Battle Of The Tablet Business Models: Samsung Galaxy Tab

by John Kirk   |   September 28th, 2012

RECAP

We’re looking at the tablet business models of Apple, Amazon, Google, Samsung and Microsoft. Today we focus on the Samsung Galaxy Tab.

4.0 Samsung Galaxy Tab

4.1 WHERE DOES THE SAMSUNG GALAXY TAB MAKE ITS MONEY?

When introducing the new Amazon tablets, Jeff Bezos said:

“We want to make money when people use our devices, not when they buy our devices.”

Samsung licenses its software for free from Google and, like Apple, they make their money when people buy their tablets. Unlike Amazon and Google, Samsung makes little or no money from the sale of content or apps. Unlike Microsoft, Samsung makes no money from the licensing of an operating system.

4.2 WHERE DOES THE SAMSUNG GALAXY TAB PROVIDE VALUE?

Samsung tablets provide value in (at least) three ways.

First, their hardware is generally very good. It may or may not be of the quality of Apple but it is certainly more than good enough.

Second, since Samsung gets their operating system software from Google for free, and since Samsung is an extremely efficient manufacturer, they can often offer their tablets for lower or comparable prices.

The above advantages are somewhat mitigated by the fact that Samsung has to pay Microsoft a licensing fee for the use of Android. Also, Apple’s supply chain prowess has allowed Apple to order supplies in such great quantities that they’ve been able to keep their prices quite low. Still, on the whole, Samsung tablets are almost always available at equal or lower prices than that of the competition.

Third, Samsung has excellent distribution. This should not be underestimated. The greatest device in the world is of no value to the consumer if it’s not sold in their country or if it’s priced out of their financial reach.

Samsung’s tablets provide value because they are well made, inexpensive (but not cheap) and available most everytwhere.

4.3 SAMSUNG GALAXY TAB BUSINESS MODEL ADVANTAGES AND DISADVANTAGES

Despite Samsung’s many strengths, their business model for tablets is a disaster and it must frustrate the life out of them. Samsung’s hardware, prices and distribution are excellent but it just doesn’t matter.

First, Samsung gets their Android operating system software from Google for free, and while Android has proven to be an excellent smartphone operating system it is not optimal for tablets. There is a fundamental difference between an app designed for a smaller (3.5 to 5 inch) screen and an app designed for a larger (9.5 to 11 inch) tablet screen. Google’s stubborn refusal to optimize their software in order take advantage of the tablet’s larger screen size has crippled the larger screened Android tablets. For more on this, please see my article entitled: “With Apps, Size Matters.”

Second, while Apple, Amazon and Google make money from the sale of content and apps, Samsung does not.

Third, since Google supplies the Android operating system to Samsung, Samsung has no control over the store and no control over the platform. Samsung can do nothing to make the store more attractive for their customers or make the platform more attractive for developers. Samsung is wholly reliant upon, and wholly at the mercy of, Google. This is even more unfortunate for Samsung because Google has proven to be an indifferent steward of the Android store and platform.

Fourth and finally, with the introduction of the Google Nexus 7, Google – the licensor of the Android operating system software – is now a direct competitor to Samsung. And since Google has decided to subsidize the price of their product, they’ve completly undercut Samsung’s tablet business model. Unlike Google, Samsung can’t make up lost sales revenues with the subsequent sales of content and apps. With Google selling the Nexus 7 for $200, Google has made it all but impossible for Samsung to sell their $400 to $500 tablets.

Summation

Samsung is a proud and powerful company but I don’t know how much longer they can continue to compete in the tablet market. They are being attacked from above by Apple, below by Amazon and Google and soon Microsoft will be entering the fray. And Samsung has no competitive advantages. They can compete against Apple on hardware and software but not on ecosystem. They can compete against Amazon and Google on hardware and software but not on price. And the things that Samsung needs to change in order to be competitive – content, apps, ecosystem – are entirely out of their control.

Samsung is simply in a no-win situation.

NEXT

We’ve now looked at the Apple, Amazon, Google and Samsung tablet business models. Next week, we look at Microsoft’s Surface tablet and wrap up the series.

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • Rich

    John, why would Samsung enter a no-win situation? Could they not have foreseen their competitive position ahead of time?

    • jfutral

      My first reaction to this question is that Samsung is more “no win” going forward. They have mostly been working from a quick copy first mover behind Apple, being more Apple-ish than any other player.

      But they haven’t come close to making the inroads in tablets that they have in smartphones, especially as they insist on counting sales as “sell-in” or whatever that term is.

      So I can only think they thought tablets would work out the same as smartphones.

      Surprise!

      At least with smartphones they had a distribution advantage over Apple (that whole carrier effect). Less so with tablets.

      I think they definitely saw the competitive landscape ahead of time. What they missed (and this is obvious from the California trial from the emails about looking at the wrong players in smartphones), I think they still don’t get the idea of why people might want particular products. All that happened with smartphones is they figured out who to copy, but not really why what Apple did was so compelling for customers.

      Joe

    • FalKirk

      Thank you for your question. You always make me think harder and dig deeper (which is a very good thing).

      Tablets weren’t a no-win proposition when Samsung entered the market. Look at phones. Everyone expected Android, in general, and Samsung, specifically, to repeat in tablets the success they had enjoyed in phones.

