Why Samsung’s DeX could be a Mobile Game Changer

Back in 1989, after being fed up with lugging around 10-pound portable computers on flights around the world, I began to fantasize about a day when a personal computer could be truly portable. However, I did not imagine a lighter, slimmer clamshell. Instead, my idea was to create what I called a portable brick or oblong device that would house a CPU and have various I/Os to support a connection to a screen, keyboard, printer etc.

In my wildest travel dreams, I had this “brick” being plugged into the back of an airplane seat in front of me where it also housed a screen and the table tray flipped over and gave me a keyboard. At a hotel, I would connect the brick to a TV and a hotel would have a cheap keyboard in the room for me to use these external devices with my brick. As I pondered this idea, I even imagined a day when this brick could be placed into a laptop shell or, at the very least, be tethered to it and serve as its CPU. The screen and keyboard would just be part of the design.

Of course, back in those days, the technology was not even close to being able to deliver and this fantasy, especially the one for the airplane, faded from sight. In my own work with PC makers, I pushed for lighter and thinner laptops to meet my goals of carrying a smaller and lighter computer with me when I traveled. However, I have always kept the idea of some type of small device that housed a CPU and provided an OS and UI that could be used with a connected screen and keyboard in my mind as I’ve felt this had potential as an alternative way to deliver on the promise of a truly portable computing experience.

Over the last few years, companies like Motorola, Asus, and others have actually brought out prototypes that used a smartphone as the core CPU, OS, and UI that was tethered to a laptop shell. Most recently, a patent emerged from Apple that actually shows an iPhone being placed in a MacBook-looking shell and served as the system’ss CPU as well as its trackpad.

But a new product introduced by Samsung this week is one of the best solutions I have seen to date. It lets the Samsung S8 and S8+ serve as your personal PC CPU and, using its OS, UI, and your data, a person can be connected to a big screen and keyboard to deliver a personal computing experience.

Called the DeX, it is a round device/dock that has multiple I/Os and includes a HDMI port to link it to a TV or monitor, a USB port for printers and various other USB supported devices, and Bluetooth to connect it to Bluetooth keyboards.

In this scenario, you just pop your S8 or S8+ into the DeX cradle and you have a PC experience in front of you ready to go. In this case, the OS is Android and the UI is based on their modified Android UI so it is very intuitive and acts just like the smartphone — but now on a big screen and with a keyboard like a desktop computer. This version of the DEX only works with these new Samsung phones and it does not appear Samsung can make it work with previous versions of their smartphones.

One of the things that has made this idea possible is the fact mobile processors have become extremely powerful in the last few years. They allow us to use our smartphones and tablets as a serious alternative to a PC in many instances. Of course, a PC or even a laptop processor can still deliver a better computing experience since it has more real estate to work with. But smartphone and tablet processors now deliver great performance that allow us to do most tasks we do on a computer, except ones that require “heavy lifting” to handle things like enhanced graphics, images, and more involved productivity.

But the one thing a laptop and desktop PC have a smartphone does not is more real estate to deliver a bigger screen and full keyboard experience.

DeX was created to address this issue. This is especially important if it is to be used for “real” productivity. This is where DeX could fit in, especially for mobile users who already do most of their mobile productivity on a smartphone.

Since I have been studying this idea for many years, I actually like the idea behind DeX and believe it has some interesting potential. In fact, I think it might strike a nerve with many mobile workers whose smartphone is at the center of their business and personal lives today.

I know this concept is a bit radical and, for many, a smartphone may not have enough power to deliver a real desktop-like experience that meets their needs. But, when it comes to extending the role of a smartphone in the lives of mobile business users, DeX gives them an important new way to use their phones for productivity. For many, it could be a game changer in how they can add a desktop-like experience through their smartphones.

