Now that Google-owned Motorola has officially announced the Moto X, I’m noticing some interesting discussion around pricing and gross margin. And it has me wondering if Google is set to cause Apple and Samsung significant pain.
Moto X is getting good reviews, and it looks like a pretty cool phone. But what I’m more interested in is the price. According to reports, Motorola is selling the phone to AT&T at $350, meaning that the carrier subsidy is only $150 since the contract price is the usual $199 we see on new phones.
Most new higher-end phones have higher average selling prices (ASP) than this. We’re all well aware that the iPhone 5, for example, commands over $600, and that a Samsung Galaxy S4 is likely in the mid $500 range.
"Selling a phone at a profit makes sense when you are a hardware company like Motorola — but throw Google into the mix and things could change."
Google has been disrupting prices on tablets for a while already, along with Amazon. They are more interested in selling tablets at cost, as evidenced by the low price tag of $229 for the latest Nexus 7. The LG-made but Google-branded Nexus 4 is also sold for as little as $299 (8 GB version), but it hasn’t been very disruptive to the market because it is not widely distributed through carriers.
Now we have the Moto X. It’s going to be widely distributed through five U.S. carriers and if they're paying $350 for the phone (and it's likely they're not all paying the same thing), carriers are making way more money promoting this phone because of lower subsidies. This leaves them with the choice of either dropping the contract pricing much closer to zero, or pushing hard on Samsung and Apple to reduce the ASP on their latest hardware.
So far Google says Motorola is being operated as a separate company. Goldman Sachs thinks that the Moto X can generate 29 percent gross margin if sold at $300. I think they are overestimating margin, but I could be wrong. I do think at $350 there is a reasonable profit on the phone. Selling a phone at a profit makes sense when you are a hardware company like Motorola. But, eventually, I suspect Google won’t be treating Motorola as a separately run company. And if Google doesn’t need to make money on hardware, it could really set the pricing bar low, making it very difficult for other manufacturers to earn as much as they’ve been used to.
"Can Apple keep up the sort of margins it has in the past? It's doubtful."
The more I think about it, the more I believe we’re quickly going to approach a scenario where Apple’s iPhone brings in maybe 30 percent gross margin, not the 60-ish percent we’re used to. Apple has the brand power and tight software integration to justify that kind of still-respectable margin. But does Samsung? Yeah, they’ve got excellent brand power. But they aren’t really differentiated on software integration like Apple is. If Google continues on its aggressive path, will Samsung be able to make the kind of money shareholders are used to seeing?
Personally, I think there is a lot more risk in owning Samsung than Apple these days, and for that matter Google also. That’s not to knock Samsung's own excellent products ... but I’d rather own shares of Google and Apple (and I do).