The Nexus business model and why retail stores will never be able to compete

November 5, 2012

    Google unveiled a couple of new Nexus devices last week. Are they any good? I honestly can’t say since I haven’t played with them, but on paper they sound amazing. Take the Nexus 4 for example: 1280 x 768 resolution screen, quad core 1.5 GHz processor, 2 GB of RAM, 8 megapixel camera … it’s a total beast. How then is Google selling the 16 GB model for just $349? Easy, Google isn’t making any money on the hardware. In case you haven’t noticed by now, Google is an advertising company. During the third quarter of 2012, 94% of their revenue came from ads. In other words, Google’s in the business of showing you little blue links for Viagra. They make compelling services that are addictive and charge nothing for them because at the end of the day it’s the ads that are displayed within those services that make the company money.

    This isn’t a radically new idea. Businesses have always had “loss leaders”, otherwise known as goods or services that are sold at break even or even worse just to make money on the customer some other way. Bars give people peanuts and pretzels because it makes them thirstier, so they buy more drinks. Same idea at restaurants. They hardly make anything selling you dinner, but they’ll recommend that you and your date enjoy a bottle of wine with your meal that has a 500% markup. And we all know about electronics stores that use high pressure scare tactics to make you buy an insurance policy for your new gadget, because that’s a huge profit center for them.

    Talking about electronics stores, the Spanish retailer Phone House has recently said that they’re not going to sell the Nexus 4 because LG wants them to price it at 599 EUR. Meanwhile, Google is selling the Nexus 4 in Spain for 350 EUR online. How is this possible? It’s obvious, and I hate that I have to point this out, but here it goes: Phone House has to lease stores. They have to pay people to remodel those stores. They have to pay people to work in those stores. They need to hire a team of people to meticulously manage the inventory. I could go on, but I’ll stop.

    Google meanwhile will gladly sell you a Nexus 4 for 350 EUR because they don’t have any overhead. I can’t confirm this, but I’m pretty sure that whenever someone orders a Nexus 4 from Google’s website, it leaves a warehouse in South Korea and goes to wherever it needs to go.

    Why is Nexus hardware so cheap? Because providing a compelling retail experience is so damn expensive. And if you’re in the business of retail, you make money only once, when you sell things. Why do you think stores hate it so much when you touch and play with a product on their shelves and then go home and buy said product off Amazon?

    The Nexus business model is, like Google, extremely disruptive. It’s bound to piss people off, but that’s progress for you. Will Samsung ever copy the Nexus business model? Of course not. All those Galaxy ads that you see plastered across cities around the world cost money. The Galaxy S3 at 500 EUR incorporates those additional costs. Do you honestly think Google is going to spend anywhere near the amount of money Samsung spends on advertising the new Nexus devices? No.

    The sad reality is that most people honestly couldn’t care less about any of these issues. The Nexus 4 provides the best Android experience on the fact of the planet, but people buy whatever their local store tells them is the best. Why do people go to stores? Because they want someone to make a decision for them and they want somewhere to go in case they need help with something.

    Comments

    • sagar makkar

      very well written article..i must say android authority has got great writers.
      this huge price difference is also expected to be seen in india according to new rumors.
      since we in india aren’t able to purchase nexus device from play store so it is expected to be launch at retail price of around 35000 INR equivalent to 644 usd unlocked.
      more than double the google play store price.

      • http://profiles.google.com/nicandro.m Nicandro Filho

        If it get in Brazil for 650 USD, it will be VERY cheap and I will be very happy for see the prices getting down!

        The Galaxy SIII is sold here for 805-1024 USD equivalent…

        Sad story, but true…

        • sagar makkar

          you are paying such a huge amount for the phones..
          i guess it will be really cheap if you get from ebay.
          don’t know about the custom duty in your country but i got it for just 397 usd including all taxes and shipping.
          try ebay dude..:)

          • utkarsh gupta

            can you share the link please where you get sIII for 397USD on ebay.in

            • sagar makkar

              i was telling about nexus 4 for 397 usd not s3 bro

          • http://profiles.google.com/nicandro.m Nicandro Filho

            In Brazil, any international order above $ 50 (Product + Shipping) is taxed at 60%. And the custom house can define what the real value of the product, even if it is declared with another value.

