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Google claims that prices have fallen and that the supply chain is efficient enough to bring down prices:

http://www.droid-life.com/2012/11/02/googles-director-of-bus...

We have seen over the last 20 years that computers not only get faster but also cheaper. The fact that the top phones have stayed at 600-700 for the past several years suggests that they are padding costs or simply have no compulsion to be efficient in their supply chains. Google says this is definitely the case and they are still making money on the Nexus 4, even though it costs much less than other flagship phones.

Also note just how horrible Motorola built-in UI is, for example. Something's wrong if they can make an inferior project and not expect to get killed. There's a lot of inefficiency at these companies and they don't care and they don't have to care. Google is trying to change that.

The Galaxy Nexus was sold at $399 unlocked (some time after release). The Nexus 4 is $299. Google is trying to bring the cost down further. When top-line phones hit $150-200 unlocked, people will be able to upgrade once or twice a year.

This will actually encourage even higher quality phones. Once all the topline phones fall to $299 or less, it opens up a space for someone else to make a really, really nice phone at the old $600 level. This is not crazy talk. This is exactly what happened with PC laptops over the last 5 years. Now the better Ultrabooks that are now jockeying for the position of "high-end PC laptop."

So there are a lot of benefits and I believe the drop in prices will lead to better phones and tablets across the board.

I know that miniaturization is pretty tough, but I hope that we get to the point where I can buy something as nice as a Galaxy Nexus for about 200 off contract. 600-800 for a cell phone is tough to swallow when I can buy an awesome laptop like a thinkpad X230 for the same price range, the latest iPad for 100-300 cheaper, or a macbook air for just 200 more.

Is there really 600-800 dollars worth of technology in a smart phone, or are the margins really high? I honestly don't know one way or the other. I do know however, that the Galaxy Nexus is the best phone I've ever used, and the fact that it was 349.00 when I got it played a large part in my decision.

When top-line phones hit $150-200 unlocked, people will be able to upgrade once or twice a year.

Not to mention that it would finally break the carrier subsidy/contract model. If you're looking for business practices that harm consumers, that should rank many places above the "problem" of phones and tablets being too affordable.

I think that would be pretty terrible. What happens to all the waste? Is this price inclusive of the original manufacturer or retailer taking my old electronics back and trying to recycle it?

Refurbished smartphones for developing countries.

I don't think refurbished means what you think it means.

Why would it break the contract model? A carrier could still pay a $150-200 subsidy and give you the phone for free, and people would lap it up.

I think people are looking at this from the wrong side. In the US, they don't sell you a phone with a service contract attached: they sell you a service contract with a bonus phone. Yes, Google or Amazon could give away phones for free to eliminate the value of the bonus phone, but you still need a strong alternative to contracts for service.

Currently you have carriers like T-Mobile that offer semi-decent prepaid service, although it's been hampered by technological issues (the band they use for 3G is incompatible with iPhones, although supposedly they're in the process of changing it). Why are so many people still buying contracts, though? Is it really just because of the subsidized phones? I'm not convinced.

Furthermore, Europe already has a very competitive phone service market, with extremely popular prepaid plans that are far cheaper than anything you can get in the US, and no locked phones; and they achieved all of this without resorting to phone dumping.

For all these reasons, I think selling phones at or below price has nothing to do with disrupting the American carrier model (which hardly makes sense for Google or Amazon anyway - they're not even in that industry!).

> Why are so many people still buying contracts, though? Is it really just because of the subsidized phones? I'm not convinced.

Because in Verizon and AT&T (the major carriers, only option for most people), you don't get a lower price for bringing your own phone. Essentially, you can pay full price for the contract and get the phone subsidized, or you can pay full price for the contract and full price for the phone.

Is it surprising that most people choose the subsidized option?

Thanks for the info, I didn't know. That really strengthens my hypothesis.

I would just like to add, there is definitely economical benefits in buying your own device, even in the US. T-Mobile offers a discount on contract plans, if you buy your own phone. While AT&T/Verizon/Sprint don't give a discount on their contract plans, all three have various prepaid options that are cheaper than contract pricing.