What Samsung Needs to Show Us with the Galaxy S8

On Wednesday of this week, Samsung will unveil the Galaxy S8, its latest flagship smartphone, at an event in New York. Along with a couple of other members of the Tech.pinions team, I’ll be at the event and I’ve been asked quite often by reporters over the last few days what Samsung needs to do this week to ensure the S8 does well. As such, I thought I’d share with Insiders a little of what I’ve been saying in response to that question.

The Shadow of the Note7

The shadow of the Note7 fires and resulting recall looms large over this event, as Samsung’s first big launch since that unraveled. As such, I thought it was unfortunate that Samsung put out news this week about recycling and potentially refurbishing and selling the recalled Note7 devices. That seems guaranteed to start the week off with more worries about a failed device rather than a focus on this week’s announcements.

But the Note7 hangs over the event in other ways too. I’m almost certain Samsung will (and should) devote at least a few minutes of stage time talking through its new quality, and especially battery, testing processes as a way to reassure potential buyers. While it’s unfortunate the Note7 has to be brought up at all, the reality is the S8 will be the first important phone Samsung announces since the Note7 debuted. As such, Samsung needs to show what’s changed and can’t assume potential buyers will have read its report or watched its event earlier this year. Above all, Samsung needs to convince would-be buyers the Note7 incidents were a one-off and the S8 will be totally safe, as its previous phones have been.

Solid Upgrade Material

Once all that is past, however, Samsung needs to show off a really solid device which makes a strong case for upgrades from older devices, especially the S6 and earlier models people might still be hanging onto. What we’ve seen in the US in particular (but in other mature markets recently) is a slowing and lengthening of the upgrade cycle. Samsung needs to convince buyers to upgrade to the S8 and not wait out the cycle in hopes of a better S9 next year. The latest iPhones are strong competitors and there are growing rumors about big design changes and other new features coming this fall, so this phone has to stack up well against those rumors too.

The good news is Samsung has demonstrated it’s able to produce really compelling devices. Even the Note7 was extremely well reviewed initially, with a number of reviewers calling it either the best Android phone ever or the best phone available. Obviously, it turned out to have a major flaw but the things that made it compelling could easily make their way into the Galaxy S8 as well. Samsung knows how to make a good looking, quality piece of hardware at this point and it looks like we’re going to get some interesting design changes to go along with what I assume will be decent under the hood improvements.

Reasons to Buy

Above all then, Samsung needs to give existing Galaxy S buyers and potential newcomers to the platform reasons to buy this device rather than either hanging onto the device they have for a bit longer or looking elsewhere. We’ve already seen the pre-announcement of the Bixby assistant which, as I wrote in our News piece last week, was an interesting choice. But that takes some of the wind out of the sails of this week’s announcement. I had expected the new virtual assistant to be a headliner, but it also avoids any disappointment with regard to the lack of integration of Viv features and sets expectations appropriately. But, for most of us, this week will be the first time we actually get to see Bixby in action. So this is Samsung’s chance to show why the approach it chose is better than their competitors’ and why buyers should use it rather than the Google Assistant that will likely also come preinstalled. Samsung will need to avoid its tendency toward heavy-handed user interface elements and tacky or gimmicky features in favor of a focus on true utility and ease of use.

Beyond Bixby, we need to see compelling upgrades in other areas. Design is clearly going to be one of those, with much smaller bezels a recurring theme in this year’s smartphone launches and likely to show up here again. The big tradeoff is the home button probably moving off the front of the phone and either onto the back or embedded into the screen. That could be a total non-issue if it’s done well, or it could be a source of significant inconvenience for users – a home button on the back of a device can’t be pressed (or a fingerprint recognized) if the device is lying face-up on a table, for example, and users may not always hold a phone with a finger resting in the middle of the back, where a rear home button is likely to be. So the excitement of a new design mustn’t be offset with disappointment or frustration over usability – this has to be a win/win, not a win/lose.

