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Google Targets Apple’s Margins with First Pixel Phone

Oct. 25, 2016
Based on independent analysis, Google stands to haul in about $483 in profit on every 32 GB Pixel XL smartphone, outpacing what Apple makes on its 32 GB iPhone 7.

Google’s new line of Pixel phones has the shape, pricing, and some of the features of Apple Inc.’s iPhone but — critically for investors — they also have Apple-like margins.

The Pixel XL smartphone with 32 gigabytes of storage has a total build of materials and manufacturing price of $285.75, according to technology component analysis firm IHS. With a retail price of $769, that means the margins on that particular model are about $483.25 per unit, excluding costs not accounted for by IHS. This exceeds Apple’s profit on the 32 GB iPhone 7 with a smaller display, according to IHS’s analysis.

Google’s margins on its first smartphone suggests that the Mountain View, California-based company not only wants Apple’s user base, but its profits, too. The Pixel is the start of a series of new products from Google parent Alphabet Inc., according to Rick Osterloh, the senior vice president in charge of hardware.

The margins suggest that “Google is getting the same pricing for the same components as other tier one manufacturers of phones,” said Andrew Rassweiler, senior director of cost benchmarking for IHS Markit. “They have as much pull as any of the big guys.”

This may not be a safe assumption, because Apple can order components in massive quantities, securing the lowest prices. Google can’t make the same volume promises to suppliers, but the company’s new hardware executives say they’re aiming to accumulate such supply chain heft in the future. Jason Bremner, vice president of product management at Google, said last month that if suppliers know you’re going to be around for years and ordering lots of components, they’re more willing to work on new designs suited to your needs.

One of the key features of the Pixel XL is its camera system, a single sensor module that takes 12 megapixel photos with the back camera and 8 megapixel shots with the front sensor. IHS estimates a total camera component cost in the Pixel XL of $17.50, which is less than the estimate of $19 for the iPhone 7’s camera system, which has similar capabilities.

The priciest component inside of the Pixel XL is its 5.5-inch AMOLED QHD display by Samsung Electronics Co., coming in at $58 per unit, according to the IHS analysis. At $50 per unit is Qualcomm Inc.’s Snapdragon system-on-a-chip, the brains of the device. Like Apple, Google has tapped NXP Inc. for the phone’s near-field-communication payments chip and Samsung for storage.

“All these different companies, not just Apple and Samsung, can make good hardware choices as hardware components have become commoditized,” Rassweiler said. “The difference here is Google looking to integrate its hardware and software which Apple has specialized in for years.”

Google’s internal development costs as well as the price to build the features on top of the Android operating system aren’t reflected in the cost analysis. Similar to Apple’s relationship with Foxconn, HTC Corp. is the final assembler of the Pixel phone. While HTC has experience building its own phones, Google executives said they were responsible for the Pixel’s supply chain, design, and engineering.

“I’d say it is likely that Google is very involved in the design of this; HTC in this case is really a provider just the way as Foxconn is to Apple,” Rassweiler said.

By Mark Gurman

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