For example, T-Mobile has a $60 flat price for unlimited text/voice and 2 GB data, which is far cheaper than their contract price. Similarly AT&T Go-phone has cheaper prices.

Next, there are various MVNOs that resell service from the big 4, and they also have much cheaper price on prepaid. However, I have noticed that US consumer are almost universally unaware that such cheap plans exist. Part of it is that prepaid is seen as something used by people with low credit-worthiness, and other reason being that the subsidized contracts make it possible for far more people to have high end phone than normal. I have met quite a few people with iPhone, who would never be able to purchase it if they had to pay $700 upfront in store.

I was one of the people who tried to get prepaid/pay-as-you-go plan for the iphone on Verizon by paying upfront. At the time, it was impossible, and I eventually gave up.

So, given that I did want an iphone, and therefore needed a contract, I tried to get one without providing my SSN. Those were another fun couple of days - it began with about 10 different Verizon employees telling me that would be impossible, and ended up with a $400 deposit and no SSN.

So, I paid for the phone upfront, but I'll get $400 back when the contract ends - as of feb 2012, that was the best deal one could get on the iphone 4s from Verizon.

And while it is easy to get coverage of any kind in NYC or SF, that is not true in general. T-Mobile's high speed coverage is lesser, and many of the MVNOs have a really limited coverage area (and non-trivial roaming charges outside those areas)

It might not be the primary thing driving the cutthroat price competition, but it does make sense for Google to want the carrier model disrupted. Currently, they are on the short end of a massive power imbalance that puts them at a competitive disadvantage against iPhone. (Just read John Gruber's gleeful posts deriding the (admittedly astonishing) lack of high-speed data on the Nexus 4.)

In fact, Google has been gunning for this disruption since the very first Nexus One. Remember, they introduced that phone -- their first -- unlocked and unsubsidized, with direct-to-consumer sales. At the time, that was a novel approach (and really exciting for knowledgeable consumers). However, they got their ass beat down by the carriers and had to whimper back home with their tail between their legs. They even stopped selling phones direct for a time.

So they failed at subverting the carrier's (anticompetitive, illogical, anti-consumer) business model the first time they tried, but you can bet they still want to. Apple actually does, too, for similar reason, but Apple didn't underestimate the power of the carriers, and waited until they had the most dominant phone in human history and the leverage that came along with to make the carriers lay down and take it however Apple deigns to give it to them.

Google would love to be in a similar position, but they won't be until either Google can make a phone close to the iPhone in popularity, or the carrier-subsidy model goes away or is at least greatly diminished (neither thing being very likely in the foreseeable future).

> Just read John Gruber's gleeful posts deriding the (admittedly astonishing) lack of high-speed data on the Nexus 4.

Lack of high-speed data? HSPA+ 42Mbps isn't "high speed"?

Yes, LTE may be "the future", but right now, there are few places you are going to get better speeds over LTE than HSPA+. And there's enough headroom in HSPA+ for the next couple of years; it can go up to a theoretical maximum of 168 Mbps. LTE definitely has more headroom, but given that people tend to upgrade phones every 2 years or so, I'd say that HSPA+ has plenty for the lifespan of the Nexus 4.

I think that selling an unlocked, unsubsidized, $300 phone with only HSPA+ is a much better strategic move for Google than a locked, subsidized phone on Verizon that does LTE.

I think part of the disconnect here is phones vs. tablets. Intuitively, phones seem to have kept a premium price probably being propped up by carrier subsidies (in the States). However, there's a part of the link you provided that sounds a bit hollow. We simply believe there’s a better way of doing it without extracting that much payment from end users, because there are other ways to drive revenues. That line in particular basically says, "we'll find other ways to get margins off of consumers". It also rings slightly hollow in that Motorola is losing money, LG just swung to profitability this quarter after losing money for a few years (as well as exiting the tablet market because of the inability to profit), and HTC has seen its ability to profit plumet. There are certainly inefficiencies and some companies have kept good margins (Apple and Samsung), but it's not as if most players are doing so well.

