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Google's Nexus Phones Are Dead

Google's (NASDAQ: GOOGL  ) Nexus program is a mix of successes and failures.

On the tablet side, ASUS has enjoyed incredible success by building the Nexus 7, a device that has single-handedly boosted the OEM's tablet volumes by several million units per quarter. The promise of a stock Android experience has driven the Nexus 7's success. However, things aren't so simple on the Nexus smartphone side.

Last Nexus standing
LG builds Google's current Nexus 4 flagship, which is aggressively sold at the unsubsidized price of $300. However, Nexus 4 unit sales haven't skyrocketed like Nexus 7 units did. LG hasn't released official figures, but some estimates peg Nexus 4 units at just 370,000 throughout all of 2012.

LG Nexus 4. Source: Google.

In a recent interview with All About Phones, LG exec Won Kim confirmed that the company has no interest in building a second-generation model for the search giant, casually referred to as the Nexus 5. LG was largely why Google had so much trouble keeping up with demand when the Nexus 4 was launched. The device was consistently out of stock, and a Google exec blamed LG: "Supplies from the manufacturer are scarce and erratic, and our communication has been flawed."

Kim noted that LG isn't keen on stock Android devices, since the company feels that such devices provide no "added value" to LG. Manufacturers have long relied on skins and modifications as a point of differentiation from their Android brethren, and shipping stock Android catalyzes commoditization. At the same time, the Nexus 4 directly undercuts LG's more profitable devices like its flagship Optimus G, which the Nexus 4 is based on.

The Optimus G retailed for $550 when it launched last year (it's now $450), which is close to what it would fetch when sold subsidized on contract by carriers. The smartphone also has LG's Optimus UI skin. Guess which one LG would prefer you to buy.

No one left
The news is particularly notable in light of Google's announcement that it has partnered with Samsung to sell an unsubsidized version of the Galaxy S4 running stock Android. And by "partnered," I mean that Samsung is throwing Google a bone, since very few people buy unsubsidized devices. Furthermore, rival HTC is widely expected to release a "Google Edition" of its newest One this summer, also running stock Android. There are no pricing details for the rumored launch, but I wager that it will be full retail price. OEMs selling "Google Edition" variants at full price could very well be the future of stock Android devices, since there's a significant disincentive for OEMs to embrace what Google wants to accomplish with Nexus phones.

Nexus phones undermine carriers. Google removes them from the sales process, frees consumers from service contracts, and relegates them to commoditized service providers. The whole point of the Nexus program is to disrupt the subsidy model that carriers have implemented. That same subsidy model also contributes greatly to the smartphone gross margins that OEMs enjoy (even if the rest of their operations put them in the red by the time they reach the bottom line).

OEMs also rely heavily on carriers for retail distribution, since most don't sell directly to consumers. Carriers, OEMs, and Google all have very different interests. In the absence of a big spike in unit sales, OEMs will eventually pick carriers and subsidies over Google, comforted by the status quo. Since most people buy subsidized smartphones and unsubsidized tablets, Nexus phones can't promise a boost in unit volumes like Nexus tablets can.

It's worth noting that HTC, Samsung, and LG are exactly the three manufacturers that have participated in the Nexus phone program thus far. An alternative would be to tap smaller OEMs like ZTE or Huawei, but those companies lack brand recognition in the important U.S. market. Google could also theoretically tap ODMs or its Motorola subsidiary if it wanted to truly become a first-party vendor, but that directly undermines its more important relationships with the larger three OEMs that are primarily responsible for Android's rise in the first place.

Samsung and LG are the No. 1 and No. 3 smartphone vendors in the world, respectively, shipping a combined 81 million units in the first quarter (HTC took a big hit in the first quarter due to component shortages). That's exactly half of the 162 million Android phones shipped during the same time, just between Samsung and LG. The importance of these OEM relationships to Android's continued proliferation cannot be understated. Google has a lot more to lose than it has to gain by choosing to compete directly.

If LG passes on the Nexus 5 while HTC and Samsung only opt for "Google Editions" of their respectively branded devices, the Nexus 4 may be the last of its breed.

As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it's also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn't sold. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2013, at 1:01 AM, vantan wrote:

    The demand for stock android phones is high enough that any manufacturer other than Samsung might be better off now not bothering with any os enhancements and just focus on getting new hardware out as fast as possible e.g. higher res camera, better sound chip, faster cpu, better display res, waterproof case, micro SD slot, etc. Expect lots of low price android phones from China with stock Android. No need for manufacturers to provide any subsidy but carriers likely will continue subsidizing subscribers to induce contract period lock in. Could eventually see non-carriers offer low end phones free when tied to non-phone related services e.g. new bank account deposits, household appliances...All good for consumers.

  • Report this Comment On May 29, 2013, at 4:03 PM, rmhjah wrote:


    I completely agree with your comment. Stock Android is far better than HTC Sense or Samsung's skin they put over the Android OS. I gladly shell out full retail for my phones to keep my unlimited data on two lines and lower family plan. Using an upgrade would add nearly $55.00 monthly to my family plan and shared data (yuck). I would love to be able to get phones on Verizon WITHOUT all of the bloatware developers and Verizon put on these devices.

  • Report this Comment On May 30, 2013, at 2:00 PM, JeromeBesnard wrote:

    Catchy title but a lot of the article is wrong.

    Actually HTC CEO just confirmed that the Nexus phone program will go on, even after announcing the "Google Edition" of the One:

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