Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics

Reggie Middleton's picture
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On Thursday, 12 August 2010 I penned . In said piece I unequivocally detailed the process and mechanism with which Google would systematically slash the profitability of the fat-margined OEM hardware and software vendors. I was the ultimate contrarian at this time for there was not a single well known analyst, investor or media personality that espoused a similar viewpoint. Apple was the "the next big thing" at that time.

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.

I have also said on several occasions that the current market sweetheart, Samsung, is not immune to the hardware margin compression woes. As a matter of fact, no hardware vendor in this segment is. It's quite evident now that Google's plans for Motorola is precisely to drive down the margins of all OEM vendors - even their Android partners who are also competitors. A complex relationship, eh? Let's face it, Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers (and Computer Hardware Vendors Are Dead, Part Deux!). I commented on the predicament that Samsung is in now as it reaps increasingly large profits, just like Apple did - Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!

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.”

For those who actually think that Apple's share price can afford such a battlle, I bring you this graphic from "Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In"

Click the graphic once to view, twice to enlarge to printer quality...

 Reggie Middletonss Ultimate Apple Value Infographichttp://; background-color: transparent; vertical-align: baseline; display: block; width: 382px; height: 404px; position: absolute; z-index: 1; bottom: 0px; left: 0px; background-position: 100% 100%; background-repeat: no-repeat no-repeat;"> Reggie Middletonss Ultimate Apple Value Infographic

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"

  1. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!! and
  2. Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

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...

Blackberry market share vs margin correlation analysishttp://; background-color: transparent; vertical-align: baseline; display: block; width: 462px; height: 404px; position: absolute; z-index: 1; bottom: 0px; left: 0px; background-position: 100% 100%; background-repeat: no-repeat no-repeat;"> Blackberry market share vs margin correlation analysis 

All of the former tech titans and market leaders have fallen the same way - Nokia, HTC, DEC, Polariod, etc.

Related reading:

Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?

Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In

Short Term Gain Brings About Long Term Pain? A Roadmap To Apple's Resurgence That Management Is Ignoring!!!

See also: Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance

For paying subscribers only:

Recent Apple Valuation Reports

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

Recent Google Valuation Reports


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dracos_ghost's picture

Did Reggie just refer to himself in the fourth person?

IrritableBowels's picture

You beat me to it; although I'm pretty sure it would be the third person.  It was inevitable though, really.

X86BSD's picture

Reg is smart. Having said that I don't agree with him. People have been hating on apple and predicting their demise since day 1. Wall Street hates apple. No news there. But the thing that really annoys me is Reggie's posts are so full of himself and arrogant. I predicted this, I predicted that, which is really annoying to me. I know he does it so he can get people to subscribe but can't you just let your record speak for itself instead of shoving these prima-donna I'm the greatest analyst EVAR posts down our throats. Maybe I'm alone in this but damn your posts are annoying.

Andy_Jackson_Jihad's picture

Have you ever subscribed to an investment newsletter?  They ALL do this, even when their track records suck for years at a time.


It is incredibly annoying but if regie doesn't want a conflict of interest, he can't trade these things as he's writting newsletters about it.  He needs to make his money on subscriptions.  Not sure what the SEC rules say about it but I thought that was the "spirit" of the law.

I agree that it would be nice if there was a newsletter out there that was so good that the track record alone did it's own advertising.  But I don't think anyone in the world is that good.  Maybe I'm wrong but I've never run across anyone that gave away free research that wasn't full of cherry-picked bragging.

Fuh Querada's picture

I was in an Apple store recently and said I was looking for a 15" laptop. The cheapest they had was 50% more expensive than the comparable Samsung product. Too high a premium to pay even for avoiding that abortion Windows 8.

NihilistZero's picture

Install Classic Shell (freeware) and you can make Windows 8 almost indistinguishable from 7 functional;ity wise.

NotApplicable's picture

Pinguuy OS is a customized Ubuntu Linux installation with most everything you'd want preloaded and configured.

Fuh Querada's picture

The penis mightier than the sword

JeffB's picture

Deliberate, or a Freudian slip there?


Andy_Jackson_Jihad's picture

Are you selling these penis mightiers?  You're sitting on a goldmine, Trebeck!

EnslavethechildrenforBen's picture

They are just making it look like "Google' and "Apple" are two seperate companies. Just like they make it look like there are different Banks.

Sure, we believe them.

Winston Smith 2009's picture

Re Google 101 video - A great analysis of Google's business model that I agree with it 100%.

Apple is toast in the long term.

Jumbotron's picture

"Apple is toast in the long term."

Not really.  Just as there are niche players in the auto industry making MUCH more expensive cars than your typical Chevy or Ford....they know their key audience and demographic wants a model that is clearly better engineered than the rest....and are willing to pay for it.

It will get MORE difficult for them in the near future to continue 50%+ margins on everything....but their niche market will always be there.....just as it is for BMW or Mercedes....or even Rolls or Lamborghini.

Winston Smith 2009's picture

Let me rephrase: Apple will be toast in comparison with its current market position.  They will be reduced to selling diamond encrusted phones to retain the market they best cater to: status symbol seekers.  Meanwhile, the mass of Android software and OS and hardware features generated by its massive user base will overwhelm them.  Apple will become the diamond encrusted equivalent of Linux in the desktop PC world and their market share will be similar.  As was said in the Google 101 video, it's impossible to compete for a large market share against low margin, highly capable hardware.  Only gullible morons pay $700 for an unlocked phone that costs $244 to make.

