Believe It or Not, Your Next Smartphone Is Basically Free

Costing $100 or more to buy, and then hundreds more to operate, your smartphone is something you might think is a pretty pricey gadget. But you'd be wrong. It's actually ... basically ... free.

At least depending on whom you buy it from.


iPhone5S. Source: Apple

Sure, at subsidized, sign-over-your-soul-to-AT&T-for-two-years contract rates, a new Apple (NASDAQ: AAPL  ) iPhone 5s will set you back $200 before the first monthly bill even comes due. Similar upfront charges apply for Samsung's GalaxyS4, the HTC One, and the BlackBerry (NASDAQ: BBRY  ) Q10. These are the prices you know about. But here's what you may not know: Most of the companies that manufacture these phones are losing money on their products.

Red ink by the gallon
According to a recent research note out of investment banker Canaccord Genuity, there are really only two companies out there that have figured out how to make a profit from smartphones, tablets, and similar devices. Says the analyst: "Apple and Samsung combined to capture a remarkable 109% of Q3/13 handset industry profits."

But those two are the exceptions. As Canaccord reveals, BlackBerry, Nokia (NYSE: NOK  ) , LG, HTC, and even Motorola, owned by Google (NASDAQ: GOOGL  ) -- they're all losing money at their phone businesses.

Our own number-crunching confirms these findings. According to data from S&P Capital IQ, Apple leads the pack of phonemakers with a 28.7% operating margin on its product portfolio. Samsung earns 16.5%, despite getting its Android operating system for free from Google. And it's all downhill from there:

  • LG Electronics earns a slight 2% operating profit margin, but is losing money on the bottom line.
  • HTC operates at a 0.8% loss.
  • Nokia, whose handset business is soon to be owned by Microsoft (NASDAQ: MSFT  ) , "boasts" operating profit margins of negative-7% on its mobile phones and smart devices.
  • Google's Motorola Mobile division has an operating profit margin of negative 9.5%.
  • and BlackBerry is losing more than 15% on an operating basis.

Everywhere you look, these companies are bleeding money.

What does it mean to you?
Not to put too fine a point on it, what all this means is that no matter what you think you're paying for a smartphone, it's an incredible bargain. Two-thirds of the smartphone makers out there -- more, because we've really only looked at the biggies -- are working for you at a loss.

This means that even if you had what they have -- the ability to buy parts at scale; factories in Singapore, Taiwan, and China; hundreds of Ph.D. engineers at your beck and call; and patents, trademarks, copyrights, and industrial designs galore -- you still couldn't build yourself a smartphone any cheaper than they've already done for you. In effect, they're working for you, for free, to bring you the benefits of the latest communications wunder-gadgets.

This holiday season, as you're reviewing your shopping list and grumbling over the prices you'll be paying, it's worth keeping in mind: Some of the biggest corporations on the planet have already given you their Christmas presents: cheap, handheld communications technology -- provided gratis.

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