How and why the Google Nexus 4 is so cheap

Features Richard Goodwin 12:22, 27 Nov 2012

With the Nexus 4’s ultra-low price tag of just £239, Google has seemingly undercut everyone — how and why did it do this?

With prices starting at just £239, Google’s Nexus 4 is one of the cheapest flagship devices the market has ever seen. As USPs go, Google has really nailed it this time, selling a high-end flagship device at the same price-point as a mid-to-low-tier handset. 

On paper it rates better than the Galaxy S3 – sort of. And In the hand it feels just as good. So what exactly is going on here? How can Google sell the Nexus 4, with its top of the line quad-core Qualcomm S4 Pro chipset, Android 4.2 OS, and high-res 4.8-inch display for so damn cheap? 

We see a few options here: the first being that Google is selling the Nexus 4 at cost – i.e. it’s not making any profit whatsoever on it. The other is that it’s actually losing money on the Nexus 4 and offsetting the costs against other aspects of its business, or a combination of the two. 

Another theory suggested only the first batch of Nexus 4 handsets would be priced so low, a type of elaborate marketing ploy, if you will, and that once stock had been replenished prices would be jacked up. 

Thankfully this isn’t the case – Google confirmed to Know Your Mobile that prices are staying the same once new stock arrives. So the Nexus 4 is what it is: a high-end smartphone priced at a below-rock bottom price. 

We spoke with Quo Circa analyst Rob Bamforth about the Nexus 4, asking specifically why Google choose to price it so low. 

‘Selling the Nexus 4 for so cheap means less profit on the hardware, but potentially more people defecting to Android and using Google’s Play store,’ said Bamforth. 

Google’s pricing does put retailers and networks in an awkward position, however, as neither can afford to charge so little for the device. That’s just basic economics. Networks and retailers have to buy-in the devices and sell them on to you and me at profit. 

Via its Play store Google has undercut everybody else in the space. No one – not O2, Vodafone, or Three – even when offering the device for free on contract can compete with Google’s proposition. It’s simply cheaper to buy direct from Google and pick and choose which network you go with.

So much so that LG has reportedly been advising many European networks to retail the handset at €599 (around £485) SIM-free – a far more representative price tag.  

But it’s not just networks that will suffer at the hands of Google’s Nexus 4. The company’s hardware partners – Samsung, HTC, Motorola, and LG – will also be affected by Google's reactive pricing. 

‘It’s also a kick in the teeth for OEMs as well,’ said Bamforth, talking about the likely affect of the Nexus 4 on Google’s long-standing hardware partners. 

Google has a sprawling business and huge levels of capital at its disposal. It also controls Android and its Play store, taking a cut of all the content that’s sold through it. 

HTC, Samsung, Motorola, and LG make money from hardware, not services, and therefore need profits to survive. They cannot afford to sell their handsets at cost. 

Bamforth says the advent of the Nexus 4 is likely to impact on Samsung and Amazon more than Apple. Samsung because it won’t be able to compete on price with Google and Amazon because charging so little for a phone will tempt many users over to Google and its Play store. 

Here, the long game is the popularisation of Google’s Nexus brand – both tablets and smartphones – and its Play services – apps, movies, games, and books. 

Amazon is currently attempting something similar with its line of Kindle Fire devices but without a smartphone, Google has the advantage at present, according to Bamforth. 

The mobile space is changing at an unprecedented rate with software companies venturing into hardware (Microsoft and Google) and retailers like Amazon attempting to take on Google at its own game. 10 years ago this would have been unthinkable. Now it’s a reality. 

In late-2012 being a mobile phone manufacturer is no longer enough. The game has changed. And to compete with the big boys – Apple, Google, Microsoft, Amazon – you need to control everything: hardware, software, and content distribution.

‘End-to-end control of the value proposition, which now includes hardware, is the game for anyone that wants to be a big player in the space,’ said Bamforth. That’s why Microsoft and Google, as well as Amazon, have ramped up their presence in the mobile space during the past two years. Control the hardware, services, and content and you control the money. 

The Nexus 4 is a continuation of this trend and is most definitely a game-changer. It turns everything in the space on its head. No one else, including the world’s biggest phone manufacturer, Samsung, can produce a smartphone with such good specs and retail it at such a low price point. It’d be suicide. 

HTC, Samsung, LG, and Motorola cannot afford to take this approach. It’d have detrimental affects on the build quality, specs, hardware, and, most importantly, the profit margins derived from their hardware. 

The only way something like this could work for Samsung or HTC is if they controlled the software (operating system) and services (Apps Store) that run on their devices. But they don’t – Google does. And that’s why it can afford to do what it has done with the Nexus 4. 

Going forwards, things will never be the same again inside the Android space. It’ll be interesting to see how Google’s key partners react and how the Nexus 4 impacts on sales of handsets like Samsung’s upcoming Galaxy S4. 

The Nexus 4 could very well be the handset that turns Google’s Nexus brand mainstream. And that could spell bad news for everybody else inside the space. 

We're expecting Amazon to hit back with something equally compelling very soon. That something is likely to be a smartphone – one that'll no doubt be aimed at quelling the hysteria currently surrounding the Nexus 4. 

Whichever way you look at it – the game has now been changed. From here on out it's going to be all about low-cost high-powered handsets and cashing in on services. Google and Amazon have wised up to this, Apple is already making a killing doing the same thing. Now the only question is where do HTC, Samsung, LG, and Motorola fit in? 

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