It looks like we’ll likely get some camera improvements, though nothing as dramatic as Apple’s recent shift to including two cameras on the larger iPhone and the accompanying portrait mode. Other phones have, of course, managed similar features with just one camera, such as the Google Pixel, but those have been less user-friendly and often also less effective in achieving the desired effect. On the other hand, Samsung’s cameras have recently become as good as Apple’s in other ways, after many years of lagging behind, and have emphasized areas such as low-light performance where iPhones haven’t always performed as well. The front-facing camera is an interesting area of focus – we’ve tended to hear much more about selfies from Asian phone makers than American ones in recent years but for at least certain segments, those front-facing cameras are important in the US too.

Beyond that, it’s down to overall performance improvements and other new software features as well as integration with other products. It’s likely we’ll see Samsung provide more details about its new Gear VR hardware, which it offered a glimpse of at MWC last month. We might get more accessories too, including a new Gear 360 camera. But would-be buyers need to know the new phone will be quicker and more powerful when handling both everyday tasks and more intensive ones like VR gaming as well.

The Stakes are High

The stakes are always high with a new flagship from any company, let alone the world’s largest smartphone maker. But they’re particularly high this year, for three reasons. First, the Note7 recall and the ongoing brand fallout from that event. Second, this launch coming in the wake of a strong iPhone launch and in anticipation of what could be an even stronger one later this year. But thirdly, the smartphone market globally continues to lag as mature markets approach saturation and upgrade rates slow down. In that context, a new smartphone needs to really stand out to sell more than its predecessors and the default will be lower sales rather than parity or growth over the prior year.

Samsung must, therefore, focus on a clear value proposition for upgraders and switchers while providing as few reasons as possible for people to avoid this device. Apple took a risk in removing the headphone jack in the iPhone 7 line, but doesn’t seem to have suffered. But if a move of the home button to the back of the device or higher pricing (as has been rumored recently) act as disincentives to buy, those could cancel out all the incremental feature upgrades we’ll likely see.

The Financial Impact of the Note 7 Recall

Samsung reported its earnings for the third quarter last week and the impact of the Note7 recall was understandably a major focus. Since I track Samsung’s financials on an ongoing basis and, since I haven’t seen a lot of coverage of what Samsung reported last week on this topic, I thought I’d share some of the details with Tech.pinions Insiders and put the impact in the context of Samsung’s broader business.

Samsung’s reporting structure

Samsung Electronics has three main business divisions:

  • CE (Consumer Electronics) – TVs, printers, AC units, fridges, and other consumer and medical devices
  • IM (IT & Mobile) – phones and tablets, but also PCs, digital cameras, and mobile network infrastructure
  • DS (Device Solutions) – components for consumer devices, including DRAM, NAND flash, modems, displays using LCD and OLED technologies, and more.

From a financial perspective, Samsung reports these three but also breaks out some of the constituent parts:

  • CE – Samsung reports divisional results but also breaks out TV sales specifically
  • IM – reports at a divisional level but also Mobile revenues specifically (though not margins)
  • DS – split into two parts: semiconductor (of which memory is again broken out separately) and display panels.

Impact on the IM division

The IM division is where smartphone sales are reported and it’s here the impact of the Note7 recall was greatest. The chart below shows revenues and profits (in trillions of Korean Won) for this division):


Note the dark gray bar for Q3 2016 isn’t missing – it’s just so tiny you can’t see it. In other words, the Note7 recall basically wiped out profits for the quarter for the division. Technically, they were 0.1 trillion Won, or about $87 million, compared with over $2 billion profits a year earlier — nearly $4 billion in profit in Q2. You can also see a revenue dip there, from 26.6 trillion Won both a year earlier and in Q2 to 22.5 trillion Won ($19 billion). That drop is about $3.5 billion, approximately the size of the gap in revenues left by the recall. When Samsung decided to fully recall all Note7 devices, it revised its earnings guidance downwards by around 2 trillion Won, so roughly that much of the impact was from reversing the revenue recognition for those devices which had actually been sold and not recalled at that point. The rest is from sales which had been expected but never happened because of the recall. Interestingly, the impact on profits was even higher – those dropped by almost $4 billion in the financials, as we’ve already seen. The reason is revenues were only impacted by foregone sales, whereas profits were impacted by the cost of the devices sold and the additional costs associated with the recall itself. Samsung doesn’t report expenses by business line, but its Selling, General and Administrative expenses overall rose by around 600 billion Won, or $525 million, year on year, and the company largely attributed this to the cost of the recall.

