Why are Android smartphones so expensive? by Seth Weintraub @FortuneMagazine August 19, 2010, 5:15 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons …or here comes the $300 Verizon iPhone? Google’s Android is a free OS given to manufacturers and certified on different carriers. Google GOOG derives revenue from advertising, rather than on selling the OS itself. Hardware manufacturers like HTC, Motorola MOT and Samsung can focus on what they do best: building great commodity hardware to complement Google’s OS. Apple AAPL , on the other hand, has to build and maintain its iOS without much help (yet) from advertising revenues. It also has to build its own phone hardware, which many believe is the pinnacle of high-end industrial design, antenna-gate notwithstanding. At the same time, Apple has to please its shareholders with its fat 40% margins (plus or minus) quarter after quarter. So the question is: Why does a high end Android phone cost roughly the same as an iPhone? Shouldn’t Android devices sell for hundreds less? On the surface, there isn’t an easy answer. Verizon VZ touts its Droids from Motorola and HTC at $199/each (left). Apple’s iPhone 4 with 16GB of RAM (right) costs the same. Image: Walmart.com Image: Verizon.com Samsung’s high-end Galaxy S Android device also sells for $200 with plan at T-Mobile and AT&T T . The Sprint S version will sell for $250 with plan. AT&T exclusivity takes a bigger cut of the pie? One would have to think that AT&T is subsidizing a higher percentage of the iPhone 4 than it would if there was no exclusive agreement in place. If not, what does AT&T pay for its privilege of being the only carrier in the US to sell the iPhone? In France, an unlocked iPhone 4 16GB is €620 or about $800. France is different than the US because French law doesn’t allow phones to be locked to carriers (Vive!). So, you can buy your iPhone at Orange and put a SFR SIM card in it without missing a beat. In the U.S., you can buy an iPhone 4 without a plan, but that phone is locked to AT&T. If that phone is to be used (without Jailbreak/unlocking) AT&T will get revenues from it. AT&T sells their 16GB iPhone 4s without plan for $599, but it is hedging that it gets more revenue out of the unlocked phone from customers who perhaps don’t qualify for post-paid plans or maybe lost their original iPhones soon after buying them. So, if an iPhone is worth $600 tied to AT&T and $800 on the open market, the price of AT&T’s exclusivity is the difference…or somewhere in between. Apple typically charges significantly more in Europe for its products than it does in the US because of taxes and other considerations. What is interesting about the exclusivity issue, and one that hasn’t been talked about in iPhone terms, is that when AT&T loses its iPhone exclusivity, one of two significant things has to happen: Apple has to make significantly less profit on each iPhone or AT&T will have to charge more to consumers. Could this jack up the price of the iPhone on both AT&T and Verizon? Will a non-exclusive price cost U.S. consumers $250? $300? For that same 16GB iPhone? Or will Apple absorb the blow, knowing it will make that revenue up by selling additional iPhones on Verizon? On the other side you have carriers making extraordinary amounts of money off of people who come into stores rather than shop at online retailers. Sticking with AT&T, but moving to the Android side of the fence, you have a couple of high end Android devices sold with two-year contracts at AT&T online and in their stores below: But those same phones with the same contracts can be found at Amazon or other online retailers for $100-$150 less: Amazon prices It isn’t just AT&T who sets Android phone prices artificially high. Those same three Verizon Droids, pictured above, today are $99, $99 and $179 for the Droid X at Amazon. T-Mobile excited the Internet yesterday by dropping the price of its current Flagship T-Mobile Vibrant from $199 to $99 for one day only. That same phone is free at Amazon. You’d kind of be nuts to walk into a carrier store to buy an Android phone wouldn’t you? The answer? It is all artificial. While the iPhone price is kept artificially low with the AT&T exclusivity arrangement in the US, carriers are charging people who shop on their websites or people who come into their stores much much more than they should for Android devices. At some point soon, I expect low end Android phones to become even cheaper. How can they be cheaper than free? I think providers are going to start offering them for free with only a one year plan. At the rate of Android innovation, two years is too long to wait between phones anyway.