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

November 5, 2012
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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.

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