Google (NASDAQ:GOOGL) subsidiary Motorola started selling its low-end Moto G phone in the US earlier than expected last week. Like a lot of Google's hardware products, the Moto G sells at ridiculously thin margins. The Wall Street Journal reports analyst Mark Newman estimates Motorola makes a profit margin of less than 5% on the Moto G.
Strategy Analytics analyst Neil Mawston said aggressive pricing from Motorola "would seriously upset Android device makers, component producers and possibly some operators who don't like to see rapid price erosion."
But the low-end smartphone market is notoriously low-margin, the exception being Samsung (NASDAQOTH:SSNLF), which garners over 95% of Android phone profits. Will the Moto G's aggressive pricing really hurt Google's Android business?
A note on the low-end
The low-end smartphone market is particularly difficult to make a profit in. Nokia (NYSE:NOK), for example, sold 8.8 million smartphones, last quarter at a gross-margin of just 16.4%. The previous quarter, the company sold 7.4 million smartphones at a 21.1% gross margin. The biggest contributor to the increase in volume was its low-end Lumia 520, which contributed to a decrease in the average selling price of its smartphones from 157 Euros to 143 Euros.
Nokia plans to use Android in an upcoming low-end smartphone, which will eliminate the cost of licensing Windows Phone. Whether Microsoft will continue producing the Android phone once it takes control of Nokia's mobile device business is uncertain, but not out of the question.
For other manufacturers, the story is the same as Nokia's. Until fixed costs are offset by volume, margins will suffer. Samsung sells enough phones on the low-end to be profitable, and has stated it won't give into the competitive price-pressure of Chinese and Indian competitors.
The point is, it's not uncommon for low-end phones to have cutthroat margins. So, why is the Moto G seen as such a threat?
Maybe the G stands for "Good"
Reviews of the Moto G have been very positive so far. What makes the Moto G stand out is the focus on hardware over customizing the Android experience. This is understandable considering Motorola's parent company, but it also goes to show competitors what can be done with a simple shift in focus. That seems to be Google's MO recently (see Google Fiber).
This is a threat, though, because low-end phone manufacturers see customized software as their only means of differentiation on the low-end. Google, of course, would prefer manufacturers to make good phones for the low-end of the market that feature Google services and support upgrades to future versions of Android.
The idea that any of these manufacturers on the low-end, save Samsung and Microsoft/Nokia, would abandon Android because Google is making a better phone at a low price is farfetched. Apple has locked out other manufacturers from iOS, and Windows Phone will suffer from the same problem as Microsoft takes over Nokia's device division. The other option, creating a custom OS, suffers the same issues (and more) as customizing Android.
Samsung, as mentioned, is one of the exceptions. It has been working on its own OS, Tizen, and expects to release phones featuring the new platform next year. Last month, the company announced a special version of the OS for low-end phones, which will help reduce the impact of bloated software on phones with low specs.
Tizen, coupled with Samsung's position in smartphones, is a threat to Google, and may be part of the impetus for producing the Moto G. That said, it's unlikely Samsung will completely abandon Android.
Lead by example
Although the Moto G might upset some competing phone manufacturers, it's unlikely it will have a negative impact on Google's Android business. Quite the opposite, in fact, as the Moto G provides competitors with a benchmark for what's possible at the sub-$200 price point. Whether that cuts into their margins or not, it's good for Google.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of 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.