If you want a superb handset then you generally have to pay an arm and a leg to get it. What makes it worse is the fact that they are easy to damage, and if not are replaced by newer models very quickly. When you consider this fact, what you pay out for a smartphone is mind boggling.
So when LG and Google launched the Nexus 4 it caused quite a stir as it came in at just under $300 unlocked with hardware that rivals the likes of the Samsung Galaxy S3 and iPhone 5. This had led to people wondering if the LG Nexus 4 could be the first of many cheap handsets that will come our way in 2013.
LG Nexus 4 sets the bar low, price bar that is
So just how have LG and Google managed to make the Nexus 4 so affordable? The folks over at Pocket-Now (PN) explain that one of the theories behind the low cost of the LG Nexus 4 is that Google are subsidising the Nexus from their own pockets. This explains why the LG Optimus G, which the LG Nexus 4 is based on, is close to $800.
This could be interesting, providing it were true and of course those in the US know all about subsidized pricing, and those on contracts take phones out over two years in order to save money on the handset. So why would Google be subsidizing the Nexus 4?
Android is a very popular platform and many people have their lives tied up in Google services. Therefore it can be difficult to move away from the platform. Google have interest financially in keeping people on-board and attracting new customers from other platforms, so they do gain a lot from this speculated PN.
Google could be counting on the fact of future advertising money offsetting the cost of them subsidising the LG Nexus 4. Now we’ve seen Amazon do exactly this with its Kindle tablet but this is the first time we’ve seen it applied to smartphones.
On the other hand Google may not be subsidising, however they could be providing the device at cost price and eating the profits. The pricing discrepancy could be explained if LG isn’t willing to do the same.
While there is nothing wrong with a manufacturer earning profits on the sales of a device, extreme profits are also common and considered nothing short of highway robbery. The lack of LTE radio will help to keep costs down in making the LG Nexus 4, however this alone is not enough to explain the figures.
So let’s take a close look at the iPhone 5 and see what the hardware components cost to make the device. Estimates have suggested that the cost of making the 64GB iPhone 5 and the materials are around $230. Without any subsidies from carriers the hardware is around $850, which means a mark-up of about 270%. Of course this is Apple that we are talking about and they typically demand higher premiums, however the idea of LG trying for a mark-up of somewhere in betweeen does not sound as farfetched when you consider Apple.
Google may have come to realise that they will sell more devices and then make up the difference when it comes to volume, by profiting less per handset. they may not be letting the device go for cost, it could be making around 20% to 30% profit, and they could still be offering the device cheap.
Of course this is all speculation, however if this is in fact what is happening and the LG Nexus 4 is a huge hit, others could then have to think hard and long about their margins of profit. They could number crunch and realise that it would actually be profitable to get less from selling a larger amount of handsets. Simultaneously, they may have no choice but to adopt the LG Nexus 4 sales model given that consumers have already seen what kind of hardware they can get for just $300.
While we don’t expect to see more $300 Android superphones anytime this year, it is quite possible that the trend will catch on in 2013 once the LG Nexus 4 sales figures come in.