How is the Moto G So Cheap? Hint: Motorola Doesn't Make Very Much Money

Wireless companies subsidizing smartphones has generally been how business is conducted ever since the first iPhone was released "locked" on AT&T's wireless network. It makes sense: without a subsidized price, smartphones are prohibitively expensive for most consumers, and wireless companies get to sell an incentive to get or keep customers on two-year contracts.

But recently, Google and Google-owned Motorola have begun offering smartphones with nice hardware and no wireless contract required (i.e., unlocked) - at very low prices. Already offering the flagship-competitive Nexus 5 for almost half the price of a comparable, unlocked, top-tier Samsung smartphone, Google and its subsidiary Motorola introduced the Moto G last week - for an unlocked price that rivals even contract-subsidized smartphone prices. In fact, the mid-tier Moto G sells at such a low price, under $200, as to confound industry watchers. How is Motorola making a profit?

The short answer, according to a Wall Street Journal teardown and analysis of the new smartphone: Motorola barely does. The 16GB variant of the Moto G costs $123 in components alone, according to TechInsights. That phone sells for $199. According to Sanford C. Bernstein and Co. analyst Mark Newman, Motorola is making an operating profit margin of less than 5 percent on each Moto G.

That is insanely low, compared to other device manufacturers. Samsung, according to Newman's estimates, made about 28 percent profit margins on the Samsung Galaxy S4, and 20 percent on the Galaxy S3 Mini, a phone that costs more than the Moto G and comes with considerably less impressive hardware. Apple makes even higher profit margins on its high-end iPhone 5s and "cheap" iPhone 5c: 30 percent and 35 percent, according to Newman's estimates.

A Motorola spokesperson told the WSJ that they "make money on every device sold," but didn't disclose how much. Motorola, as a company, has been operating at a loss since Google acquired the company in August 2012.

Analysts believe Google's decision to have Motorola manufacture and sell an unlocked smartphone at such a low price is likely intended to put price pressure on the top mobile device makers, Apple and Samsung. And while Google works with Samsung, which is the top device-maker running Google's Android operating system, Motorola's Chief Executive Dennis Woodside has reportedly said that other manufacturers' prices are too steep: "The way I see it," said Woodside to the WSJ, "there is massive demand and the market isn't satisfying that demand."

While smartphone manufacturers have focused on creating and selling the most effective iPhone rivals, that strategy is beginning to erode for some, as the high-end smartphone market is increasingly seen as oversaturated. HTC, in Q3 of 2013, posted its first operating losses ever, which, in part, was due to the company being unable to sell its flagship HTC One in quantities that it previously expected. In response, HTC's executives told shareholders that the company would begin focusing on mid to low-end smartphones, a strategy previously suggested by Latinos Post.

Even when the U.S. market for low-to-mid-tier smartphones is satisfied, there are plenty of other emerging markets where low, unlocked phones are going to sell in ever-increasing numbers in the coming years. Latin America, for one, is emerging as a hotly contested market for low cost phones, and a place where upstarts like Firefox OS are trying to get an early foothold. But currently in the U.S., the best, untapped market for mobile devices wants cheap, unlocked smartphones, a reality that both manufacturers and wireless companies are quickly coming to grips with.