In tablets, we see really hard price competition. Amazon is selling the Kindle Fires at cost. In short, tablets are cheaper than phones with much smaller displays and smaller batteries. In a certain light, why is the Nexus 4 a full $150 more than a Nexus 7 (assuming the same 16GB storage)? Sure, miniaturization probably has to do with the cost difference,

Also, I think the comparison to laptops might not be so great. Ultrabooks aren't doing so well and we've seen huge consolidation of competition in the PC/laptop market. Heck, we nearly saw HP leave the market. Dell generates less than 5% of its income from the consumer market. Yes, we have some Ultrabooks coming in, but they aren't selling so well and seem more driven by Intel than by the manufacturers (excluding Apple here). In a lot of ways, Laptops are actually showing how this is a problem: I hate that 1366x768 resolution, but everyone uses it because it's cheap and everyone is focused on price. Yes, I can spend over $1000 and get a nice resolution, but there's this gap in the middle. I remember reading an article lamenting how Dell would try every couple years (in a half-hearted sense) to create a MacBook Pro competitor line just to get hit by a complete lack of sales as people only cared about price. And that's ok in a certain way, but it also leaves little room for innovation and risk taking (what Engadget was commenting on). If I want a Windows version of a MacBook Pro 15", what is there? Certainly, there is no Retina MBP competitor. Really, I don't want Apple to take the high end and have every Android vendor compete on price alone like laptops devolved into. Heck, laptop vendors compete so much on price that poor quality keyboards and trackpads are the norm. Any hidden place they can save a cent gets hit. I'm sure the Nexus devices have fine touchscreens, but if price becomes the only object, things like the touchscreen quality could get hit in the future. We want the lowest price for good stuff. It's easy to read processor and RAM specs, but we also want to make sure that the non-listed stuff works well. And we want to make sure that we don't get to a point where we aren't improving because we've programmed ourselves to be so cheap that we won't spend an extra $15 for something much nicer - I feel that way about trackpads.

We'll see over the coming years how it all plays out, but LG already exited the tablet market. Motorola's last tablet was a year ago? There certainly are vendors struggling and some giving up. That's not to say that there isn't some bloat in there and not efficiencies to be had. Google is a great company - great companies push the bounds. At the same time, I'd like to be sure that the level of competition will stay high - that there will be many companies able to remain competing. It's hard for us on the outside to be commenting because we don't have complete information. Google is saying things to the effect of, "well, prices are sorta coming down and we think we can make up the money in other ways like making sure that people continue to think of Google for search". According to the link, even Google's Motorola division seems to think Google's vision for pricing isn't quite fully realizable.

You might be totally right and in 5 years we'll have awesome competition at better price points than we have now and I'll have been the silly spoil-sport raining on the parade. I was mostly trying to point out that these prices may not be sustainable (at the same time, they may well be). Even if companies aren't purposefully trying to corner the market or anything, this could happen. Amazon might think that they'll make $x off of content for each Kindle Fire only to find out that people just don't buy on them, but were buying them on price alone. Then, a few years later when many companies leave the market due to price, we're left with less competition. Low prices are certainly good. We want to make sure that the prices and innovation keep going into the future.

We want low prices (that's a great thing), but we also don't want to lose options and competition in the future (that's a bad thing).

I think the idea you're getting at is an efficient price. Not too low to devastate competition, not too high to be unaffordable.

The idea of efficient prices ties up a lot of concepts, especially anti-trust concepts. You're really spot on. Consider though that there's a whole body of language that specifically outs Amazon and Google's behavior as plain anti-trust violations. E.g., Amazon bundling its book marketplace with a tablet sold below cost; Google bundling its search and advertising business on an operating system sold at inefficient cost (by sharing ad revenues on partnered devices, Google is essentially paying manufacturers and carriers to use Android).

