Believe It or Not, Your Next Smartphone Is Basically Free

Costing $100 or more to buy, and then hundreds more to operate, your smartphone is something you might think is a pretty pricey gadget. But you'd be wrong. It's actually ... basically ... free.

At least depending on whom you buy it from.


iPhone5S. Source: Apple


Sure, at subsidized, sign-over-your-soul-to-AT&T-for-two-years contract rates, a new Apple iPhone 5s will set you back $200 before the first monthly bill even comes due. Similar upfront charges apply for Samsung's GalaxyS4, the HTC One, and the BlackBerry Q10. These are the prices you know about. But here's what you may not know: Most of the companies that manufacture these phones are losing money on their products.

Red ink by the gallon
According to a recent research note out of investment banker Canaccord Genuity, there are really only two companies out there that have figured out how to make a profit from smartphones, tablets, and similar devices. Says the analyst: "Apple and Samsung combined to capture a remarkable 109% of Q3/13 handset industry profits."

But those two are the exceptions. As Canaccord reveals, BlackBerry, Nokia , LG, HTC, and even Motorola, owned by Google -- they're all losing money at their phone businesses.

Our own number-crunching confirms these findings. According to data from S&P Capital IQ, Apple leads the pack of phonemakers with a 28.7% operating margin on its product portfolio. Samsung earns 16.5%, despite getting its Android operating system for free from Google. And it's all downhill from there:

  • LG Electronics earns a slight 2% operating profit margin, but is losing money on the bottom line.
  • HTC operates at a 0.8% loss.
  • Nokia, whose handset business is soon to be owned by Microsoft , "boasts" operating profit margins of negative-7% on its mobile phones and smart devices.
  • Google's Motorola Mobile division has an operating profit margin of negative 9.5%.
  • and BlackBerry is losing more than 15% on an operating basis.

Everywhere you look, these companies are bleeding money.

What does it mean to you?
Not to put too fine a point on it, what all this means is that no matter what you think you're paying for a smartphone, it's an incredible bargain. Two-thirds of the smartphone makers out there -- more, because we've really only looked at the biggies -- are working for you at a loss.

This means that even if you had what they have -- the ability to buy parts at scale; factories in Singapore, Taiwan, and China; hundreds of Ph.D. engineers at your beck and call; and patents, trademarks, copyrights, and industrial designs galore -- you still couldn't build yourself a smartphone any cheaper than they've already done for you. In effect, they're working for you, for free, to bring you the benefits of the latest communications wunder-gadgets.

This holiday season, as you're reviewing your shopping list and grumbling over the prices you'll be paying, it's worth keeping in mind: Some of the biggest corporations on the planet have already given you their Christmas presents: cheap, handheld communications technology -- provided gratis.

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The article Believe It or Not, Your Next Smartphone Is Basically Free originally appeared on Fool.com.

Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple and Google and owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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