The Wall Street Journal blog has a good summary of Goldman’s analysis of the effect of the Nexus One on Google’s margins.
Now for the bottom line. Goldman guesses that the hardware cost of making the $530 phone is about $300, which it will pay to HTC. So from the remaining $230, take away $50 per unit for warranty, after-sales service and R&D expenses — which HTC will cover apparently. Then take away HTC’s $75 profit cut. That leaves $105, from which Goldman subtracts an estimated $50 for Google’s R&D and marketing expenses. That leaves Google with about $55 for each phone it sells, a margin of about 10%. That would add at most 2% to Google’s earnings before interest and tax, a basic gauge of operating profit.
I’ve seen estimates for Nexus One sales as high as 5-6mm in 2010, but I think it’s safe to trust a Goldman analyst to have done his homework on these estimates. Based on the hype surrounding the phone, I think a modest beat of 3.5mm is reasonable – if Google is able to sell closer to 5 million phones, however, that does result in an EBIT (Earnings Before Interest + Tax Expenses) increase of $275mm.
That said, I think relying on this analysis misses the forest for the trees. The Nexus One may sell well, it may not. 3.5 million phones in your first real attempt at hardware sales is impressive, but Google has their eyes on a different prize: getting non-smartphone users hooked on the flexibility that constant access to the internet can provide. The chart below is what Google is really paying attention to, and the Nexus One is just one way to get more people more connected to the internet.
(Picture above can be found at www.abovethecrowd.com)