There hasn’t been much to cheer about on Wall Street lately when it comes to Android manufacturers' earnings. HTC and Motorola have both issued relatively disappointing quarterly results for long enough to annoy the investment community. In the case of Motorola, the big GOOG has come to their rescue anyway.  Motorola didn’t even hold a conference call to discuss its latest quarter (because of the Google deal, it said). They’re getting assimilated into the Google unless something goes haywire with the merger. 
But HTC is still an almost perfect pure play on the Android smartphone market. Yeah, they support Windows Phone too, but almost all the volume is on Android right now, and I think it’s a safe be that this will continue to be the case in 2012.

Mobile Nations Stock TalkNeither Motorola or HTC seem to be performing very well. Motorola can’t seem to get enough volume shipped to make a profit on phones, while HTC’s profitability has slipped considerably. The latest quarterly forecast from the Taiwanese giant is for an operating margin of only 7.5 percent.

So what does all this mean to investors and consumers?

I think investors need to keep in mind that Android vendors don’t have much ability to differentiate on software. Especially with the release of ICS, the features and capabilities of the OS are much improved and there is less of a need for vendors to mess around with something that is already very good.

This leaves vendors to compete on hardware. And even there, it’s a challenge.  Most of the volume is for the same old sheet-of-glass form factor that we’ve all grown to love since the launch of the iPhone back in 2007. So we watch vendors compete on gigahertz, megapixels, screen resolution, size, milliAmp hours, and so on.

And of course they compete on price. All of the big Android vendors make good hardware, and carriers are naturally interested in reducing the subsidies on these small computers. Especially those who also get stung by the massive subsidies that are applied to iPhones. The iPhone 4S, for example, is believed to cost carriers more $600, meaning there is a massive $400 subsidy for a device that fetches the carrier a two-year contract. (Something Sprint alluded to in its earnings call Wednesday.) Apple makes the money. Carriers just help them do it. 
So the Android vendor community is under immense pressure to cut costs, and this means fewer dollars of profit on the latest phones. 

Making matters worse for HTC and Motorola (and others) is the necessity to fight against Samsung, a vertically integrated vendor who just so happens to make its own screens, memory and the exynos processors. (Along with being more diversified in the electronics space.) Vertical integration often allows vendors to produce at a lower price, or at least the illusion of lower price depending on internal corporate accounting.

My belief is that we’ve moved past the big innovative period in the smartphone market. RIM got things interesting with the QWERTY-focused BlackBerry lineup. Then iPhone changed the game entirely, and finally Android brought in some much needed competition and, of course, openness. 

The hardware battle is now all about cost. The Android vendors are probably not the best way to play the trend. In a war, people on both sides of the fight die. But it’s the arms dealers that make money. 

My good friend Ed Zabitsky from ACI Research, and co-host of Mobile Nations Stock Talk has been educating me on exactly what’s happening within this supply chain. I find it fascinating. We’ll definitely be talking about this in the next live podcast.

So does this mean most Android vendors are doomed? No, of course not. It just means that people who compete on hardware are likely destined to earn the kind of margins that PC vendors make.  There’s always a profit to be made by someone even if it’s thin. So long as there is demand for Android smartphones, there will be enough companies who can get by on slim margins to make them. The stock market will value these companies the way they should be valued in the long run.

Should consumers worry? Nope. Not any more than they worry about PC box makers disappearing. There are always enough competitors to supply our needs. 

Chris Umiastowski is a former sell-side equity analyst at Orion Securities and TD Securities. Before that, he was an engineer for Nortel Networks. Chris is co-host of the Mobile Nations Stock Talk podcast.

 

Reader comments

Should poor manufacturer earnings reports matter to Android consumers?

33 Comments

Maybe if they eased up on how many phones they are putting out there they would have more positive earnings.

I wish I could give this comment more than 3 stars. LOL

Why would I buy any device when a better one (from the same company - looking at you, Moto) comes out in a couple of months? They're not going to sell enough of any device to earn money if they keep one-upping themselves and making the new device nearly obsolete just a few weeks later.