Overall impact

However, the overall impact of the recall on Samsung Electronics was much more muted, in part because other parts of the business performed well in Q3 and in part because Samsung sold some assets in the quarter in anticipation of the early phases of the recall. A summary of Samsung’s overall financial performance is shown below:

Samsung overall performance

As you can see, while there certainly was a dip in operating margin in the quarter, it was much less dramatic than in the IM division, where margins dropped effectively to zero. A large part of that is because the IM division accounts for less than half of the company’s overall revenues and only around a third of its operating profits. The semiconductor segment of the components division actually accounts for the largest chunk of operating profits and happens to have done particularly well this quarter, which helped offset some of the drop in the IM division. But Samsung also sold some of its stake in components vendor ASML in the quarter, which basically offset the increase in SG&A driven by the cost of the recall when it came to net margins. As a result, Samsung’s net margin was only slightly lower year on year and quarter on quarter.

Guidance for the future

Samsung has provided some rough guidance for the future impact of the Note7 recall as well. In essence, Samsung is expecting the impact to run through the current quarter (Q4 2016) and the next quarter (Q1 2017). In the current quarter, the impact is expected to be around 2 trillion Won, while in Q1 it’s expected to be around 1 trillion Won. Of the 2 trillion in Q4, around 1.5 trillion of the impact will hit the IM division, while the other 500 billion will hit the semiconductor division, which would make some of the components used in the Note7. In the grand scheme of things, this roughly $2.6 billion hit isn’t enormous, though it’s not nothing. But, of course, Samsung will also seek to replace many of these would-be Note7 sales with Galaxy S7 or S7 Edge sales instead, which will help mitigate the impact on overall sales, though the costs already incurred for manufacturing devices which will not now be sold along with the ongoing costs of the recall will still be felt.

It’s worth looking at Samsung’s overall guidance for the fourth quarter as it relates to smartphone sales, too. It sold around 89 million total handsets (including feature phones) in Q3 and expects to sell a similar number in Q4. Of that total, around 75 million were apparently smartphones and the company expects to sell a similar number of those in Q4 as well. As with Q3, that would be down significantly on last year, when the company sold 80-85 million smartphones in the fourth quarter. Interestingly, this also puts the likely total within touching distance for Apple, whose guidance suggests it will sell somewhere in the high 70 million range. We could therefore see Apple outsell Samsung in a quarter for only the second time ever (the first was Q4 2014, when the iPhone 6 began selling in volume).

A Post-Note Samsung

It looks like the hammer has finally dropped and Samsung has instructed its partners to stop selling all Note7 phones and instructing users to stop using both the original devices and the supposedly safe replacements. I’ve spent a fair bit of time over the last few weeks talking to reporters about all of this and again this week as the latest installment in the saga has unfolded, so I thought I’d share with Insiders some of my thoughts about what happens next.

A quick note: this article was written on Monday, before Samsung announced that it was permanently ending production of the Note7.

