Are smartphone profit margins fair?


Last week, Motorola dropped an unexpected holiday surprise, and we saw the return of that killer $150-off deal for no-contract Moto X sales. This was the same offer Motorola attempted for Cyber Monday, and after that effort failed, brought the deal back for a couple days earlier this month.

Seeing these savings arrive for a three-peat got me thinking about a couple different things. For one, based on the reaction I was seeing, that $150 makes a huge difference in the phone’s appeal. At $500, you’ve got a lot of factors to weigh, but at $350, the Moto X is a tough deal to turn down.

I also considered how odd it is that this deal keeps returning, taking the very same form. I could understand Motorola giving users one do-over after the initial failure, but two, let alone three? I get the very strong impression that knocking $150 off the Moto X’s sticker price isn’t fazing Motorola one bit – that it could keep on selling $350 no-contract Moto Xs without breaking a sweat for as long as it chose to.

moto-g-review-15Throughout all this, I’ve got the Moto G in the back of my head: the poster boy for the affordable Android. Now, this isn’t exactly official, but industry estimates have suggested that Motorola makes about 5% profit off each Moto G it sells. Based on the differences in hardware between the G and the X, and the effect that has on component cost, it stands to reason that Motorola could easily enjoy those same sort of margins – if not even larger ones – by selling the Moto X at somewhere around the $300 point.

That’s a very intriguing prospect, and in that light even these $150-off deals don’t sound so hot. But clearly that’s not what Motorola has decided to do in the long term; it believes that it can get what it wants by keeping the Moto X priced as it is – and with those much more comfortable margins for the company.

And absolutely, Motorola has every right to do just that. No one’s forcing you to buy its phones at any price, and even with the limited lineup it currently offers, it gives shoppers an array of options at varying price points – something for every budget.

But at the risk of this turning into some leftist anti-capitalism rant, are the sort of profits that manufacturers expect from smartphone sales – the wide berth that lets Motorola discount a phone by $150 without losing a penny – necessarily fair to consumers?

5s-unboxTo answer that, let’s take off the blinders and look at the sort of margins other industries see. What about automobiles? Porsche has the highest profit margins around for any car manufacturer, as only befits a luxury brand – and based on reports, it turns an average profit of 18.4% on each sale.

Compare that to Apple and the iPhone 5S: based on component cost and manufacturing estimates, Apple’s turning something like a 225% profit on a 16GB iPhone 5S – and will make even larger margins on sales of higher-storage variants.

Legally? Cool. In the eyes of its shareholders? Cool. But I simply can’t get on board with the idea that these kind of runaway-profit, license-to-print-money situations are necessarily fair to us shoppers.

Apple’s not solely to blame – nor is Motorola or any other OEM – and lord knows everyone’s jacking-up their prices as far as they can get away with. In fact, I’d argue that a sizable chunk of responsibility falls squarely on us, the consumers; after all, none of this would even be possible if we didn’t agree to keep paying as much as we are. Let’s also point a nice share of the blame at the carriers, which in the US at least have done all they can to push full retail prices out of the minds of shoppers blinded by subsidies.

att920storeLooking at all this, my biggest problem is that while I totally believe that mainstream smartphone pricing is absurdly inflated, I’m just not sure what an “acceptable” profit margin might look like. It’s almost a little sad to say, but even capping things at 100% profit would be a noticeable improvement over the current situation. What if a brand-new, just-launched Galaxy S 4 had sold off-contract for just $500? That’s a 100% profit right there.

Or take a page from Porsche’s playbook and aim for something more around 20% – that same GS4 is now looking more like a $300 phone. Granted, all this is over-simplifying things – perhaps I’m not appropriately factoring in expenses like patent licensing or advertising costs – but make no mistake, those are differences that manifest in the “tens of dollars” range, not the hundreds that matter here.

What kills me is how little shoppers seem to care about the extent to which they’re getting fleeced, even with the mountains of evidence before them. They see the Moto G and think “well that’s only so cheap because it’s a low-end phone.” Maybe, but if that Moto G were sold with an iPhone-level markup, it would cost over $400.

Or they see the Nexus 5 and think “well that’s only so affordable because Google’s subsidizing the hardware.” Heck, variations on that line get parroted every time a new Nexus phone comes out, and yet teardowns inevitably reveal that the phones actually don’t cost an arm-and-a-leg to produce, and even at the crazy low prices they’re sold, a small profit isn’t outside the realm of possibility.

To an extent, I can understand this mentality – we love having the highest-end, most desirable devices, and one way or another, we’re going to attain them. It’s uncomfortable to acknowledge how frivolous we’re being when making such purchases, and it may just be easier to pretend that’s not the case, ostrich-head-in-the-sand-style.

Where does that leave us? Is it even possible to effect meaningful change to the way phones are priced? I really don’t know, and even the arrival of models like the Lumia 520 or Moto G doesn’t have be convinced. In the end, we very well may have to just live with it – but that doesn’t make it any more fair.

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About The Author
Stephen Schenck
Stephen has been writing about electronics since 2008, which only serves to frustrate him that he waited so long to combine his love of gadgets and his degree in writing. In his spare time, he collects console and arcade game hardware, is a motorcycle enthusiast, and enjoys trapping blue crabs. Stephen's first mobile device was a 624 MHz Dell Axim X30, which he's convinced is still a viable platform. Stephen longs for a market where phones are sold independently of service, and bandwidth is cheap and plentiful; he's not holding his breath. In the meantime, he devours smartphone news and tries to sort out the juicy bits Read more about Stephen Schenck!