The Nexus 5’s cheap pricing: A key element of Google’s Android strategy

High-end smartphones cost £550. Right? That's what they cost. All smart people know that.

Except for the freshly revealed £299 Google Nexus 5, that is. Just as it did with the Nexus 4, Google built a quiet subsidy into this Nexus phone that makes it hard to recommend almost any other unlocked Android phone.

Of course, most folks get their smartphones subsidised by carriers anyway – but that doesn’t take away from what Google has managed to pack into a £300 handset here.

Impossible specs for the price

The Google Nexus 5 matches a lot of the specs and features of the cream of this year's Android crop. It has a 5in, 1080p screen like the Samsung Galaxy S4, a Qualcomm Snapdragon 800 processor like the LG G2, and a pretty sleek form factor. Provided it works well (and it probably will), it's a match for any high-end £550 unlocked smartphone.

That's because it is a £550 unlocked device, of course; it just isn’t priced at that point. There's no manufacturing magic going on here. The Nexus 5 is a loss leader, so Google can seed stock Android phones out to developers, satisfy the Android faithful and maybe even get enough stock Android devices out into the world to put pressure on Google's OEM partners to accept the latest versions and features.

There's always a delicate dance with the Nexus, though. Nexus phones are rarely marketed heavily, because Google wants to leave room for other high-end Android phones in the marketplace.

And so far, Google's partners haven't been able to sell phones for Google's prices, because they need to make money on the hardware. Google can sell a limited number of Nexus phones at cost or even at a loss, making the money up from its huge reservoir of ad revenue. Samsung, LG, and HTC, which rely on phone hardware sales for their profits, can't do this.

Samsung's feeling so Blu

Those other high-end Android manufacturers are under pressure from two directions. Google is subsidising its unlocked phones, but over in the States, I've also been hearing a lot from Blu and Verykool, two companies that are working hard to repackage low cost Chinese Android phones for the US market.

They're starting to filter decent-quality, unlocked Android phones into the US for between $100 (£60) and $300 (£190), once again slashing those Galaxy prices in half or less. If they can maintain quality – and that's a big, big if – then they'll start to play a much larger role with the pre-paid carriers over in the US.

This is all part of why Samsung has been so aggressive at developing its own SDKs, its own pen interface, and its own video, music, and app stores. Samsung knows that if you only do hardware, you're in danger from any company that has more ways of making money.

Enter Amazon and Microsoft?

There are two other companies that could join Google in this strategy, upending the phone pricing apple cart.

Apple, by the way, is not one of them. Apple has invested in its products being just at the affordable end of luxury goods – it wants the iPhone to be the device that people aspire to, and then to lock in users with iOS-only apps.

But Microsoft and Amazon could both go in Google's direction soon. Amazon already sells Kindle Fire tablets at cost, so any upcoming Kindle phone will probably be cheaper than the competition.

Microsoft, meanwhile, makes a ton of money on Office and server software, but still wants to raise its mobile profile. While the Surface is priced so it doesn’t rock any boats with Microsoft's Windows OEM partners, Microsoft/Nokia will probably soon be the only higher-end manufacturer of Windows Phones. A subsidised Windows Phone – even a low-end one – could get that OS into more hands. It will certainly be interesting to see how this all plays out.

For now, the Nexus 5 is £299. It has amazing specs. Need an unlocked phone? We'll have a full review soon, but the signs look very promising at this stage.