The difference between a one-off and a pattern

Though in some ways the issue that appears to be plaguing the replacement Note7 devices is the same as the original one, the situation has now changed dramatically. In the beginning, Samsung could claim this was a one-off, put it down to one of its partners, and entirely resolve it with speedy intervention and a plan to replace all the potentially faulty devices with replacements. But now, several things about this scenario have changed:

  • Samsung’s claim to have found the source of the problem seems to be wrong
  • Samsung’s proposed solution (swapping battery suppliers) doesn’t seem to have worked
  • The simple safety features on both the packaging and the device which were intended to flag safe devices are now useless (and downright misleading)

As a result of all of this, owners and potential buyers of these devices will now find themselves questioning whether Samsung really knows what caused the fires in the first place and, therefore, whether any future proposed solution can actually solve the problem definitively. In other words, we’ve gone from a one-off – an outlier – to a pattern and that’s about the worst thing that could have happened from a Samsung brand perspective.

I’ve written previously about the dangerous power of negative narratives in tech. What’s happening here is we’re seeing a narrative developing around Samsung’s devices, especially once you add in recent reports about exploding Samsung washing machines as well.

Where we go from here

The question now becomes where Samsung goes from here. The taint of the faulty devices isn’t going to vanish immediately and the second round of problems means, not only is this going to be in the news for even longer, but the perceptions will linger beyond that. At the very least, Samsung needs to kill off the Note7 at this point but, even worse, it may have to kill the Note line entirely (at least by that name) in order to shake off the negative associations. The best case scenario is Samsung is able to continue the line under another name come next Fall. The worst case is it has to abandon this whole line of devices entirely.

However, the impact won’t be limited to just the Note line. The narrative discussed above could spill over into how people view future devices, which could be even worse. Given Samsung’s usual launch dates for new devices, it is going to have to do a lot of work between now and the Spring to ensure the next Galaxy S phones aren’t hampered by lingering concerns about quality and safety. If it fails to do that, we could see some long-lasting effects that could put Samsung back into the sort of tailspin they found themselves in a few years ago. As I’ve said previously, that would be a great shame, because Samsung had appeared to be finally recovering from all that.

Competitive benefit

The other big thing I’ve been asked about is to what extent competitors will benefit. Samsung issued a number suggesting a large portion of original buyers had replaced their faulty Note7 phones with replacement ones, once those phones became available. But between the early window when those replacements weren’t yet available and the fact almost all the devices sold in the US and other markets will now have to be replaced with other phones, those numbers are now meaningless. The big question is what phone people buy instead. There are four possibilities:

  • Buyers simply get refunds and wait until later to upgrade, perhaps holding out for a similar future device from Samsung
  • Buyers choose another Samsung device – on a net basis, the best outcome Samsung can hope for and probably quite likely for a lot of buyers who have an affinity for Samsung devices
  • Buyers choose another Android device – if they’re keen on Android but now wary of Samsung
  • Buyers switch sides and choose an iPhone (or go back to one if this was to be their first Samsung phone)

Only the last two options are really bad for Samsung in the long term and they’re probably the least likely. I would guess many buyers will either hold off on upgrading (assuming they still have their old phone) or switch to another Samsung. But, given the timing of all this relative to the launch of the Note7, the coming availability of the LG V20, and the launch of the Pixel from Google, there may be a decent number of buyers who switch to one of those, too. In many cases, Samsung may struggle to ever win those customers back – this has been something of a nightmare scenario for the small number of people who have bought one of these devices and potentially been through not one but two device replacements.

Overall, it’s very clear this has gone very badly for Samsung and it’s only a question of how long and how far the ripple effects will be felt. At the very least, Samsung is going to have a bad end to 2016 and it’s quite possible that its 2017 could be significantly impacted as well.

Samsung’s Enterprise Mobility Strategy comes into Focus

I spent the best part of Monday in New York with Samsung, learning the latest on its enterprise mobility story. It’s a story that’s come a long way over the last five years or so, but it’s also a great illustration of how Samsung has continued to set its Android smartphone strategy apart from the competing Android vendors. It’s worth looking at how this approach has evolved over time, both as an interesting facet of Samsung’s strategy in its own right and in terms of what it says about Samsung’s Android strategy overall.

