Last week, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google unveiled a new lineup of hardware for 2018, including new Pixel 3 phones; its first Chrome OS tablet, Pixel Slate; and a new Home Hub. The Pixel 3 and 3 XL appear to be great devices, particularly in the camera department. While Google will never sell as many phones as Android leader Samsung, it's abundantly clear that Google is taking hardware more seriously than ever before.
The search giant also chose to take a page out of Apple's (NASDAQ:AAPL) playbook: It's jacking up the price.
The Pixel 3's biggest weakness is its price
Starting at $800, the Pixel 3 is $150 more expensive than last year's Pixel 2, which started at $650. Pricing has been the most significant contributor to Apple's iPhone revenue growth over the past year, after the Mac maker priced last year's iPhone X at $1,000. Apple stuck with that starting price point for iPhone XS this year, and pushed even higher with the iPhone XS Max, which approaches $1,500.
But Apple is launching the iPhone XR this month, with pre-orders starting later this week, at a $750 starting price. Compared to the iPhone XR, the Pixel 3 may have a tough time competing. Pixel 3 doesn't have any type of 3D facial recognition, while the iPhone XR includes Apple's TrueDepth camera system and Face ID. The iPhone XR's display is larger and has thinner bezels, and comes in a greater variety of colors for more personalization options. Apple's A12 Bionic chip also utterly crushes the Qualcomm Snapdragon 845 inside the Pixel 3.
Perhaps the most confusing part of the price increase is that the Pixel 3 doesn't have any drastically expensive hardware changes compared to the Pixel 2, which means that the price bump isn't primarily meant to offset any cost increases. This is about padding hardware margins.
Google should be trying to boost unit volumes instead
Last year, Google sold an estimated 3.9 million Pixel phones, according to IDC. That's a rounding error compared to the 1.5 billion total smartphones sold globally in 2017, of which nearly 216 million were iPhones. On average, it took Apple less than a week to sell 3.9 million iPhones last year.
There is an inherent trade-off between price and demand, and there are plenty of compelling Android alternatives with comparable hardware at much lower price points. That's why Google adopting a premium pricing strategy is so bizarre. Google is still in the process of ramping its hardware business -- reported within Google other revenues at $4.4 billion last quarter -- and aggressive pricing is the simplest and most effective lever to pull that will bolster unit sales. With higher unit sales comes operating leverage, as the company could then spread out fixed costs across more units.
Instead, Google will artificially limit demand with an $800 starting price. It's almost like Google doesn't really want to make that much of an impact on the Android market, which could very well be the case, as it is competing with its own partners -- the same companies that are the real volume drivers for the platform. Perhaps Google is just trying to recoup that $1.1 billion it paid for HTC's smartphone team.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.