Phone prices have been totally skewed for a long time, and most new high-end phones have cost $600 only because that's what they were expected to cost. The release of the first iPad made that obvious, because it was the same mobile components as the iPhone, a bigger battery, a larger screen, and more aluminum and other materials for the case, but still cost $100 less. And the iPad was still profitable! The only reason companies continue to get away with $600 phones is that carrier subsidies distort the market. The notion that there's some mythical "correct" price that manufacturers used to charge that's now being undercut by Google is ridiculous. This is a market correction.
I get a bit of an ugly feeling about the way competition is working at the moment. On the surface it's all roses - glitzy features coming faster than we can count them, hardware obsoleted with far better options every 6 months, prices falling like crazy ...
But you look under the surface. Apple and Microsoft championing user's "privacy" - why? Because they want to attack the revenue base of Google. Don't compete with your competitor. Poison their environment until it is too toxic for them to survive and they leave.
Google releasing ultra cheap phones - why? Apple hugely dependent on enormous margins. Don't compete with them directly. Poison their environment by changing how people think about hardware. Make it a zero margin game and Apple goes away as simply a side effect.
I feel differently about these things on different days. On good days it seems like we're in a golden age of competition. On bad days it seems like we're witnessing a silent armageddon where all sides have abandoned our interests and have voted for mutual-annihilation. "If I can't win, I'm going to make sure you lose too" they are saying. I hope my good days are the ones that turn out to be correct.
Supreme excellence consists in breaking the enemy's resistance without fighting.
I think you make good points re: their strategies--but those strategies have some risks for those pursuing them, and the consumer tends to benefit either way.
If google can hurt apple's margins, the consumer wins. Meanwhile, if they can't, they just end up giving away a bunch of phones. And to my knowledge, no company has been able to maintain the kinds of gross margins Apple has without becoming a monopoly. The apple brand is a kind of monopoly, and patents add monopolistic properties to innovation. But no brand lasts forever, and the big players all have patents they can use against each other, somewhat damping their appeal with MAD
Meanwhile, on the privacy front, I suspect we'll see more push back on this in coming years. Better privacy laws are probably good for the consumer, but could be catastrophic to many companies that currently place huge theoretical value on their big data. If strong restrictions come into place on how you can and can't use that data, suddenly it's not quite as valuable as first thought.
So I'm generally optimistic that this is still the kind of competition that helps consumers.
I don't think that pricing aggressively to get people to pick your product over your competitor's is "poisoning the environment". It's Capitalism 101. Uprooting an entrenched market leader isn't done by being as-good-as, it'd done by offering something so compelling over the market leader (in this case, price) that people are willing to give you a shot. Apple managed to survive the computer price wars with its ridiculous margins intact, by positioning themselves as a luxury brand with an image that justifies the price premium. Why would the smartphone/tablet market be any different? We know from decades of technology sales that hardware trends towards being easier and less expensive to produce, and thus, more affordable. Economies of scale naturally dictate that Apple is going to have to lower prices to compete; if their prices remain the same, their margins go up because the component hardware becomes less expensive to produce.
Google is gunning for people who are price-sensitive because they can afford to have next-to-zero margins on their hardware. I don't think it's to poison the perception of mobile hardware pricing as much as it is an attempt to be as competitive as possible.
The iPad Mini costs about $195 to build, according to analysis I've read. Apple could had made the choice to position it at $299, still made a ~30% profit margin (rather than 40%, which is about Apple's margin on everything), gotten under the psychological $300 barrier, and been much more price-competitive with the Nexus 7 ("It's a premium brand! You pay a little extra, but it's worth it!") - the fact that they chose not to isn't because they had to make a choice between a profit margin and being competitive. It's because they make a 40% margin on everything they sell, and the iPad Mini wasn't going to be any different. They may pay for that choice in loss of marketshare, but that's economics, not a poisoned perception.