Knox in 2013

Samsung began its foray into the enterprise with its Samsung Approved For Enterprise (SAFE) program in 2012, with the Samsung Galaxy S 3. But it wasn’t until its Samsung Knox capability was announced in February 2013 things really began to take shape. The impetus behind Samsung Knox was a sense at Samsung that, though it had done very well in the consumer market, if it was to continue growing its smartphone shipments, it needed to break into enterprise. At the time, iOS devices had become the de facto standard in the world of bring-your-own-device (BYOD) deployments, while Android was still viewed with suspicion by most corporate IT departments. Google itself wasn’t taking this problem very seriously at the time – in fact, in 2012, it disbanded 3LM, a Motorola subsidiary formed by former Googlers and designed to make Android more fit for enterprise deployment. This was the strongest possible signal Google could have sent it wasn’t going to solve this problem on its OEMs’ behalf.

And so, Samsung decided it needed to take matters into its own hands, leading to the creation of Knox and its first capabilities in 2012, which were focused on dual-persona containers and certain other functionality, coincident with the launch of the Galaxy S4 in early 2013. This was basic functionality and certainly didn’t overcome all the concerns IT departments had with deploying Android devices, but it was a starting point for what’s come since.

Knox in 2016

Knox has been through quite a few iterations – six subsequent releases by my count – and is now a much more fully-fledged security solution than it was. Version 2.7 launched with the Note7 in the last month or so and brought a handful of new features with it. But the more significant evolution over the last three and a half years has been the transformation of Knox from a series of point solutions into a security platform. Knox is now baked into almost all mid-to-high-end Samsung smartphones at the hardware and OS layer and the basic functions are available to all Samsung smartphone users as a result. Those basic functions include hardening intended to prevent hacking or rooting of the OS and a variety of other features.

Enterprises, however, can add additional functionality across four key domains as part of paid offerings from Samsung:

  • Knox Workspace – which is the evolution of the first Knox product, a dual-persona container, now “defense grade” and certified by a variety of government agencies in the US and around the world
  • Knox Premium – a cloud-based end-to-end solution which enhances the basic functions
  • Knox Enabled App – an app-level containerization solution, which cordons off individual enterprise apps from the rest of the data on the device, while maintaining the look, feel, and functionality of the app
  • Knox Customization – a service which allows businesses to deploy a variety of Samsung devices, often tablets, in a variety of settings in which their functions can be locked down and restricted. For example, in kiosks, as point of sale devices, or as terminals for workers in various settings.

Another key element of Knox in recent versions has been an attempt to overcome some of the security risks associated with the slow roll out of new Android versions. Samsung has worked with Google and others to roll out security-specific updates separate from the major Android releases on a regular basis in order to patch vulnerabilities. In the most recent version, Knox also allows enterprises in some markets (though not yet the US) to determine exactly which version of the software should be deployed on its device fleet.

A broader transformation

Over the past year in particular, Samsung’s enterprise strategy in the US has undergone something of a transformation under new leadership, shifting from principally selling devices based on hardware features to selling solutions which incorporate devices, software, and services from Samsung. These solutions are intended to give businesses more of an end-to-end approach than Samsung has offered in the past. Google, which as I said earlier had largely ceded this space to others in 2012, has since stepped up and provided Android for Work as a base layer of security for Android devices in the enterprise, but Samsung has continued to innovate above and beyond what Android offers out of the box. Meanwhile, Samsung’s various Android competitors have tried their own approaches to enterprise solutions but these have either faded over time or remained far less functional than Samsung’s offerings.