How does Apple compete against tablet undercutting? How does Microsoft compete against operating system undercutting? Maybe the parameters have changed, and we should embrace the "better way of doing it without extracting that much payment from end users." But beware the world where Microsoft can't sell operating systems and Apple can't sell hardware. We would prefer to have that competition and innovation than none at all.

Then, a few years later when many companies leave the market due to price, we're left with less competition.

We will not have less competition because of price or dumping. We will have less competition because the natural dynamics of platforms is to tend towards monopoly, because of lock-in effects of consumer investment in stuff that works with the platform combined with the economies of scale of making things work really well with any one platform.

It upsets me that your misguided wall of a rant is taking up so much space on this otherwise interesting discussion!

Costs are coming down. This is what a retail price of 999 yuan ($160) gets you:

"ZTE U950 smartphone packs a 1.3GHz Tegra 3 chip, 1GB of RAM, 4GB of internal storage and a 2,000mAh battery beneath the 4.3-inch display."

http://www.engadget.com/2012/10/29/ztes-u950-tegra-3-phone/

There's an economic concept called "pricing behind the curve" that looks a lot like "dumping". But it's different.

Pricing behind the curve means you base the price of your product on the average component cost over the life time instead of your actual current cost. Microsoft does that with the Xbox. In effect you subsidise the early models and make up for that in the long run. It's a valid strategy to gain market share quickly and does not hurt consumers.

Dumping means you subsidise your own product to push competitors out of business. It does hurt competition in the long run if done effectively. Dumping is illegal and you can get into a lot of trouble if you are found doing it.

Since the competing companies are not accusing anyone of dumping, I think it is safe to say no dumping is currently going on.

I am not convinced that Amazon is losing much if any money on Kindle fires. They have far less overhead and far fewer middle men than standard tablets which when coupled with extremely high volume sales and crap hardware can drive there prices vary low.

For comparison http://www.amazon.com/Coby-Kyros-7-Inch-Android-Multi-Touchs... low end 7" tablet List Price: $179.99, sale price 100$.

PS: Also, Amazon has little control over there P/E, it's investors that are convinced there going to profitably rule retail in a few years.

We may never find out because Amazon never reveals how many Kindles it sold or whether it really is making money from Kindle, and the whole "financial industry" is complicit in this crime in cheating the naive investor.

If you're a naive investor you're cheating yourself. Vanguard, index funds and “A Random Walk Down Wall Street” are all old.

http://news.yahoo.com/amazon-ceo-confirms-kindle-sold-cost-0...

Amazon has confirmed that they're selling the Kindles at cost hoping to make it up on content. Third parties have done calculations on the Kindles and found the parts and assembly to be higher than the selling price (without taking into consideration things like shipping, warehouses, credit card fees, etc.). Amazon is being above board in saying that they're hoping to make their money back via content.

In terms of the P/E thing, I only brought it up because of how some investors justify Amazon's price. Some investors believe that Amazon will be able to get large market power in certain industries (maybe retail, maybe e-content) and then charge higher prices to get fat margins at the expense of consumers. I don't think that's in Jeff Bezos' ethos (to his credit). However, cornering a market is a strategy that companies have done.

That's not dumping, though; that's standard economics as practiced in the gaming console market for decades.

Amazon is exploring the idea of ad supported hardware. Ad supported content on the web has pretty much wiped out paid content. We will see if ad supported HW does better.

To call it predatory pricing is stupid.

If you leave prices high and keep Apple in business, you have to be concerned about their slow rate of innovation. Most of their innovation is figuring out how to extract more money from you. They are like Microsoft IE innovation. MS was really slow until the FREE Chrome and Firefox browsers started to take significant market share.

sometimes you can make something too cheap to be really sustainable

Or even too cheap to be worth owning. That's happened to me before with furniture, and it's happened to everyone who wants a 1080p laptop but can only find 1366x768.

I've been complaining about lousy laptop resolutions for years, but it finally seems to be getting better. I helped a friend buy a new laptop last weekend, and there were plenty of 1080p options.

