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Why do profit-seeking companies keep making profitless Android phones?

Why do profit-seeking companies keep making profitless Android phones?

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Here’s a quick survey of the traditional Android device manufacturer landscape: Samsung is doing alright, LG and Sony could be doing better, HTC doesn’t know what it’s doing, and Motorola is done. Smartphones have grown to be the most essential piece of modern technology, and yet the industry manufacturing them has backed itself into a corner where only two companies, Apple and Samsung, are generating any reliable profit. The quarterly earnings reports keep painting the same bleak picture, with most phone makers barely breaking even in spite of increasing shipment numbers and constantly improving products. It seems a Sisyphean task, and it’s been going on long enough to invite the question of why so many companies bother making Android phones at all.

The present situation is the product of combining the opportunities opened up by Google’s Android operating system with the inertia of a mobile industry that was in need of renewal. Into the void left by Nokia’s stumbles and Palm’s demise stepped faster-moving, spec-driven competitors like HTC, who could focus on iterating their hardware and design, relying on Android to be their software solution. That worked beautifully for HTC for a while and has proven an enduring strength for Samsung. However successive waves of even faster, even cheaper competitors out of China have dramatically eroded the average price of Android smartphones (and manufacturers’ profits with it). Even Lenovo CEO Yang Yuanqing, whose company is no stranger to competing in China’s price-sensitive market, has described some of the local upstart manufacturers as irrational and unsustainable.

moto x (hands-on)

If there’s no money in it, why would a company continue to be an Android OEM (Original Equipment Manufacturer) today? Ideally, every mobile OEM would like a bottom line that looks like Samsung’s, but no others have achieved it. It’s not even certain that Samsung Mobile will sustain its profitability, with industry analysts describing its present Herculean efforts as "running to stand still." So how do others bridge the cognitive dissonance between the desired outcome and the perpetual failure to achieve it?

Smartphones as an engineering showcase

For LG, every new smartphone bearing the company’s insignia serves as an engineering showcase for the various component businesses that comprise its vast conglomerate. LG Chem builds batteries, LG Display produces advanced displays, and LG Mobile combines them in smartphones like the G Flex. Showing off technical leadership is helpful in convincing other OEMs to buy and use LG parts, and it shows the company in a flattering light to the wider consumer audience. Beyond that, LG believes it needs a smartphone to connect to its growing ecosystem of smart home, TV, and in-car gadgets, plus phones provide free and ubiquitous advertising. Like a little black dress, smartphones are deemed too versatile and important for a "serious" consumer electronics company not to have one.

sony xperias

Sony pursues a similar brand halo effect with its Xperia smartphones. They are some of the most densely packed, tightly integrated modern devices in the world — and though they have their downsides, Sony’s phones are a credit to its engineers. Before Apple and Samsung, Sony was the original aspirational tech brand, and for a company that built its name by defining innovation, not participating in the most important innovation contest — smartphones — would seem fatally unambitious. Sony would also argue that there are ecosystem benefits such as being able to play PlayStation 4 games on your phone, however the PS Vita has proven a more natural choice for that purpose than the company’s handsets.

Smartphones as a shopping portal

Others see smartphones as a conduit to generating profits elsewhere. Xiaomi is famous for selling phones at cost and then seeking to capitalize on a well-disposed user base by selling additional services and extras like luggage. Amazon’s ecosystem play is not terribly different, with the Kindle Fire Android tablets existing as almost disposable vehicles for getting Amazon’s online store and content distribution network into people’s homes. If the Fire Phone hadn’t been such a flop, it would have now been the centerpiece of this strategy — though its failure could also be interpreted as evidence that this isn’t a great plan in the first place.

Not every Android OEM has the luxury of choice. Android may be profitless, but barely keeping afloat is still preferable to going under, and well, what’s the alternative? Microsoft has all but given up on Windows Phone — to the point of exporting all its mobile software, even the keyboard, to iOS and Android — and BlackBerry made the switch to Android last year, too. There is no third option, and Apple’s not sharing iOS.

Smartphones as an act of desperation

The answer for companies like HTC and BlackBerry is that they’re Android OEMs out of sheer necessity. And their escape from that position of need is diversification: HTC is doing it through the Vive VR headset and BlackBerry already relies on its enterprise business to sustain it. Desperation isn’t a pretty reason for making Android phones, but at least it’s an honest one.

BlackBerry Priv

It still costs a great deal of time and effort to build a great smartphone, but making a decent one is now easy. Android, even without any retouching or enhancements, is a first-class mobile OS, so all a manufacturer needs to do is figure out how to produce and sell the most attractive possible device at the cheapest possible price. History will record the names of Palm, Motorola, Sony Ericsson, and Nokia’s device division as the victims swept aside by this rising Android tide.

What remains now are Apple and Samsung’s tightly integrated monoliths at the top and a sea of Chinese competitors who seem hellbent on destroying each other (and, if they’re lucky, Samsung too) through a rabid price war. The motivations of those market participants can still be related to profit with relative ease — whether it be some small sliver on big volumes of cheap phones in China or the prestige premium commanded by Apple worldwide — but what of everyone else? Is LG’s mobile business really important enough to maintain if it keeps hemorrhaging money? Motorola’s wasn’t. Does Sony really need brand totems so badly that it would continue to tolerate losses? Nokia didn’t. The profits in the mobile business have shifted away from manufacturing and toward software and services — and most companies are still struggling to deal with this new reality.