Samsung as the Android default

All of this has left Samsung as the default option for Android in the enterprise. It’s the only Android vendor that appears to take deep security and other enterprise needs seriously and the only vendor which has dedicated significant resources to selling and supporting solutions in the enterprise. This mirrors its successful work over recent years to become the default Android vendor among consumers in key markets like the US, especially at the high end. This is Samsung’s strength – leveraging its scale and investment to dominate within the markets it seeks to play in – and it’s arguably paid off in a big way in the enterprise. The interesting thing about all of this – at least to date – is it’s mostly about positioning against other Android vendors rather than against Apple and iOS in the enterprise, though the latter are definitely potential future targets. Samsung’s efforts have been mostly about neutralizing the concerns and disadvantages associated with Android in the enterprise rather than necessarily about besting Apple. That may begin to change going forward, should Samsung decide to broaden its offerings further. Apple is obviously not standing still either, striking partnerships with IBM, Cisco, SAP, and others around the enterprise. But it’s increasingly clear that – from a smartphone perspective at least – these two companies will carve up the lion’s share of the enterprise market in the coming years.

The next challenge

The next big step for Samsung is to begin to make one of the hardest transitions of all for a tech company – to go from selling technology solutions to selling business solutions. That’s a subtle shift but it means really understanding and then transforming internal business processes and not simply offering technology products to meet specific technology needs. I’ve seen a variety of other tech companies – notably telecom operators – attempt this leap over time and it’s a tough one to make. It always requires partners who can bring both capabilities and credibility beyond those the tech companies themselves bring to the table. It also requires a major shift in mindset for sales teams trained to sell products based on features rather than their business transformation potential. The big question is whether Samsung can build the partnerships needed to achieve this combined credibility and whether it can drive the internal cultural change necessarily to sell and deliver these solutions. One of the hardest things of all is Samsung sells entirely through indirect channels rather than directly to enterprises, which will add another layer of complexity here. The other big challenge is, to the extent Samsung wants to work with multinational companies, its highly regionalized structure may prove a handicap – serving global customers requires a global structure for sales and support and that’s not the way Samsung is currently organized.

An ongoing evolution

Samsung’s strategy and positioning is by no means set here. Knox itself has been through quite a bit of transformation over recent years and its public identity is still a little muddled. Samsung has largely marketed the point solutions until now, which means different enterprises have different perceptions of what Knox really is and what it stands for. Samsung wants to begin to communicate a clearer identity for Knox in particular and its enterprise activities overall, but business marketing is notoriously difficult. There’s only so much ads in airport terminals can achieve. But Samsung does seem to be making some progress here and, in the process, is solidifying its lead as the Android vendor for the enterprise.

The Samsung Debacle and the Long Term Impact on its Reputation

I would sure hate to be the person at Samsung who made the decision to go with the battery supplier they are using in the 2.5 million Galaxy Note 7s they have shipped around the world. Samsung has now canned this supplier and will use the same battery supplier Apple uses.

As you know, there have been over 35 reports of Galaxy Note 7s catching on fire and, in one case, causing serious damage to a vehicle. It has gotten so bad the FAA is now requiring flight attendants, when announcing the safety rules on planes, to tell passengers that if they have a Galaxy Note 7 with them to not turn them on or charge them when on the plane. Samsung has recalled all Galaxy Note 7s and, while they plan to replace them, it will take up to two or three months to get new ones back to their customers. Their stock is tanking because of this. It gives Samsung’s mobile division a black eye that could have a long-term impact on the future of their smartphone business.

This could not have happened at a worse time for Samsung. It came before Apple’s own iPhone 7 launch and it will only help Apple if those on the fence who were leaning towards a Galaxy Note 7 can’t even buy one in the very near future. While the Galaxy Note 7 has had great reviews, the fact they catch fire makes the current versions on the market totally unusable.

At the device level, Samsung will overcome these difficulties although it will take some time. The new battery supplier, one who already has a solid track record as the battery supplier for Apple’s iPhones, should give future owners of the Galaxy Note 7 some assurances that, once they get their new model, it will be much safer than the previous one. But this is clearly a setback for Samsung’s mobile division and could have a long-term impact on people’s perception of Samsung’s quality control and proper component sourcing capabilities.

But this is not the first time Samsung has had a huge misstep and ended up with serious PR problems and internal management headaches.

