At $350, Google's Nexus 5 heralds a future without phone contracts: Peter Nowak

It’s Black Friday, a day that is supposed to be all about deals. In that vein, I’ve saved the best for last in this week-long gadget series: the Nexus 5 smartphone.

Google’s new flagship mobile device has much in common with the company’s Chromebook laptops, which I covered off in yesterday’s post. Both are unique weapons in the search company’s attack plan to get more people using more of its services. Both are priced well below competitors’ products, mainly because Google isn’t really interested in making big profit margins on hardware. It’s all about the ad dollars garnered when using search, Gmail, Maps and all the other software-ish stuff it does.

The Nexus 5 differs from Chromebooks in one key way. While the laptops are relatively low-powered compared to competitors, Google’s smartphone has similar specs to other rival high-end devices and is in some cases better (it has a higher screen resolution than the iPhone 5S, for example). But, just like the laptops, it’s way cheaper, coming in at a base price of $349 in Canada.

That’s a very important distinction from other phones because it’s about more than just saving buyers a few dollars. At the risk of sounding hyperbolic, it actually has the potential to reshape society.

I’ve written before about how high-priced smartphones are bad for everyone, and it sure looks like Google shares the sentiment. Phones are otherwise a unique category of gadget that defies the fundamentals of Moore’s Law, whose expanded meaning states that the performance of electronics is exponentially improving while the cost and therefore the price is decreasing along a similar trajectory.

Yet, smartphones have skyrocketed in price since their introduction, with some now costing more than $800. Amazingly, that’s more than a lot of TVs. Heck, you might even be able to get a beat-up old car for that price.

The reason for the anomaly is clear: Manufacturers sell the devices to wireless carriers, who then resell them to consumers, mainly through “subsidized” multi-year contracts. These middle-man contracts keep the prices of the devices high, which is good for the manufacturers and the carriers because it means guaranteed profit margins for both.

If phones were sold directly to consumers, the same way that just about every other category of gadget is, they’d be exposed to the same sort of price competition and therefore Moore’s Law. If wireless contracts didn’t exist, it’s very likely we’d be seeing high-end smartphones for $100 all-in by now. And if the devices were cheap and consumers weren’t tied into contracts, carriers would have to compete harder for their business, which means monthly bills would be lower. In the end, the only thing that’s being subsidized are high profits.

Ultimately, wireless service – and phones – could be much, much cheaper than they are now, and if they were, we’d all be using the mobile Internet more. I can’t imagine any alternate reality where that’s a bad thing. Some might argue that high margins all around fund further innovation, but that’s an ideologically-based argument that ignores the history of science and technology, where successive new discoveries have depended on and benefited from Moore’s Law (the Internet itself wouldn’t exist without cheap and ubiquitous landline phone service).

A future in which the mobile Internet is plentiful and cheap to access is one that Google has been trying to usher in since its inaugural Nexus One launch back in 2010. By selling inexpensive devices directly to consumers, the company has been trying to show that there is an alternative.

There have been stumbles along the way, to be sure. For one, Google initially knew nothing about making hardware, or especially about selling it to people. But three years later, the company has learned a lot.

I’ve been using the Nexus 5 and yup, it’s a pretty good phone. Indeed, it’s largely indistinguishable from many of the high-end Android smartphones out there, which includes having a camera that’s not as good as the iPhone’s. I’d agree with many of the detailed reviews out there – it certainly does hang with the big boys and it’s almost a phone that everyone might want.

On the retail side of things, Google has come a long way too. The company has figured out how to streamline purchases through its Google Play app and content store. It used to be a real dog’s breakfast, but is now much improved. In-roads with retailers have also been made through products like its Chromebooks and the Chromecast media streaming dongle. The next step is figuring out how to sell phones on a mass scale without involving the carriers.

At $350 with no contract on Google’s website – although carriers will sell it to you for $500 – the Nexus 5 is very close to being below the psychological threshold where the majority of consumers might be willing to forego a “subsidized” contract. If Google can get below $300 – $250 would be magical – for a phone that can hang in the high-end, the company may well achieve its goal of sparking a mobile paradigm shift. And we’ll all be better for it.