OTOH, attacking Google on "privacy" is poisonous, IMO, because it's hypocritical; both Apple and Microsoft have long histories of doing things that are questionable on that front. Attacking your competitor and attempting to ruin their image or public perception as a tactic to dissuade people from buying their products, rather than competing with them on features or price is absolutely ugly, and should be called out and discouraged. Apple seems to be really hot on this strategy lately (privacy with Google, "cheap knockoff" with Samsung, "patent thieves" with basically everyone else), and it's discouraging, because consumers benefit much more when companies put their money and effort into building products that outclass their competitors rather than simply trying to discredit them out of business.
Aggressive pricing happens to any market which gets commoditized. It leads to more competition among the existing players to innovate and differentiate themselves.
Today, a tablet is a commodity product. Making a faster and higher resolution tablet is no longer revolutionary but just evolutionary. If the OP wants the existing players to survive why can't they create more breakthrough products than encourage inflated profit margins?
Exactly. I don't see the problem - some manufacturers are giving consumers what they want at prices they want, and are not doing so illegally. If those new "incumbents" then later decide to "profit" after having thinned out the ranks, there is nothing stopping others stepping in and undercutting those incumbents.
This is exactly how markets are supposed to work - there is good information about pricing, there is good information about product, and there is free entry and exit for both manufacturers and consumers in the market.
Not even mentioned in the article is MediaTek whose really cheap integrated chipsets are allowing another wave of really cheap devices that make the ones in the article seem expensive.
It's hard to see a consumer downside to subsidized hardware. Don't want to use Amazon/Google's software? It's your phone, you bought it. Run what you like.
The Nexus 4 is an excellent play; it's a capable and carrier-independent phone. May it encourage wireless carriers to focus on network coverage, network quality, and price.
It'll be a great day when Verizon starts pricing like Ting.
The only ones hurt by low pricing will be the manufacturers. Companies with no software expertise and no way to differentiate themselves (basically all the Android OEMs at the moment) will become the Dells and the HPs of the mobile space.
> Companies with no software expertise and no way to differentiate themselves (basically all the Android OEMs at the moment)
Most Android OEMs are still learning what it means to be a software and service provider, but I do not agree that they have no way to differentiate themselves.
An Android OEM can completely define the software and hardware experience on his devices. If he wants to stay compatible, he needs to pass the Android Compability Testsuite of course. But even then the final OS can look and feel very different from other Android-based systems.
The problem isn't that OEMs are unable to modify the OS, it's that they do it badly.
I've owned four Android devices, and used a lot more. Three were Google branded, and were awesome. My current phone is an HTC Sensation 4G, which is awful. I don't know that I can blame Sense and HTC for all that sucks about this phone, but I miss my Nexus One pretty much daily. I'm eagerly awaiting the Nexus 4, because it'll only cost a little more than I can sell my Sensation 4G for, and will return me to living in a pure Google Android experience.
I want less OEM customization because the OEMs break the OS and make it less pleasant. Even if I couldn't sell my current phone to recoup some of the cost, I'd probably still buy a Nexus 4. The friction of using an unreliable and quirky phone has a cost that I consider too expensive. So, I regret buying a device that doesn't have a pure Android OS build, and I'm very unlikely to make that same mistake again.
No devices can not pass the CTS and look/feel significantly different. Vendors sign up to Google's non-fragmentation agreement which means that although you can put a slick veneer over the top (but doesn't effect functionality). You cannot add new cool stuff. For example you wouldn't have been able to add your own NFC payment system to ICS ahead of other vendors. You also can't add your own APIs to power your own devices etc.
sorry, but that is simply not true. CTS does only test for API compability.
If you decide that you want to license Google's Apps for Android for your device, then Google will try to use all its power to prevent you from using a competing technology like NFC. That is how software licensing works, and who comes out on top is usually the one with the most powerful decision.
But this has nothing to do with Android or the Compability test suite. It also does not interfere with any plan to use a unique look&feel. You don't have to license Android.