Zero Govt's picture

that's exactly where Apple is positioned, at the top of the tree

let Goofy pick off all the low hanging fruit it likes, subsidise its tanking Ad revenue business with past profits and continue to dump Droid on the telecoms market at HUGE LOSSES

Reggie Rooster is an accountant squaking non-stop about Apples coming margiun compression, his blinkers are burning red hot on Goonbubbles minus a few $billion losses propping up their ever more desperate telco dumping campaign

you know you're truly piss-ppor when you can't even price your crap in the market

PS. don't rule out Linux making a come back, they're ever more popular in the server market

Winston Smith 2009's picture

"dump Droid on the telecoms market at HUGE LOSSES"

I don't think you actually watched the Google 101 video, did you?  That was its entire point!  Google can easily afford to do that and don't give a damn about making money on hardware.  They want to control worldwide data flow and storage via their comm networks and servers.  The cheaper they can provide hardware for people to access that, the better for that, their business model.

Zero Govt's picture

forgive me but "don't give a damn about making money" is about as absurd as this clucking headless turkey, Reggie the Rooster

this mathamatical moron (an accoutant no less) is up on the roof crowing about Apples margin compression waving the banner for a dumper who is running huge margin compression losses without so much as a word on the topic

absolute insanity

Winston Smith 2009's picture

What is your reading comprehension or are you intentionally omitting key portions of what I said?  I said that they don't give a damn about making money on hardware because that's not their business model!  With them, breaking even on hardware is fine.  However, not so with Apple.  Their business model requires making, ideally, LOTS of margin on their hardware.  And that model can't compete with a giant who is producing increasingly superior hardware and OS features and whose customer base is exploding.

Zero Govt's picture

you're like Reggie the Rooster, you don't know if you're coming or going

so Google don't give a crap about hardware margins... that'll be why they bought hardware company, Motorola, so they can go ´double-dumb´ and lose money on software and hardware ...a strategic masterstroke!!

Schneiders really got a nose for hunting marketsto lose money in, whatta great CEO ...if I was a Goofy shareholder I'd have been running for the hills when he double-dumbed huge red-ink losses in Android with subsidising his core as well, Ad Revenue ...any shareholder left aboard when he triple-digits 'stupid' with losses in hardware deserves the penny-share sector

Goofy are cribbing the vertically integrated biz model of Apple who pushed out from software into hardware to seek more profits, only Goofy are going one worse. They've gone vertical to the point of manufacturing their own hardware, which Apple avoided with sub-contracting as its not their area of expertise (smart)... Goonbubble not so much

This is Goofy's strategic mistake, a software company stretched a step too far into manufacture...they just can't stop 'meddling in all areas' they've no known expertise (see Teslar).. it is ego run amock, the loss-seeking is stone cold hard evidence Goofy have lost the plot completely

in the meantime please take Reggie's hand and join Steve Schneider with the Dunce caps in the corner of the classroom for not understanding profits and commerce itself... trashing the telco software market ($0.00 margin to compress) and going red ink double-dumb in the hardware market ($0.00 margin to compress) while you cretinously crow about Apples margins least in all sanity they have profits, the biggest ever made by any corporation in history, and that's how you measure success by the way 

PS. this is ZH, a financial and economics website, you'd all be better at Huffington Post where the loons, socialists and not-for-profit twats reside.. join Reggie the accountant and Steve Schneider a loony goofy CEO that think swimming in red ink is the Dawn of a New Tek Age

Winston Smith 2009's picture

No it is already not at the top of the tree for either hardware or OS features.  There's a difference between BMW and Chevy hardware and features and that's what people are paying for.  Increasingly not so between Apple and Android hardware or OS and, as trends are going, soon to be apps, too.  The iPhone is in a number of ways inferior to current Android phones (read columns by those who have switched) and with the Moto X, Google can now attack their margin with an assembled in the USA phone.

Apple hasn't had an original idea in years and unless they come up with some must-have, original hardware soon, their market share can only go down.

Zero Govt's picture

big kudos for Moto-X being made in the USA

Apple are evolving their products, cleverly, you cannot expect revolution as a regular occurance ...just speculating but I see continued growth in their iMac's and laptops, that hooks people into iPhone these markets Apple are up against the absolute garbage that is Microsoft, that's where I see Apple making further inroads 

Winston Smith 2009's picture

I consdier the iPhone and iPad to be ground breakling if only because, in some ways, they were excellent products in categeries that were the first to be widely accepted.  Now, they have not been coming out with anything equally groundbreaking but are merely evolving their products.  That's not enough as Android phones are also evolving and the force behind them, Google, doesn't care about hardware margins.

machineh's picture

Question is who makes the MotoX -- same subcontractors who make the Nexus devices?

theliberalliberal's picture

Reggie's brilliance asside, why does all his articales read like a C.V.

I this

I that

If you keep being right,  someone else will make a "Peter Schiff was right" video for you.

KarmaNaRx's picture

You guys dun goofed

A is A's picture

Font family: Where the hell is the article?

bank guy in Brussels's picture

Reggie Middleton has been un-masked as a bot invented by the CIA's Google Inc. to tout their criminal company


EnslavethechildrenforBen's picture

Can you imagine if there was a "truth" button on Google news?

Zero Govt's picture

Goofy wouldn't know where to find a truth button..

...but they've found a trumpet, Reggie the Rooster

...this turkey just can't shut up, he must be corn-fed by Steve Schneider himself