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Google Inc (GOOG)’s Nexus Phones Are Dead

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Google Inc (NASDAQ:GOOG)‘s Nexus program is a mix of successes and failures.

On the tablet side, ASUS has enjoyed incredible success by building the Nexus 7, a device that has single-handedly boosted the OEM’s tablet volumes by several million units per quarter. The promise of a stock Android experience has driven the Nexus 7’s success. However, things aren’t so simple on the Nexus smartphone side.

Last Nexus standing
LG builds Google Inc (NASDAQ:GOOG)’s current Nexus 4 flagship, which is aggressively sold at the unsubsidized price of $300. However, Nexus 4 unit sales haven’t skyrocketed like Nexus 7 units did. LG hasn’t released official figures, but some estimates peg Nexus 4 units at just 370,000 throughout all of 2012.

LG Nexus 4. Source: Google.

In a recent interview with All About Phones, LG exec Won Kim confirmed that the company has no interest in building a second-generation model for the search giant, casually referred to as the Nexus 5. LG was largely why Google Inc (NASDAQ:GOOG) had so much trouble keeping up with demand when the Nexus 4 was launched. The device was consistently out of stock, and a Google exec blamed LG: “Supplies from the manufacturer are scarce and erratic, and our communication has been flawed.”

Kim noted that LG isn’t keen on stock Android devices, since the company feels that such devices provide no “added value” to LG. Manufacturers have long relied on skins and modifications as a point of differentiation from their Android brethren, and shipping stock Android catalyzes commoditization. At the same time, the Nexus 4 directly undercuts LG’s more profitable devices like its flagship Optimus G, which the Nexus 4 is based on.

The Optimus G retailed for $550 when it launched last year (it’s now $450), which is close to what it would fetch when sold subsidized on contract by carriers. The smartphone also has LG’s Optimus UI skin. Guess which one LG would prefer you to buy.

No one left
The news is particularly notable in light of Google Inc (NASDAQ:GOOG)’s announcement that it has partnered with Samsung to sell an unsubsidized version of the Galaxy S4 running stock Android. And by “partnered,” I mean that Samsung is throwing Google a bone, since very few people buy unsubsidized devices. Furthermore, rival HTC is widely expected to release a “Google Edition” of its newest One this summer, also running stock Android. There are no pricing details for the rumored launch, but I wager that it will be full retail price. OEMs selling “Google Edition” variants at full price could very well be the future of stock Android devices, since there’s a significant disincentive for OEMs to embrace what Google wants to accomplish with Nexus phones.

Nexus phones undermine carriers. Google Inc (NASDAQ:GOOG) removes them from the sales process, frees consumers from service contracts, and relegates them to commoditized service providers. The whole point of the Nexus program is to disrupt the subsidy model that carriers have implemented. That same subsidy model also contributes greatly to the smartphone gross margins that OEMs enjoy (even if the rest of their operations put them in the red by the time they reach the bottom line).

OEMs also rely heavily on carriers for retail distribution, since most don’t sell directly to consumers. Carriers, OEMs, and Google Inc (NASDAQ:GOOG) all have very different interests. In the absence of a big spike in unit sales, OEMs will eventually pick carriers and subsidies over Google, comforted by the status quo. Since most people buy subsidized smartphones and unsubsidized tablets, Nexus phones can’t promise a boost in unit volumes like Nexus tablets can.

It’s worth noting that HTC, Samsung, and LG are exactly the three manufacturers that have participated in the Nexus phone program thus far. An alternative would be to tap smaller OEMs like ZTE or Huawei, but those companies lack brand recognition in the important U.S. market. Google Inc (NASDAQ:GOOG) could also theoretically tap ODMs or its Motorola subsidiary if it wanted to truly become a first-party vendor, but that directly undermines its more important relationships with the larger three OEMs that are primarily responsible for Android’s rise in the first place.

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