Google could be subsidizing almost $400 of the Nexus 4 cost

As we first heard, the Nexus 4 is going to sell as an 8GB model for $299, and a 16GB model for $349, unlocked. And, there will be a version sold through T-Mobile for $199 with a 2-year contract. We've also heard that LG could be attempting to set the price much higher internationally (although we're unclear why LG would be setting the price on a Google Nexus phone). So, the theory has come out that Google may be subsidizing the cost of the phone by anywhere from $200-$400, but we think that's not quite the right way to look at what's happening. 

Sure, the international version of the Nexus 4 has been rumored to sell for as much as 600 euros (~$767), which would be 300 euros more than what Google is charging in the Play Store. And, the LG Optimus G is listed as $550 full retail through AT&T, and that is essentially the spec sheet as the Nexus 4, the only differences being the case design, and that the Optimus actually has 32GB of internal memory and a microSD card slot. 

The trouble with that line of reasoning is that the cost of a device sold to a carrier has the manufacturer markup already added in. The iPhone 5 would cost $649 unlocked for the 16GB version, but Apple only pays somewhere around $207 to build an iPhone 5. If Apple started selling the iPhone unlocked for $400, no one would say that Apple is "subsidizing" the cost, that's just taking less profit per unit. The same applies to the Nexus 7 and the  Kindle Fire, no one claimed that Google or Amazon were "subsidizing" the tablets, they were simply selling at cost, or at very low margins. That's what's happening with the Nexus 4. 

The Nexus 4 has a great screen, 2GB of RAM, and a fast new quad-core processor, not to mention the induction charging coil, NFC and Gorilla Glass on the front and back. So, it's not unreasonable to think that Google could be paying around $200-250 to build each unit, meaning they are being sold at a very low margin. Of course, that same pricing structure isn't coming in the T-Mobile version of the phone. 

The T-Mobile contract Nexus 4 will be $199 with a 2-year deal, which is the same as an average smartphone. T-Mobile's website gives the option to pay $199 up front, then $15 per month for 20 months, which means T-Mobile will be getting $500 from customers for the Nexus 4. So, the real question is in how much T-Mobile is paying Google for the handsets. If T-Mobile is paying $500, then that pricing makes sense, but if the carrier is paying the same cut-rate price that consumers will through the Play Store, T-Mobile is making quite a lot of profit on the Nexus 4 hardware. This would be a strange thing for a carrier, since carriers almost never make money on the hardware, and only make money on the mobile service plans.