Will Motorola’s new low pricing strategy worry companies like Samsung?

June 3, 2013
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woodsideDennis Woodside, the CEO of¬†Motorola Mobility since its acquisition by Google last year, has declared war on high priced smartphones during the All Things D conference. While speaking on stage with¬†Walt Mossberg, Woodside said that because Motorola¬†is a more nimble company (than say giants like Samsung) it doesn’t need to worry about making very high profit margins on its smartphones. Instead the company’s¬†new ¬†pricing strategy is to¬†build high-quality, low-cost devices.

The price of a smartphone is $650. That's not gonna persist.
Dennis Woodside, CEO of Motorola

These comments are great news for consumers who could see the price of flagship smartphones fall if Motorola is successful in shaking up the market. But Rolfe Winkler of the Wall Street Journal also thinks that these fighting words from Woodside should have “executives at Samsung shaking in their boots.” He also thinks that “folks at Apple should also be sweating.” Is he right? Unfortunately no and here’s why.

Winkler is working on the assumption that Motorola, as a well known brand, will be able to sweep in and metaphorically pull the rug out from under Samsung’s (and Apple’s) feet by drastically reducing the cost of high-quality smartphones. Motorola will release its highly anticipated Moto X phone this fall and it is assumed that Woodside’s comments are about the pricing of the Moto X and other handsets that Motorola has in the pipeline.

Assuming the Moto X is in the same class as the Samsung Galaxy S4 and the HTC One, Winkler is predicting that Samsung and HTC will lose market share based purely on price. However he is wrong for several reasons.

First, although Samsung makes huge profits and has high margins on its phone sales (as does Apple) even if Samsung reduced its profit margins dramatically, the device would still sell for $500 or more. Although the component costs of the phone is under $250 that does’t include actually assembly costs, R&D and corporate overheads etc. If Woodside is only talking about a $150 reduction in the wholesale price, although welcome, that isn’t enough to revolutionize the market.

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