How Google Impacts the Premium Smartphone Market

Google has the ability to put a lot of wood behind this arrow.

Jan 11, 2014 at 2:00PM

According to the Wall Street Journal, Google (NASDAQ:GOOGL) recently  cut prices on its flagship MotoX to $399. The question investors should ask is, what affect will this have on the smartphone business?

Wood behind the arrow 
The MotoX is sold only in North and South America and, by volume, sells far fewer units than either Samsung (NASDAQOTH:SSNLF) or Apple (NASDAQ:AAPL). In fact, as of mid-November, MotoX stood at a disappointing 500,000 . This number pales to Apple's 33.8 million iPhone's sold last quarter, so why would the company think cutting the price of a poorly selling smartphone could have a potentially dramatic impact on the world's most enviable smartphone makers, Apple and Samsung?

First, Google's has spent a considerable sum to market the MotoX. Google has the ability to put a lot of wood behind this arrow, and has chosen to do so. Furthermore, while there is no doubt that Google would have loved to sell 30 million MotoX units at premium prices, it suits Google's long-term interests to forego margins and near-term profits in exchange for market share. Why?

Ecosystem
Google doesn't necessarily need to make money on its hardware. Google is content to get users into its Android ecosystem, where the company will reap increasingly valuable data that helps support the moat around its search engine as it learns the preferences of individual users.

How important is this data to Google? To paraphrase a Google exec, "We don't necessarily have the best algorithms, we simply have the most data." This statement explains the fruit Google derives from giving away software for free. That's in addition to getting users in the habit of using apps like Gmail and Maps, and eventually Google docs, as its assault on Microsoft Windows and Office continues.

Carriers subsidies ending?
The perception is that, in terms of quality, the iPhone and Samsung Galaxy are the best phones on the market. As carriers have traditionally subsidized phone upgrades every two years, it made sense for consumers to do so only when they became eligible.

Enter T-Mobile, which announced that it would offer no subsidies, instead making the cost of your monthly plan cheaper. Where before, most of the newer phones cost consumers (a subsidized) $200 at most, it was a no-brainer to choose whatever was perceived to be the best phone available, when in fact the "subsidy" is priced into mobile contracts.

Last quarter, only 21% of smartphones sold by T-Mobile were iPhones. In contrast, 51% of Verizon's smartphone activations were Apple devices. While part of the explanation for this is that T-Mobile got the iPhone long after the other carriers, and therefore already has an entrenched Android user base, there is no doubt that price sensitivity exists when consumers must foot the whole bill for a new phone.

With rumblings of ending subsidies at both AT&T and Verizon, this suddenly makes a lower-priced flagship phone like the MotoX much more attractive.

Cutthroat 
This will undoubtedly negatively impact sales for both Samsung and Apple. Google can, and will, operate at much lower margins in exchange for data and extra sales via their ecosystem.

More negativity
Google will have a more dramatic impact on Samsung sales. Google bought Motorola not only for its patents, but also to obtain more competitive leverage over Samsung, which was believed to be wielding too much power as the dominant profit-maker from Android phones.

Further, there will always be die-hard Apple loyalists who demand the Apple experience. However, Apple refuses to license iOS to other handset manufacturers. One Apple product begets another, as they function seamlessly and in unison. Customer satisfaction scores are off the charts.

The Android experience on a Samsung is largely the same  as other phones, less the poorly functioning bloat-ware Samsung adds to its phones. As the MotoX catches up in specs and added capabilities, there becomes little reason to pay substantially higher prices for a Galaxy.

Bottom line
Google's foray into producing and marketing proprietary hardware, then selling those devices for much lower margins, combined with the possibility of carrier subsidies disappearing could have a significantly greater negative impact for Samsung than for Apple.

Samsung, despite its enormous resources, will probably not be successful in developing its own ecosystem, as the company is simply light years behind both Apple and Google, and even Microsoft. I remain bullish on Google, although its P/E of 30 is a bit rich for a normal company, its search engine is as wide as can be, and it funds its moonshot projects (driver-less cars, robotics, etc.), which may end up revolutionizing the world.

Profiting from the next technology revolution
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Margie Nemcick-Cruz owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers