Google launched announce its first jointly developed smartphone with Motorola, the Moto X. Given Motorola management’s recent comments regarding a gap in the market between low-priced feature phones and high-end smartphones, we believe Google’s strategy could have two notable implications: (1) the Moto X could launch with an aggressive gross margin profile where, in-synch with the Nexus 7 strategy, they seek to sell the phone at a breakeven gross margin, which could help Google take share, or (2) Google could launch Moto X with a margin profile comparable with competitors’ offerings currently but potentially take steps to drive industry margins down over time.
Potential impact on Apple with the launch of Moto X
Looking beyond the initial Moto X launch, Apple’s powerful platform-centric strategy and its significant installed base loyalty, part of Apple’s competitive edge has come from the fact that it tightly integrates its hardware and software together, producing innovative synergies that its hardware-centric competitors have a tougher time matching over the long term. Google’s unified approach with its Motorola subsidiary appears to recognize this advantage, and they are clearly seeking to match it.
If Google’s Motorola smartphones can capture an increasingly significant portion of the smartphone market and the company accepts gross margins that are far lower than those currently enjoyed by the leading high-end vendors, broader industry ASPs will clearly face increasing pressure. If this were to force Apple to lower prices at the high-end. Google’s Motorola strategy clearly has the potential to make it an even more formidable competitor for Apple over time. As has been the case in the past, in our view Apple’s response must be to innovate aggressively, and at a far more substantial pace than we have seen with its most recent product refreshes.
Impact to Apple may be negligible if Google’s in-house phones fail to generate meaningful share or if Google’s unified efforts weaken the broader Android ecosystem by alienating key OEM partners. Either way, in our view Apple’s response must be to create products that competitors can’t match.
Potential impact on Samsung Galaxy Family with Moto X Launch
The Moto X is a conspicuous event for Android OEMs, including Samsung Electronics, as it represents Google’s first move into smartphones and Google has indicated that it would like to close the gap between low priced feature phones and high end smartphones. However, the initial impact on Samsung Electronics may be limited in the early stages for a few reasons. 1) Moto X appears to be targeted mainly at North America at this time (North America accounted for 14.1% of Samsung Electronics’ handset shipments in 2012, according to Gartner); 2) Google has had limited success in hardware to date (Nexus tablet and phones); and 3) due to limited success to date operator willingness to attach a high subsidy on the Moto X and promote it as the flagship product may be limited.
Second, and more important, we would need to monitor the potential success of the Moto X. There is a virtuous cycle with phones – the more popular a product is the more willing operators are willing to support it (either by positioning and/or subsidies). Samsung Electronics has benefited from this trend more than any other Android OEM over the past two years. However, if the Moto X were to enjoy success it could narrow competitive gap between Samsung Electronics and Moto X.
Longer term, Google’s hardware success could drive Samsung Electronics to more actively explore its own operating system or after sale revenue opportunities. We believe that this may be one reason why Samsung Electronics continues to pursue Tizen Mobile Operating System.