            For example, they may require that the value of the Nexus 4 is the retail stores, and not the Play Store. That is, I could end up paying the value of the phone, or more, in taxes.

            But it does not always happen, it is a lottery. Many people here buy cameras, cell phones and other products through e-bay. I already did some shopping, but I never ventured to buy expensive things.

    • jmquez

      3 things:

      1) Thanks for stating the obvious, another article that seems to only focus on the $$ part. The truth is that google doesnt need Samsung or even Android but Samsung and Android need Google.

      2) If Google’s goal to succeed involves giving everyone the chance to own the best tech around, how is that a bad thing?

      3) Samsung does not compete with the Nexus 4, there are completely different products targeted at different people sold in different ways.

      4) You want to know who Google pissed off with their Nexus range? APPLE.

      • D3VIOUS

        I Couldn’t agree more .. Google trying to give you the best technology at the best price and if LG didn’t know that why did they accept to work with Google ?
        if LG knew that this pricing will hurt their business they would have said No way to Google it simple but don’t just come after the official announcement to tell me we won’t stick to Google Prices

        • On a Clear Day

          I used to sell cell phones for a major carrier. Most people who buy frankly – and this is NOT a put down – don’t know that much about what they are buying – thus the reason, in my opinion , why so many opt for Apple with all the hype you read about how “great” it is. None of us want to feel like we made a bad choice and appear foolish in the eyes of our friends for using bad judgement; so, they go with the safe decision – the one “everyone else” is using.

          The Nexus brand is going to shake things up and cause a number of good things possibly to transpire – among them, hopefuly, making it clear that updates to Android can occur in a timely fashion – rather than at the behest and perrogtive of a carrier more interested in selling us a new phone than helping us get full value out of the ones we already have.

          Will the Nexus business model drive bricks and mortar stores out of business? Of course not, it (they) serve a certain market segment – albeit a huge one – but not the whole enchilada. There will always be people who enjoy and want a more customized experience and whose purposes and lifestyles are best served by personalized service and willing to pay for it.

    • spukoo

      Sagar its in India for 18k grey market chukuu

      • sagar makkar

        i have pre-ordered it for inr 21700 from ebay india..
        18000..? i guess it can’t sell at that price even at grey market because..
        299 usd= 16000 approx inr then shipping custom and all middlemen profit..i guess not possible., but i can be wrong.
        if you know any place where it is selling for inr 18000 please let me know.

        • Harshal

          Sagar U order nexus 4 at 21,700 on ebay.in?? It shows 23500 for 8 GB from Cart2india.how come u found this deal?

          • sagar makkar

            i have got a 7 percent off coupon..QTSGULSG4P
            see if this works for you

    • Spazz

      ur faces..spazz

    • Santosh Talwar Mirchi

      Never heard of ebay u chutiyas..go suck on that ..Buy from there lende paws..

    • ron

      i understand the cost related issue with a physical store and an online store, google wants to make money wid ads nt on hardware, country taxes etc r the reason for the price difference. but y is the Asus Nexus doesnt hav much difference compared to the US? at least here in India. More over the Asus Nexus has international warranty. Google shud hav chosen Asus to build the phone too.one wud have had the option to buy it from abroad and get warranty too. LG ‘s one screwd up company

    • aholsteinson

      “Google’s in the business of showing you little blue links for Viagra.”

      What was that about? That was very unprofessional to be honest.

    • saurabhaj

      STEFAN CONSTANTINESCU,
      You had written a great article,
      Yes it`s right that people will buy good product wherever it`s available cheaper,
      may be Google wants to become next Amazon.
      I don’t have any problem,
      but people will still go to shop to buy because they will want someone to makeup there buying decision,
      100% correct unless you are Fanboy of any product line or company.
      But companies should bring some way so that retail price is not much larger than online price.

    • http://twitter.com/MattGMckenzie Matt ✵ McKenzie

      Well Stefan, are you glad you got that out of your system?

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