Google (NASDAQ:GOOGL) rang in the new year with a round of price cuts on its subsidiary Motorola's flagship smartphones, the Moto X and the Moto G. Google knocked off $150 from the price of the high-end Moto X. It now sells for just $399 -- $50 more than Google's Nexus 5. The Moto G will be available at Best Buy for just $99, without a contract.
Google's aggressive pricing may worry some Samsung (OTC:SSNLF) and Apple (NASDAQ:AAPL) investors, as both companies make a significant share of their profits from smartphones. Should it worry Google's investors?
How can it make any money?
According to IHS, the Moto X costs $221 to build./ That's more expensive than the iPhone 5s -- $199 -- but less expensive than the Galaxy S4 -- $244.
The margins for the Moto X at $399 will be relatively thin, and depending on whether or not Best Buy or Verizon is subsidizing the Moto G, the company could be taking a loss on the model, which costs an estimated $123 to build.
Google owns the Android ecosystem, and it could make up some of the lost revenue through incremental app downloads in Google Play and increased use of its services. But it will have to increase volume in order to really make up the difference.
According to Ian Maude of Enders Analysis, Google's current rate of annual advertising revenue per user is close to $30, but it's unlikely every Moto X purchaser is new to Google. In fact, it's unlikely that they don't use Google services already. Additionally, although Google Play revenue has been growing strong, a Moto X is more likely to take a sale away from another mid-level or high-end Android over an iPhone, so the app revenue is moot.
The case makes more sense for the low end, where Google can provide much more value with the Moto G versus competition. The Moto G is one of the best phones you can buy in its price range, and will likely facilitate more app downloads and actual smart-feature usage -- Google Search, YouTube, Gmail -- unlike most low-end Androids. That could meaningfully add revenue for the Android ecosystem.
Why Samsung should be more afraid than Apple
The Moto X sold just 500,000 units in the third quarter after its August release. It's not a huge threat, but if Google is successful at increasing volume through a price cut, it's much more likely to come out of Samsung's market share than Apple's.
Apple is a brand that fosters loyalty. We don't need to look at survey numbers here -- this is what Apple is known for.
Samsung has been pushing to make its smartphones equally sticky, and has had some success. A survey from Consumer Intelligence Research Partners earlier this year suggested Samsung had similar brand loyalty to Apple. It found that 38% of Samsung smartphone owners had upgraded from a previous Samsung model, compared to 42% for Apple.
But Samsung achieved those results differently than Apple. Apple makes a few products that all work really well together -- to change one out would negatively impact a user's experience on other devices. Samsung, on the other hand, has flooded the market with smartphones and spends heavily to advertise them.
Apple can continue to do what it does and expect its sales to remain largely unaffected. Samsung, however, would find itself faced with a competing Android phone that offers similar capabilities at a lower price. It might be pressured to increase its ad spending to prevent sales loss.
Still, with the Moto X and Google's other phones taking such a small part of the market, the threat isn't huge. Right now, it's just potential, and Samsung ought to do its best to curb that potential.
Google's hardware strategy
Google's hardware strategy is great in theory, but the competition is really strong. We'll see if Moto X sales increase meaningfully at the new price point, but expect Samsung to fight back with more and better advertising. Google, for the most part, lets its pricing do the advertising for its products, and spends significantly less on marketing. Perhaps the strategy will work with the Moto X. Both Samsung and Google investors should keep an eye on Moto X shipments in 2014.