Did Google Pick the Wrong Nexus Partner?

Google's (NASDAQ: GOOGL  ) Nexus program is a boon for OEMs looking to collaborate on high-profile Android devices. Since consumers have already expressed interest in unmodified versions of the operating system, devices carrying the Nexus brand are virtually guaranteed strong demand and envious unit volumes.

The search giant's most recent Nexus 4 flagship is already a runaway success. It's too bad that OEM partner LG continues to struggle with demand and can't produce enough of the device. The Nexus 4 has been out of stock more often than it's been in stock on Google Play. That's a good indication of healthy demand, but also potentially limiting if Google and LG simply can't keep up.

What problem?
What's worse is that LG isn't even acknowledging that there's a problem. After all, the first step is always to admit you have a problem. An LG exec told Korean outlet Chosun Ilbo that there were no supply problems and that production was proceeding swimmingly at its manufacturing facility in Pyeongtaek, South Korea.

The millions of Android loyalists anxious to get their hands on the device would beg to differ. Some enthusiasts have even gone as far as to decipher IMEI numbers and serial numbers with the hopes of estimating Nexus 4 volumes. If their methodology is correct, LG only shipped 370,000 units in the fourth quarter. For a device meant to rival Apple's iPhone, that's a far cry from the roughly 50 million iPhones that Apple is expected to have shipped in the fourth quarter.

Google itself also begs to differ, apologizing for the shortages. A Big G exec recently called out LG specifically, "Supplies from the manufacturer are scarce and erratic, and our communication has been flawed."

My own worst enemy
On the other hand, maybe LG isn't too keen on undercutting itself, so it isn't too anxious to ramp up production. Part of playing along with Google's grand plan involves targeting lower price points to the extent that LG's higher-end devices could get cannibalized. LG's own current flagship is the Optimus G, which the Nexus 4 is based on.

The Optimus G retails for $550, much higher than the high-end $350 Nexus 4. The biggest difference between the two devices is that the Nexus 4 lacks official 4G LTE support due to Google's strategic goals of reaching a large number of markets without carrier support, subsidies, or hardware margins.

This is quite possible when you consider that LG is already trying to sell the device to carriers and retailers for much more than Google is. A Spanish phone retailer suspended Nexus 4 sales when it found out LG wanted to sell it for upwards of twice as much. Stateside, T-Mobile lists the Nexus 4's unsubsidized "suggested retail" price as $550, a whole $200 more for the exact same model offered on Google Play. All the better to make T-Mobile's subsidy sound more generous, my dear.

LG probably saw what played out for Asus in the tablet market and didn't want to suffer the same fate. Asus builds the Nexus 7 on behalf of the search giant, a tablet that retails for $199. Cooperating with Google on its first flagship Android tablet at such a low price point has effectively locked Asus out of the $199 tablet market, along with other leading hardware OEMs. While Asus appears content with volume over margins, LG may not be.

Sorry, Sammy
The previous two generations of Nexus smartphones, the Nexus S and Galaxy Nexus, were built by Samsung, who has much broader scale than LG. If there's one thing Sammy's good at, it's churning out plenty of smartphones of various shapes and sizes. Perhaps Google should have stuck with Sammy on this one.

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