It's still not ideal, because the 16:9 aspect ratio sucks, and it's ridiculous that nobody but Apple has laptop displays matching the iPad 3 or Nexus 10 at any price. But it's an improvement over the years of 1366x768 regression.

>I know I picked on Amazon a bit here and that's just because the Kindle Fire is being sold at cost below the competition.

First of all it's not clear Amazon is losing money on the Kindle hardware. But even if they are they seem to have adopted the console model - I give you subsidized hardware and then you pay through the nose for content. They are not going to lose money in the end even if they do lose money on the hardware.

Ask anybody who has one of the old Kindles how much they spend on ebooks compared to what they used to spend on dead trees. The impulse buy will get you every time.

And that's a perfectly reasonable and sustainable business strategy, provided not too many people root their kindle and use it for something else.

Amazon lost money last quarter because they made some questionable acquisitions and because they're in the process of expanding into new markets (like film production), not because they're dumping hardware below cost.

We heard all these arguments before in various industries along with calls for protection(ism) and government intervention. Unsustainable, unfair competition, crushing the competition leading to lower quality and higher prices down the road. It just rarely seems to come to that, not for long at anyway. They never manage to actually hike prices.

Sustainability is a messy concept. What is the product that needs to be sustainable? How do you define that? Why is the handset alone necessarily the product that you want to be sustainable on it's own? Is a web browser a product that needs to be sustainable on its own? There are many businesses where the real product is not the gadget we hold in our hands. And every time those who try to make a profit from some individual component complain about unfair competition from others who sell a larger package and subsidise that individual component.

Let me ask a few questions about your Amazon example. You say no one will enter the market once Amazon crushed everyone else for fear of Amazon coming back with low prices.

But why wouldn't someone else cross subsidise from a different kind of business and successfully compete with Amazon? Google definitely does exactly that. Others may come up with more ways to do that. Oracle reviving its Java handset business, carriers + Mozilla, someone buying Sony and it's media business. Apple might well be able to do it through media subscription services or just keep selling into the high end luxury/fashion market.

Will Amazon shareholders put up with razor thin margins (even losses recently) forever or will they eventually ask for a payout?

What keeps another big retailer that doesn't carry the cost of giving away handsets from undercutting Amazon in the retail market? Or if it's such a good idea to give away handsets, why wouldn't WalMart buy Netflix and join forces with Samsung or HTC to do the same?

At the end of the day, I'm not concerned about any of this being just temporary. Smartphone prices will never go up. There are just too many angles from which a wannabe monopolist could be attacked.

I agree with some of your analysis. Note though, as far as my reading in the literature on this subject, empirically predatory pricing hasn't been viable in the long run. *I'm a PhD candidate studying this very topic.

Very interesting; do you have some kind of summary/ survey of the literature on that?

Predatory pricing seems "intuitive", it'd be interesting to read about the conditions that make it not work.

This is a fairly solid overview: http://works.bepress.com/aaron_edlin/74/

Basically what falls apart is that once the predation period is over, the predator can't block other firms from entering.

The only way what you write makes sense is if Apple were dumping, not Google or Amazon.

Dumping to protect market share, then jacking prices back up once the competition has been seen off.

But with new entrants trying to compete with an incumbent with an enormous lead, I don't see anything wrong with making the investment to sell at cost or a loss. The consumer wins because they get hardware cheaper and more competition which should drive prices down across the board. The only people losing out are the people previously in a monopoly-like situation.

Do consumers really win here? If your only indicator is that they save a couple of bucks, then sure. But there is more behind consumers winning.

Imagine a scenario where a company is able to cut costs, never over take the market leader and eventually dump the product, support and all (because they can't afford it due to the low cost). Does the consumer, who is still tied to this device, still considered a winner? The argument can be made that the company can then raise the price to try and offset the low cost previously. Sure, they can do that...and if they get caught, they could be called out for predatory pricing.

