Raymond James analysts Tavis C. McCourt, Brian G. Alexander, in a recent report, examine several tech companies for interrelated news and notes – specifically, smartphone pricing – that could affect the forward outlook of all of them. The report covers companies such as Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), and Flextronics International Ltd. (NASDAQ:FLEX).
Google drops Moto X price to compete with Apple
Google Inc (NASDAQ:GOOG)’s Motorola unit dropped the price on its flagship smartphone, the Moto X, yesterday to $399 for U.S. consumers without a wireless contract, down from $550 originally. In December it had been offered at $349 during brief promotions but the cut to $399 is now permanent. This compares to Samsung’s Galaxy S4, which is $600 without a wireless contract and Apple Inc. (NASDAQ:AAPL)’s iPhone 5s, which is $650 without a contract. The Moto X is only sold in North and South America, and therefore price cuts will have a limited global impact, but given its high end specs, it could be an interesting test case as to the price elasticity of high end smartphones in the Android ecosystem.
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At Best Buy, Motorola is now offering its lower end Moto G, originally $179 without a contract, for $99 during a promotion, although it is hard to know how much of this price cut is financed by Google Inc (NASDAQ:GOOG) vs. Best Buy Co., Inc. (NYSE:BBY). This compares to $250 for a similarly spec’d Samsung device without a contract. We believe the lower end Moto G has already seen good demand outside the U.S. in countries where carrier subsidies are less meaningful. In general, we view Apple Inc. (NASDAQ:AAPL) as sheltered from these pricing decisions as Apple customers rarely switch to Android-based phones, with Samsung likely having the most to lose if Google is successful in driving meaningful demand with price cuts.
Wholesale pricing to impact Qualcomm’s license business
As it relates to Qualcomm, Inc. (NASDAQ:QCOM), the company would likely be indifferent from a chip perspective between Moto X and Samsung Galaxy sales, and likewise its license business would get similar license revenue from both even with the price cut on the Moto X due to “caps” on Qualcomm’s license terms. However, a dramatic shift in smartphone demand below $250-300 wholesale pricing would start to have an impact on Qualcomm’s license business, all else being equal. However, it is worth noting that the opposite has been true so far, with reported ASPs increasing in both developed and emerging economies for Qualcomm in 2013.
We view these price cuts as mixed news at best for Flextronics International Ltd. (NASDAQ:FLEX), who manufactures the Moto devices. On one hand, we believe demand has been underwhelming (thus the price cuts), but on the other hand, Google Inc (NASDAQ:GOOG) appears willing to cut price to drive more volume, which ultimately could improve demand.