of the situation seem simple enough: there are only so many smartphone customers, and if companies start making less money from each of them, we’re soon going to end up with fewer companies still in the smartphone business. Even with the specter of decreased choice, I still think that could be a win for consumers; frankly, the market seems a bit over-saturated at the moment.
For now, there’s a whole lot we don’t know about the Nexus 4, including just how and why Google’s priced the smartphone like it has, but I’m nonetheless hopeful that its incredibly affordable price tag is just going to be too hard to ignore, and that the phone’s arrival could have far-reaching effects on the smartphone industry.