There are so many ways to compete with an incumbant, and price could be one of them. The only pitfall is the scenario (which has happened time and time again) of hemorrhaging losses because you are solely competing on price.

Competing solely on cost relies on heavy volume being sold in order for it to even provide razor thin margins. The companies will continually lose here because they aren't able to really recoup their investment put into the device.

In my opinion, the consumer only wins when the company wins because of the intangible benefits a company can afford to provide such as support and customer service. Without these, I don't see the consumer winning with companies competing solely based on price. And I think Apple is the perfect example for this (only because I cant think of others). They charge higher than normal for their devices, but they have great support and are willing to bend over backwards to make sure you as a customer are happy.

Just my .02

What you say is true when there are only two competitors - every move by the underdog will then be good for consumers. But chances are that a dumped Nexus/Kindle will hurt others much more so than Apple. (Most likely example: Google may push Amazon out of the tablet market, which would be a loss for consumers.)

If we actually had meaningful competition the tablet space, the Engadget article wouldn't strike many of us as absurd. The Kindle Fire and the Nexus 7 have been the only credible contenders with sustainably differentiated offerings against the iPad juggernaut. Microsoft might become a player, but even they evidently they feel they have to toss in the family jewels (Office) to have a shot.

The players who are failing/exiting had no hope of ever presenting a meaningful challenge to the iPad. It's still to be seen if even Fire/Nexus/Surface devices can sell in the same order of magnitude as the iPad.

I'm not exactly sure what solution you're proposing here, to an old problem that's already been around longer than Google or Amazon - Government intervention?

I'm also curious how this would be evaluated if Amazon/Google price their hardware devices in a different fashion than more hardware based companies like Apple/Samsung - on the services they lock you into. I'm skeptical that Amazon is really losing money on each tablet sold, as those tablets really are just vending machines which they then make money off of product sales. (Similarly with Google and its services/ads.) Do we regulate hardware pricing even if the profit calculated isn't directly on the hardware sale itself?

I'm merely pointing out that this might not be the best situation. I'm not proposing any intervention or anything like that. I'm merely pointing out that we may find that we have fewer tablet vendors in 5 years than we have today - the opposite situation from what we would want to happen.

In terms of the Amazon tablets, they are selling them at cost (they've explicitly said this) and it will take time to see whether they make back the money they spend on shipping, warehousing, R&D, etc. via content. It may be a model that others adopt to provide competitor tablets. It could also lead to a duopoly of Apple and Amazon on tablets. That would be bad. It could lead to Amazon getting further leverage over publishers and consumer prices. Also bad.

The thing is that bad behavior isn't without precedent. Standard Oil sold at below cost in a market to make the competition exit. When the competition was gone, they would raise prices significantly. So, in the short term you could get cheaper gas, but in the long run, you removed the competition. And sometimes we do regulate bad behavior. We did it with Windows and in the absence of Android, we might be considering it against Apple.

I'm not saying that I'm a fan of intervention or that companies can't attempt a console-style business model for tablets. I'm just suggesting caution in a developing industry that many see as a future of computing: one where we'll want competition and innovation, not for most players to exit before it even takes off. Low prices are a good thing, but let's not get ahead of ourselves and happily applaud low prices into an oligopoly. We want cheap prices that can be sustained and innovated on. Maybe these tablets are going to hit that. But there are some signs that might not be the case given LG's exit, the fact that Moto and HTC don't have recent offerings, the general mediocre financials of Amazon, Moto, HTC, LG, and Asus, etc. Then again, maybe that will turn a corner in the near future and I'm worrying for nothing and we'll have an awesome, cheap, competition-filled future.

Your analysis ignores competition on any axis other than price. Clearly a low price alone will not win you the market. There is always space for selling premium goods to those who consider their purchase more than a commodity.

Sure, they are using low pricing to gain market share, but we all see the tablet market is now dominated by iPad. So some cheap fresh blood is a good thing if you ask me.

Apple just needs to get into cloud services more so they can compete. I don't feel bad.