This time last year I took time to go into detail in regards to how Google is able to go about this...
Eariler this year, I delved even deeper into the details of how Google will cut the fat-margined companies (read as Apple, et. al.) off at the knees!
As coincidence would have it, Google management has now come out in public with affirmation of the business model that I have attributed to them these last few years, as reported today by the Financial Times on their front page.
Google is preparing an attack on Apple’s iPhone with a device that is more aware of its surroundings and smart enough to anticipate how it will be used next, according to the head of the internet company’s Motorola subsidiary.
The gadget, called the Moto X, will be made in the US and will be part of a campaign to drive down the cost of smartphones and end the high profit margins companies such as Apple have enjoyed, said Dennis Woodside, the Google executive installed to run Motorola after it was acquired in late 2011.
Mr Woodside’s comments, made at the D11 conference in southern California, marked the first official confirmation by Google that it would launch a “hero” phone, or flagship handset capable of competing with devices such as the iPhone and Samsung’s S4.
Mr Woodside hinted that the new handset would go on sale later this year and be priced well below the iPhone 5, adding that the sort of steep price declines seen in consumer electronics from personal computers to televisions were overdue in the smartphone market.
Without naming the iPhone directly, he said: “Those products earn 50 per cent margins. We don’t necessarily have those constraints. Those [margins] will not persist.”
... He added that Google was confident that the device, which will be “broadly distributed”, would be a big seller because “the experiences are unlike other experiences out there.”
Putting stock market performances aside, the question du jour is, "Is this negative margin attack working?". Quick answer, hell yeah! I opined on margins by means of the market share vs profit share debate over the last two days, reference"
This strategem employed by Google was visible at its onset and could have been mitigated had Apple been less greedy in terms of short term profits (it was one of the, if not the most profitable companies in the world) and gunned for ubiquitous distribution. You see, over time, every company's margins get cut. The pertinent question and the inflection point into the next paradigm centers around the next logical questions, "Will you be the one to cut your own margins or will you allow your competitors do it for you?"
As long as the market leader actively and religiously cuts its own margins it essentially trades incremental profit margin for incremental market share growth. From a long term cash flow perspective, it actually averages out to about the same. The problem is if you fail to cut margins often and early, you reap large cash flows in the beginning of the cycle to forgo them through margin compression towards the middle and end of the cycle, characterized by market share loss at the onst.
I've been using Blackberry as an example of this...