      There were a wide variety of things that prevented that from happening. Fist, as jfutral pointed out in his comment, there were no carriers to distort the market. Notice that Apple has 70+ percent market share in iPods, 70+ percent market share in tablets and only 30 some percent market share in phones. The carriers are a big reason for that discrepancy.

      Second, apps that work on a smartphone simply don’t work well on a tablet. Google did not and does not encourage developers to develop tablet specific apps. As the expected tablet boom failed to materialize, the number of developers who devoted their time to tablets simply shriveled up. After that, the Android tablet market entered into a vicious downward spiral where no apps meant no tablet sales and no tablet sales meant no developers developing apps. And so on and so forth.

      Third, Google reversed their business strategy when it created the Nexus 7. You could say that they undermined their Android manufacturing partners or you could say that they stabbed them in the back. However you want to characterize it, it is, in my opinion, the death knell for any Android tablet product not named “Google”.

      When the iPad was announced, critics called it just a big iPod touch. Well, a Tsunami is just a big wave too but it turns out that big makes a big difference. Tablets are whole different animals than phones. Apple gets this. I think that Microsoft does too. Google doesn’t get this and I think that Amazon is about to be taught this lesson.

      Samsung may well have learned this lesson or they may even have known it from the beginning. Their problem is that the things they need to change in order to be competitive in tablets – the Google Play store, the Google operating system, the Google ecosystem – are all out of their control.

      • http://www.facebook.com/THExREALxTACO Jeremy Taco Patterson

        Your “tsunami” analogy made me laugh out loud.

        So true! I absolutely do NOT understand why Google DIScourages Tablet-specific Apps. Again, I am led to believe that they are keenly aware of their customers’ tendency to want things FREE or as close to it as possible, and they’re just downright scared to REALLY develop the App environment for their tablets out of concern of wasting a TON of money and having no way to recoup those losses.

        Thanks for the series of articles, TechPinions!

      • jfutral

        “When the iPad was announced, critics called it just a big iPod touch. Well, a Tsunami is just a big wave too but it turns out that big makes a big difference.”

        Best line ever.

        Joe

      • jfutral

        “When the iPad was announced, critics called it just a big iPod touch. Well, a Tsunami is just a big wave too but it turns out that big makes a big difference.”

        Best line ever.

        Joe

    • Defendor

      I don’t think anyone would have foreseen Google “salting the earth” for its own licensees two years ago. Not even Google.

      Everyone from the PC sector wanted to rush the tablet space because Apple left room for margins. Where the PC landscape was already largely a commodity business.

      So why did Google suck all the margin out of the Android tablet business, effectively destroying it for it’s own partners? One word: Desperation.

      The Android tablet business was shifting toward becoming the Amazon tablet business. A business where Google didn’t profit and had less control. Google played the only real move that would tilt the Android tablet space back in their favor, they released their own zero margin tablet (partners be damned).

      Apple and lawsuits are a minor nuisance to Samsungs Android tablet business. But their “partner” Google OTOH pretty much gutted it completely.

      • FalKirk

        We’re on the same page.

        How much longer can Samsung or any Android tablet manufacturer afford to stay in this market?

        And when they do all drop out, doesn’t a Nexus 7 only tablet market completely undercut Google’s core advertising business model which is based on acquiring as many eyeballs as possible?

        • Defendor

          Google was damned if they did, damned if they didn’t. They may be forced to carry the Android tablet torch themselves and become a major device manufacturer.

          I am betting most OEMs are going to be concentrating on higher margin Win8 tablets as their next big hope. But there they have big license fees and MS also competing with them (but I bet with more room for margins).

          It sucks to be tablet OEM right now.

          • FalKirk

            “It sucks to be tablet OEM right now.” – Defendor

            Ain’t that the truth.

  • pawhite524

    John,

    First, let me say i have learned a lot from reading this series on business models for tablet manufacturers/purveyors, i.e., Amazon and Google are not the actual manufacturers.

    This is not the prelude to a “but” as to the focus of this article. When it comes to understanding Samsung’s business model overall a giant step backwards may be needed to rationalize their entry into this no-win situation in the tablet market. My observations suggest Samsung is compelled to have a product in every electronics arena- washers/dryers, fridges, TVs, dvd players, phones, computers, vacuum cleaners, and on and on.

    This gives the perception Samsung can build everything (is the answer to all our consumeristic “prayers”) and from what I’ve read in product reviews, do it pretty well. Again, with perception being the very heart of marketing, Samsung’s absence in a product arena would be sticking a pin in the balloon of public perception. If Samsung didn’t enter the tablet arena I believe it would look like a big, big failure for Samsung for many reasons but especially because they were making the screens and other components for the iPad so had inside knowledge (and a recently proven corporate ethos to copy, copy, copy!) as to how to do it, and, the illusion, initially, of “It’s just a big iPod, how hard could it be?

    In conclusion, I opine Samsung did not understand the importance of the “unique product business model” you have clarified so well and Samsung applied their typically successful “one size fits all” business to the tablet marketplace to their eventual and current dismay. As you noted. they are not successful in this product arena.

    • http://twitter.com/qka qka

      Interesting. Your thesis goes along with Samsung being the “Official IT Sponsor of the Olympics”, or whatever the official title is of what Samsung is spending so much money on.