Motorola Mobility finally released a flagship device over the summer when it launched the Moto X -- which is a pretty strong contender to high-end devices like the Samsung (NASDAQOTH:SSNLF) Galaxy S4 and Apple (NASDAQ:AAPL) iPhone 5s.
When the Moto X debuted its retail price was $549 without a contract, about $50 less than a no-contract Galaxy S4 and about $100 less than an iPhone 5s. But this week, Motorola dropped its pricing for the X to just $399 -- a move that could boost sales of the smartphone in the U.S. and lead consumers away from Samsung and Apple at the same time.
A good phone at a fair price
A teardown by IHS shows the build price for the Moto X is about $221, which is close to the same price Samsung spends building a Galaxy S4 and Apple does for the iPhone 5s. With the drop in price, Motorola's margins for the device will obviously be cut. Lowering the margins on a brand new flagship device may not seem like the best move for cash-burning Motorola, but it does have the markings of Motorola's parent company Google (NASDAQ:GOOGL). Android became the dominant smartphone OS because Google gave away its system to original equipment manufacturers for free.
Motorola isn't giving away free phones to flood the market, but it is significantly undercutting the price of its rivals, while offering the new Android 4.4 KitKat OS and a slew of high-end specs on the phone.
Motorola is likely doing this to try to create momentum for the device, considering it only sold about 500,000 Moto X devices in the third quarter of 2013. Meanwhile, Apple sold 9 million iPhones 5s and 5c units during their launch weekend, and the Galaxy S4 sold 10 million units within a month of its launch.
While Motorola is quite a ways away from upending its top competitors, the strategic move of dropping the Moto X price by about $150 may entice enough consumers to give the company a significant role in the smartphone industry. Motorola doesn't need to outsell Apple and Samsung, but rather show U.S. consumers that a high-end device running the latest Android software is available, at a fraction of the cost.
The move comes at a time when U.S. wireless carriers are transitioning away from subsidized phones to more upfront pricing. T-Mobile helped tip the U.S. wireless market in this direction and both AT&T and Verizon now have similar plans. As U.S. consumers start seeing the real cost for their devices, obviously having a lower-priced smartphone could help tip potential customers toward a certain device. The Moto X received an excellent rating from CNET editors, and with the device running the latest Android OS and being built by a company owned by Google, it's hard to imagine diehard Android users won't give the device a serious look.
Some investors may be skeptical that a price drop could have any impact on Apple and Samsung, and at this very moment that may be true. But selling a high-end device like the Moto X for a significantly lower price than those of its rivals may end up being a long-term strategy for Motorola -- and one that could eventually pay off. Google has proven it can give away software to gain the majority of the market and Motorola may follow in its footsteps by undercutting smartphone competitors to boost its place in the smartphone arena. Motorola may not be a top contender any time soon, but its latest pricing move may help the company push further into the smartphone space and take a little territory away from Samsung and Apple.
Fool contributor Chris Neiger has no position in any stocks mentioned. 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.