The obvious answer to the question in the title is yes. OEMs will only stick with android while it's profitable.

What else can they do, sell the companies and give the money back to the investors? They will profit from Android as long as they have customers.

Before it comes to that they better have a backup plan in place. They absolutely lucked out by Google releasing android. They were skinning the crap out of WinMo for chrissakes! They need their own OS. It's the only way they can control their own destiny and not rely on any other company for anything.

Exactly. Like it or not, when you buy a phone you are partnering with the manufacturer. HTC and Motorola are reinventing the same low def small screen phones over and over again.

Yes we should be checking to see if they are dying or are just in a coma. At least Motorola is including extended life batteries but still the pulse is faint.

Here's what continues to baffle me. Why are carriers so willing to to push the iPhone. Its costs them more for every sale, they aren't forcing people onto more expensive plans or longer contracts to make up for it so I just don't get it. AT&T for instance, I am still under contract for my current phone, if I go to their upgrade page the only phone they will give me a discount on currently is the iPhone! If you go to their sales page if you click on a iPhone they take you to an order page, if you click on and Android phone they take you to a product page. They are pushing it soooo much harder yet it costs them more? What's the deal? Are they all just Apple investors too?

my guess is that the conversion rate for iphone sales is higher. even though the margins are smaller, if the likelihood of making the sale is markedly higher, it's still more effective to promote it harder.

They're not. At&t is putting more emphasis on other platforms like android and WP7 so they don't rely so heavily on iOS. The reason why you get that scenario with the iPhone is because the EARLY upgrade is a program exclusive to the iPhone. You're still paying more for the phone so as long as you're willing to pay out the ass you can get a new phone.

Here's what continues to baffle me. Why are carriers so willing to to push the iPhone. Its costs them more for every sale, they aren't forcing people onto more expensive plans or longer contracts to make up for it

You are exactly correct about this, and it is starting to become public knowledge, and Wall street is taking notice.

CNN Money has a big article on this very issue.

Quote: "A logical conclusion is that the iPhone is not good for wireless carriers," says Mike McCormack, an analyst at Nomura Securities. "When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident."

Sprint said:
The cost of adding an iPhone customer is about 40% higher than the cost for the average non-iPhone customer, according to Sprint.

So indeed, why do they still do it? As a group they should give Apple an ultimatum: Lower prices or we will passthru the true cost of the iPhone which will have the effect of raising the retail prices so high that the customer jump to android. Any carrier that doesn't go along will be so saddled with debt they will fail.

I don't think it does matter to the average consumer. Are Android Central readers your average consumer? I think not. This is exactly why HTC, Samsung and Apple to name a few don't recreate the wheel by completely changing their UI. They have followings that are use to how they run and work for them. I'm pretty Sense biased as far as Android goes and I'm definitely not one of the many crying about how Sense is old and tired and memory taxing and wah wah wah.... That's what roots and roms are forrrrrr....

that's setting a low bar, 3 successful manufacturers i imagine would push the envelope faster than 1 successful and 2 faltering ones. but to maintain status quo, yea, no worries.

i'd rather be an Android vendor than be RIMM or Nokia!!!

of course margins will decrease as a market matures. but i still think we are in the 1st inning of a 9 inning game before smartphones reach PC-level commoditization.

i think Apple's margins are 36%. what are Samsung's margins?

until the "leaders" margins come down - the market has not fully matured.

HTC and Motorola made several mistakes which caused their decline. don't blame Android. without Android they would not have reached their previous highs and today their market values would be much lower.

i also disagree with the comment - "My belief is that we’ve moved past the big innovative period in the smartphone market." again - i think we're still in the 1st inning.

regardless - RIMM is screwed.

It would seem like most of the Android developers would loveee to be in nokia or RIM's place. Look at facts. Open your eyes.

HTC, Samsung, Motorla and LG have all talked about working on their own OS. Being a Android OEM just to make carriers and google money isn't a very sustainable business model for OEMs.

