One of the stark differences between the Android and iOS ecosystems is the amount of control Google and Apple wield over their operating systems and devices. A new report claims that Google wants to take a page from the Apple playbook and increase control over its hardware, while simultaneously capturing a larger share of the profits.
Up until now, the Nexus program has been a partnership, in which Google designs the software and the hardware partner is responsible for other aspects of the device’s design. Google’s previous Nexus partners have included HTC, Samsung, LG, Motorola, and Huawei. The Information is reporting that this may change, with Google exploring other options.
Under the new program, OEMs would be reduced to contract labor, not partners — phones would be branded by Google, without any logo or other differentiating information to identify the original manufacturer. The goal would be to capture more of the high-end smartphone market that’s increasingly dominated by Apple.
To understand why Google is headed in this direction, consider the revenue and market share splits between Apple and the rest of the industry. First, here’s the total market by volume, courtesy of IDC.
Samsung’s share of the business has trended downwards since 2012, but it still commanded 21.4% of the market in Q2 2015 — the largest single share of any vendor. Apple is in second place, with 13.9% market share.
Now, compare net profits:
Apple owns a whopping 94% of total smartphone operating profits. Samsung comes in at 11%, while all other manufacturers trend negative. The reason these figures exceed 100% is because all of the other companies reported negative operating income from their smartphone businesses.
What drives the distinction? Average selling prices. According to Canaccord Genuity, it’s the vast difference in ASPs — Apple’s ASP sit at $670, whereas Samsung’s are just $180.
Google wants to see Android compete more effectively in the high-end smartphone market, but its partners aren’t delivering devices that do that particularly well. Samsung’s product mix has swung towards budget and midrange devices in order to appeal to customers who might otherwise buy products from Huawei or Xiaomi. While these two companies still lag far behind the vendors US customers are familiar with, both are huge success stories — Huawei’s market share has doubled from 2012 to 2015, while Xiaomi has risen from 1% of the market in 2012 to 5.6% today.
Ars Technica reports Google has held off from making this change because it doesn’t want to upset OEMs, but notes many OEMs aren’t thrilled with the current program anyway. Not only does Google micromanage hardware design, the company takes a 15% cut on devices, thus shrinking OEM profit margins even further.
While the loss of branding isn’t particularly attractive, the OEMs might actually make a better profit margin if they shifted R&D expenses to Google and served as contract manufacturers. Absolute profit might or might not drop, depending on how high the R&D expenses are at any given company. The way Google has cycled through Nexus partners, however, suggests that multiple companies have tried the current Nexus partnership system and been unhappy with the result.
Google is apparently considering a partnership with HTC to build its devices on contract. In happier times, HTC would likely decline, but the company’s market share has cratered and its smartphone business is on the ropes. Under these conditions, HTC may decide it’s better to build devices on contract than to forego the additional revenue.