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"Those products earn 50 per cent margins. We don't necessarily have those constraints. Those [margins] will not persist." So said Dennis Woodside, boss of Google's phone-making subsidiary Motorola Mobility this week. He is referring to the iPhone. He hopes to hack at those margins with the Moto X, a phone that will read users' minds (or some such). The Moto X, he intimated, will be much cheaper than the iPhone.
Customers may or may not like the Moto X. But Mr. Woodside's comments touch on key issues. The first is the sustainability of Apple's profitability. Last quarter, Apple's gross margin was 37 per cent. It was 47 per cent just a year before. Much of that is not about iPhone; the iPad mini has had a big effect. The peak margin quarter at Apple was also the quarter where the greatest portion of the company's sales came from iPhones. But the mix of newer and older iPhone models sold may be hitting margins, too (iPhone average sales prices seem to have fallen about 5 per cent over the year).
It is remarkable that despite a furious debate over Apple's prospects, the market has displayed Moto X-like prescience about Apple's margin problems. Even two years ago, when Apple was growing sales at a dizzying 80 per cent clip and margins were widening, the market gave the company's shares a very ordinary valuation - valuing it, in short, as if its margins (and growth) would come under pressure soon. And so they did.
The other issue is whether Google is using Motorola as a competitive tool in its fight against Apple - not in devices directly, but in Internet services. Google has always argued that it bought Motorola for its patents and, because of the many phonemakers that use the Android operating system, keeps the device business at arm's length. That may be true in a narrow sense. But how exactly is Motorola "not constrained" by the need for wide margins? It is Google that is not constrained. And why then is Motorola led by a former Google executive? The answer is because Motorola simply has to serve Google's primary interest - which lies in dominating all the internet service businesses where Apple is currently dug in, from operating systems to music.
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