On the other hand, how many Billions in profit did RIM make last year again? How much debt does RIM have? Oh yeah none. Lol silly to think that a debt free company that continues to add millions of users each quarter and generates billions in profit every year is screwed.

I don't own a RIM phone. But I'm also smart enough to read numbers and RIM's numbers aren't as bad as the majority of Android OEMs are.

If anything I'd say HTC is screwed, Motorola was very screwed until Goggle bought them to prevent Moto from sueing every other Android manufacture just like M$ is. Speaking of which you know how much money M$ makes from android? Its several times more than Motorola or LG are making. Speaks volumes considering M$ doesn't sell any Android phones lol

you my friend have spoken very wisely. when your profits are tied to only building of hardware, your margins will continue to shrink because there is alway going to be another competitor who builds it for less undercutting your margins.
The likes of RIM, Apple, msft & google will continue to mint money because they own their own OS which none of the android OEM's do.

It costs money to own your own OS. More costs = higher prices.

There will always be a place in the market for the high priced brand, (BMW, Prada, Gucci) but its never a big place.

The question you should be asking is how well is it working out for Android OEMs.

Look at Motorola. They have sold at least 50 million Android devices. Now how much profit have they made since becoming an Android OEM? None. Less profit than RIM makes a day. Lol

M$ makes hundreds of millions of dollars in profit off of Android, people are saying they could make as much as a billion a year off of Android sales soon.

It's a major problem for Android. Eventually these companies are gonna get sick of making zero margin devices. They aren't running a not for profit charity. If you don't think these companies are looking for alternatives to Android then your just not accepting reality. Just imagine if ZTE becomes popular in America. Then we will really see problems.

Motorola was on their death bed and almost worthless when they started using Android. Android saved them and they sold the company to Google for $12.5 BILLION. HTC's current market cap is about $15B.

Android works for Samsung because they are executing.

closed proprietary systems like iPhone are the exception rather than the rule. in in the long run - they always lose.

closed proprietary certainly won't save RIMM.

based on its current market cap - RIMM is worth $8B and falling fast.

RIMM is toast.

canada lives off of the goodwill of the American people.

OK so in your opinion Motorola losing anywhere from $200+ million to $50 million every quarter since they have been and Android OEM is saved. Motorola was no longer on their deathbed. Yet you think the company that makes $700+ million to $1 billion in profit every single quarter is toast?

I don't understand your logic.

Also we all know why Google bought Motorola. Motorola had gotten sick of losing money and they decided it was time for them to start cashing in on android the same way M$ is. They had publicly said they were gonna go after android OEMs for licensing agreements. Google had no choice but to buy theme.

First inning?
No.

The big changes in the cell industry are slowly winding down. LTE is in its build out phase. Everyone has a cellphone and the carriers are eating their young. (By that I mean converting their existing dumb phone customers to smart phones).

There is nothing much new on the horizon after LTE.

Carriers will become dumb pipes. Less willing to subsidize, and forced into interoperability once LTE is everywhere.

Phones do pretty much everything that they are going to do already, at some level. Nothing new in the pipeline.

Baseball isn't the best analogy. Thr automobile industry is a better model. Ford Chevy Toyota.

It doesn't end after 9 innings. But it changes less and less each year from here on out.

until the "leaders" margins come down - the market has not fully matured.

What do you mean by "leaders"? Profits? Numbers sold? Best technology?

It only matters to apple fans. They get to use it and try to say Android is going down. They fail to see that other Android makers are doing better and fail to see that not making as much money as you thought you would and losing money is not the same thing

It's the pace of change that is causing some manufacturers problems.

If your product is not cutting edge then it is simply swallowed up as one of the rest.

Relief is at hand though, mobile phone and tablet technology is beginning to mature. I expect by the Q4 2012 things will have settled down and the pace of change will become more manageable.

Although having said that the rise of the microsoft/nokia partnership could kick everyone's apple cart over.

HTC's problem is they make and sell crap. Their phones are plagued with quality issues, ie, poor reception caused by antenna design issues, failed power buttons, etc. Their Sense overlay is a nice addition to Android, but their hardware should be flushed down the toilet.