Well, it is not coincidence that Google decided to lower prices of Nexus devices now.
They want to neutralize Windows 8 mobile devices. With that price levels it will be hard for Microsoft to charge anything for its OS.
And the article thesis is completely stupid. What kind of innovation we got from paying 8 billions yearly for ring tones? Now they are free and what happened?
This it will be good to some, now it's mainly good for Google and Amazon who are trying to win money in this new market, either directly and indirectly, and consumers who can choose increasingly better products at lower prices.
People were saying that tablets would be the future and would be the new PCs for every user, well with this new future comes also the late stagnation that has come to the home computer industry, the new thing ceases to be sexy after all when it's no longer new. Or do people really thought that Apple like growth would be sustainable forever? If the PC became cheap enough to be a low margin product by now then what is so different in tablets for this not happen?
I think Apple is doped up on huge hardware revenues, and the moves by Google and Amazon will rightfully bring them back to planet earth. Because what really matters in this "post PC" era Apple themselves announced is not hardware.
Hardware without function is called a "brick", a worthless paperweight. Of course thats referring to hardware where the software embedded was lost or corrupted, but its as good as any analogy for the iOS situation: premium integration for the highest bidder (Facebook), functionality determined by politicial fights (Maps).
This make no sense to me. "Hardware without software is a brick." So? Software without hardware is... what? At least you you can use a brick as a crude tool.
Software without hardware is just an idea. Like a brick, it alone is useless as it cannot be applied to anything, or used. Hardware and software need each other in order to function.
I wonder when Apple's going to start subsidizing their hardware with content sales? Seems like they have the choice between doing that and losing marketshare, ulimately ending up a cult/niche offering.
Considering Amazon's recent $274 million quarterly loss, don't you think it's a little bit too early to say that their model is the best? Apple earned $8 billion in the same amount of time.
Their acquisition was a big part of their loss, but they run their business with very thin margins and still would have lost money without the acquisition.
The Nexus 7 is creating a real market for genuine Android tablets; in the medium term this will greatly benefit all non-Apple OEM, because they will have a big market to compete on.
Does anyone remember where exactly that article that made a great counter point to this, saying prices will keep going down, and in the future manufacturers will have to provide content instead of only hardware? It was giving the example of the $50 Chinese tablets etc. I tried googling it but failed. It made a much better argument than this one.
This engadget article is just looking at the first ply of the game.
If companies such as Apple cannot produce products at prices that people want, then they should go out of business. That helps everyone by providing them with the products they demand - it doesn't hurt them.
Aggressive competition is a great thing. It incentivizes innovation to reduce cost and incentivizes competitors to differentiate themselves, which gives more options to consumers at lower prices.
The assertion that intense competition prevents companies from providing new products is unsubstantiated by anything in the article.
Aggressive competition is a great thing. It incentivizes innovation to reduce cost and incentivizes competitors to differentiate themselves, which gives more options to consumers at lower prices.
Competition is not always beneficial. Consider copyrights and patents. These are deliberate monopolies, i.e. huge restrictions on competition, in order to foster desirable economic outcomes.
As an example, if we eliminated pharmaceutical patents, this would enable greater "competition" in the pharmaceutical manufacturing industry, but guess what? Private companies would cease to invest in drug research. Meaning that, you, as the consumer, lose out on potentially new treatments being invented and brought to market.
Please refrain from using the pharmaceutical industry as an ideal model for innovation, competition and new treatments fostered by patent protection.
There is a significant problem with the emergence of multiple-drug resistant infections. Even with patent protection, pharma companies are not pursuing development of new antibiotics. Why? Because the economics are unfavorable. Better to have a monopoly drug like Lipitor that people have to take for the rest of their lives than an antibiotic that you only take for two weeks [1].
