Did Google buy Motorola to kill smartphone profits?

Maybe it is all of the ridiculous Nexus 5 rumors and speculation that's been happening recently, but we are finding ourselves drawn to conspiracy theories these days. That said, most of the conspiracy theories are little more than fanboy paranoia, but this latest theory comes from a (generally) reputable source: The Wall Street Journal. The idea is that maybe Google bought Motorola to be something of a Trojan horse.

The idea has some merits, but we don't think the theory really hits what is actually happening in the market. We're of the mind that the theory may be something of a slant hit - it catches a bit of what will happen, but not the causation it puts forth or the motivation of Google either.

The Theory

The facts of the matter are this: Google paid a huge amount of money for Motorola Mobility ($12.5 billion). So far, not only has Google not seen any profits from Motorola, but the division is actually losing more money now than it did one year ago. And, Motorola's flagship Moto X is decidedly a casual consumer device - it strives for performance, and easily understood value propositions over cutting edge specs and premium materials. All that together has led one WSJ writer to the theory that maybe Google doesn't want to make profits with Motorola. Maybe, Google wants to use Motorola to erode the profits of every other company in the mobile space.

Essentially, the idea is that Google wants to shift the idea of a quality smartphone from being a luxury device to a commodity device. Motorola would be run as a hardware company with no interest in profits, and could then bring down the profits of other companies. Consider, most top-tier smartphones cost somewhere around $200 to $250 to manufacture, but sell for around $600 to $650 at full price. WSJ is saying that maybe Google wants to use Motorola to bring down those profit margins, because that leads to more people buying smartphones, which means more people on the Internet seeing Google ads.

The Flaws

It's an intriguing theory, and one that has some pull to it. We do see a couple of glaring issues with the theory though. First, in order to affect the profit margins of companies like Apple and Samsung, Motorola has to be more competitive in the market and put out more successful products. While the Moto X did capture the attention of some tech pundits, the reaction from the tech world was decidedly mixed on the device; and worse, the device flat out hasn't sold well.

There has been very little marketing behind the Moto X, despite rumors that Motorola could be authorized to spend upwards of $500 million on the campaign (to make that number believable, we would need to hear that Motorola paid TJ Miller about $300 million for his time as the Lazy Phone). Given its current level of success of Motorola, claiming that the company could have that much of an affect on the profit margins of the industry leaders is like saying that Nokia's success in the Windows Phone market would lead Samsung to build more WP8 devices (we've seen how that is going.)

The other big flaw in the theory is that the Moto X is following the same pricing structure as the competition. The Moto X cost about $221 to build, and Motorola has been selling the device for upwards of $599 at full price. The device launched at $199 on contract, but the price has dropped to $99 on many carriers already. WSJ points to this $99 price as if it is evidence to support the theory it presents, but we would see it more as evidence that the device is not selling well, and carriers are trying to move stock.

The market is pushing towards reduced profit, not Google

If Google really were trying to erode competitor profits, it certainly could do so with Motorola, but it would require the company to use more of a Nexus pricing structure, or at least something in the middle. Maybe if the Moto X launched at $99 and $450 at full price, we could see where the idea comes from. Even if it is a long-term play, there is little evidence to support the idea right now other than the fact that Motorola is continuing to lose money for Google. There is however supporting evidence to show that Google is simply following the trends in the market.

There is no arguing that Google's main objective with the majority of its products is to bring more eyeballs to Google ads, and it is likely the same with Motorola. The evidence is definitely there when considering the upcoming DVX which will be aimed at emerging markets and lower-income pre-paid markets, but there is nothing to show that the DVX will even marginally be a competitor to the iPhone or any Samsung Galaxy device. Maybe if the DVX is a runaway hit it could cause Samsung to shift its profit aims a bit, but it's unlikely we'll see Apple do the same. In general, the low-end market is where the growth potential exists for smartphones, because the high-end market is becoming saturated.

The idea that Google wants to use Motorola to get quality smartphones into the hands of as many people as possible is one that we've been in on since Google first announced its plans to buy Motorola. Google definitely would like to use Motorola to get more people using smartphones, which means using the Internet, and therefore seeing more Google ads. Google understands that emerging markets are the place to do that, and is likely pushing Motorola to target those markets as a strategy to help Motorola regain some standing in the market which it has lost recently as Apple and Samsung have been taking over.

Conclusion

In the end, it is very likely that smartphone manufacturers will have to reduce profit margins and shift towards more commodity products, because that's just the way the market works. Eventually, anyone who is going to buy a high-end smartphone will have a high-end smartphone, and the turnover in that segment will even out, but growth will most certainly not continue in the high-end market. But, there are a lot of people in emerging markets who could get a lot of value from smartphones, but few companies have been aiming products towards those markets.

That is changing right now, and Motorola is planning to be part of that change. Profit margins will be dropping, because manufacturers will have to find ways to sell more devices at lower costs simply to be competitive in the market. Amazon seems to be planning to get in on this, as are ZTE, Xiaomi, and plenty of other manufacturers. No doubt Google wants to profit from all of those new users regardless of if they use Motorola devices, but that doesn't necessarily mean that Google is pushing the trend.

source: WSJ