Profit of a manufacturer only matters if you love Apple and read BGR. The problem is that manufacturers issued way too many phones in a short period of time, when they should have focused on a few great products, I mean, you have the Bionic, then Razr, then Razr Maxx within a few months - I'd be pissed if I bought a Bionic. HTC is probably taking the right route in 2012, fewer phones, higher quality, they just need to execute.

I also posted a long time ago that lack of building a brand recognition is bad, HTC keeps making new phones with bad names, when they could have kept incredible name made a few variants, instead, we get a thunderbolt, and a rezound as well as the AT&T variants.

Profits of manufacturers also matter to stock holders.

If a company can make a profit, they can't fund research and development.

Don't know about HTC, but Motorola's market share has dropped so far that they can't support their current devices. Plus, when they designed MotoBlur, they integrated it so deep into Android that it is a huge development effort for them to transition to any new version of Android. So, my beautiful dual core T2 Atrix 4G,which is barely a year old, won't ever see ICS. It is the last Motorola product I'll ever own.

I don't understand this site and you people. This site should be renamed google central. android is OPEN SOURCE.

Google is the owner and main supporter but it is a framework that is open which means that eventually oems and carriers will come up with non google versions. they will also be able to develop their own versions that don't have anything to do wit google.

So market share for google might drip off but android is going to continue to grow.

Unless the brand recognition, reputation and sales are strong enough, IMO, it's not feasible and pretty risky for an OEM to develop their own OS. We are currently seeing Microsoft (an already well established company)struggle with their own mobile OS even though they own the no1 spot on the desktop. We saw WebOS pretty much go down the drain. Nokia's own OS really hasn't lit up the high end market - at least here in the US. It's just not an easy task.

OEMs should instead, pay a lot more attention to customer demands be it the average Joe or the power user. Motorola quickly gained a reputation for locked bootloaders and their Motorblur has not been a hit with many. This has surely cost them customers and high regard in the tech-blog community. Yet they continued with the same-old same-old. I think they have underestimated how many consumers are doing their homework these days. And even though they seem to have a hit with the Razr line, for them it's been a roller coaster ride.

HTC is losing the 'cool' factor and overall hardware design/features following to Samsung. HTC used to be the design to beat. Even their Sense UI interface was considered superior to Android's but lately even Sense is beginning to get a bad rep from some. Plus there doesn't seem to be very many advantages to it over ICSs. What they should be doing is trying to figure out where they went wrong and what catapulted Samsung right past them to the no1 position. Customer demands and perception matter and they matter a lot.

In the end I think the market is going to be littered with Android models for a while to come however there may be less big players unless they find ways to 'hold their own'. I see Samsung really taking on Apple and possibly eclipsing them in the not too distant future. I also see Apple's balloon deflating slowly. They are not the only game in town again and Android has proven it can match and pass IOS's capabilities. And more importantly, consumers have accepted Android as a viable alternative. Also, I believe carrier dependence on the iPhone is going to wane eventually given the recent earnings reports. They are either going to negotiate better terms or turn up the pressure on Apple in other ways. The future is interesting.

Vendors need to stop competing on specs and focus on aesthetics. People who read this site care about specs but the rest of the world doesn't. If they focused on creating a form factor that wows when people see it, they would sell a ton.

I can't agree with this article. There are things manufacturer can do to differentiate their phones.

Point #1: Just get the damn hardware to play nice with the software -- OPTIMIZE it. Skinning the OS is one thing, but skinning it to a point that it slows down the phone? HTC needs to take a look at Samsung's Galaxy S2 to see what "responsible skinning" means.

Point #2: Who says there's no room to improve hardware? Just look at the RAZR MAXX. It's thinner than almost every other phones in the market, and yet spot a massive 3300 mAh battery that can finally sail in LTE sea for more than a couple hours. The only problem? Motorola didn't actually "design" it. The birth of the MAXX is more like an accident. Manufacturers cannot depend on accidents to make a product -- they need to study the market and see what the buyers really want. And, yes, we don't need a slow and expensive webtop.