Patent-protection does not necessarily provide solutions that markets want. It only provides solutions that are profitable with patent protection. There is clear market failure regarding antibiotics. Where are the desirable economic outcomes and new treatments?
Appealing to the pharma industry as an example of where patents work at their best is not helpful for a discussion on patents unless you identify its obvious shortcomings.
If you seriously believe the reason we don't have new class of antibiotics is because of the pharmas are not interested enough in making one, you don't know what you are talking about.
You know why we cannot find new antibiotics class? Because it is hard, really really hard! Your statement about economics being the main drive of finding new cures, including antibiotics, is a great insult to tens of thousands of researchers working hard day to day with the sole purpose of find that damn compound. Yeah, these researchers are human with lots of feelings and sometimes with friends and families needing new treatment too, and they are not just working for the salary or bonus.
Patent system is not perfect, but getting rid of patent system will not speed up or better incentivize any effort of finding new drugs and cure. Think more public funding in basic research in universities, and new/better way of regulation/approval instead.
I agree that patent protection has some deep flaws in the pharmaceutical and other industries. I would even be in favor of abolishing software patents. However, this is really a tangential discussion to the original point that competition is not always beneficial. I referenced copyright and patents as examples of this idea, but the specific pros and cons of these is really a separate issue.
Given the sales numbers and profits, I'm not convinced that Apple isn't already producing the products people want at the price those people are willing to pay.
Race to the bottom affected the PC market. Look at how Dell, HP, and others are doing.
Yes, there is a large number of consumers that are very price sensitive. When they get subsidized devices (like the Kindle with ads), some portion of that group complains about the ads.
The best thing that could happen is for people to become more educated about the tradeoffs and make decisions accordingly.
All these devices are really cheap to produce, Apple and Samsung are selling them for US$ 500 to US$ 600 because of their high margins.
There's nothing wrong with this situation but as has happened with the PCs, consumers will probably see that there's no use sustaining prices that are high forever and when there's demand there will be supply. And boom, your will probably have a new race to the bottom.
I am pretty sure the thing you are missing is that there will be a segment of the market that will pay more -- as is happening with apple products. There is also a segment that is all about price and these are the people buying devices accordingly.
Unfortunately, there is a segment of the second group that buy cheap and then expect more. Eventually, devices will catch up to meet even the needs of those likely to complain at the lower price point.
When China does dumping, you don't call it a good thing, right? This is essentially the same thing: taking advantage of a success business in one market to eliminate competitors in another market by pricing things at near cost or even below cost. In case of Amazon and Google, they are using money from other divisions to fund the mobile hardware division; in case of China, they are using profit from other state-owned enterprises to fund dumping in solar panel, for instance.
Google and amazon have started a race to the bottom and no one will win that way. It has to be profitable for all concerned otherwise there is no point.
I didn't when I got a cheap device that was faulty and fell apart more than once. I have since decided it is a false economy. 159 quid plastic tablet vs 259 quid aluminium one is what it comes down to for me. The extra 100 quid gives me as the consumer a much more pleasurable device that's much more durable and lasts longer. It pays for itself because I can actually use it before it breaks. That's just my experience so far.
Last time that I decided to shell out more money investing in the "aluminium factory" I bought an mp3 player and found out rather quickly that they break as any other cheap player.
I also found out that the sustainable model of the "aluminium factory" is to make me pay almost the same price of a new player to replace a shattered display.
In the end I was lucky enough to find on ebay some companies madly working against the sustainability of the free market that sold me a replacement display for 20£.
I ever since bought only cheap, plastic players. They still even let you change batteries...
Google and Amazon don't make money from hardware/software. And if Android OEM's refuse to lower prices then Google can still continue with Motorola. Android OEM's who are just in the game for hardware are in danger.
Amazon sells content at relatively high margin. Google has a new content store they want to push. The profit from selling the hardware is only part of a consumer's financial relationship with these companies. I'd be far more worried for Samsung/Asus, which are entirely hardware based.