In the early 1990s, Samsung desperately wanted to become a world player in PCs. While they created their own PCs, they only had success in South Korea. When they tried to get channel support in the US and Europe, critical markets for PC growth at the time, they were shut out.

So they took aim at a Southern California company called AST. Although AST was not a huge brand like IBM, Compaq, HP or Dell at the time, they were still a top 5 PC vendor in those days and, more importantly, had strong channel acceptance in the US and Europe.

I was working with Samsung at the time as a consultant and was one of seven people in the US that were put on a special council to review the proposed AST acquisition. When all of the facts were presented, I was one of two on the council who took a very strong stand against this deal.

I had already been working in the PC business for 10 years by then and had seen at least one wave of consolidation of PC vendors take place in the 1988-89 time frame. Although AST had survived that wave of consolidation, they ended up weaker and their channel position was not as secure as Samsung and many other people had thought it was. I concluded that, if Samsung was serious about this deal, it would take serious marketing dollars as well as huge investments in channel development. I also questioned their ability to bridge the culture gap — at that time, they had no experience in US retail.

But on the day we were to present the recommendations of the council, we got word Samsung had closed the deal for AST. Internally, it was being championed by a senior member of Samsung’s management and he got it pushed through without ever seeing any outside research on the possibility of the deal succeeding. But four months into the deal, Samsung concluded the deal was a bad one and fired the senior executive who supported the deal and, within 15 months, AST was out of the market. Even worse, it branded Samsung as a failure in broad world wide PCs, something they have never recovered from.

I am not saying this issue will be the end of Samsung’s smartphone business. Indeed, their momentum will carry them forward and, if they correct this mistake quickly, they can keep this business on course. But something that happened with the AST issue could possibly haunt them in the future with these battery issues. Once Samsung failed in their PCs bid, the trust factor for Samsung in that segment of the business kicked in and has become a negative part of their history.

Given the magnitude of this battery issue, I suspect, at the very least, Samsung has not only a major PR issue to deal with but a trust factor that could color customer’s view of Samsung’s smartphone well into the future. A worse outcome for them is, if consumers conclude Samsung’s smartphones are even at the slightest risk of failure, it will shape people’s view of them and, in many cases, shift these folks to look for alternatives to purchase. As you can see, this is more than a PR problem for them. At its root, it suggests Samsung’s management decisions when it comes to component sourcing is questionable and this weak link in the chain impacts their overall quality control and final products.

This debacle will have a major impact on Samsung both internally and with future customers. It will be very difficult for them to come out of this unscathed even if they fix this problem.

Samsung Converging its High-end Portfolio

Today, Samsung unveiled the Galaxy Note7, its latest extra-large-format, stylus-toting smartphone. The device features several new hardware and software features as well as a new design. However, the headline has to be that Samsung appears to be converging its two high-end product lines – the Galaxy S series and the Note series – in a way that sets things up in an interesting way for this fall, when we might well see Apple expand its iPhone product line too.

Sevens all around

Symbolically, the choice to skip the Note 6 and move straight to the Note 7 seems fitting, given Samsung appears to want to align its high-end devices more closely. The Note and Galaxy S lines have hitherto been pretty separate, sharing the occasional feature here and there, but largely positioned quite differently and with different specs and designs. This year, that changes, with the three phones being based on many of the same internals and sharing certain design cues as well. Thus, the differences narrow to stylus support, size, and specific features which are included in the new device, while many of the other details are the same.

One interesting question that arises from all this is whether this means we’ll eventually see the Note series launched earlier in the year, alongside the new Galaxy S devices. That seems unlikely, given it provides a useful boost for Samsung’s sales in the second half of the year and allows Samsung to respond to last-minute iPhone rumors. But if these devices are increasingly seen as members of the same line, it would make sense to launch them simultaneously.

A premium lineup in a declining market

This is undoubtedly a premium lineup – in the US, each of these devices is sold at over $650 unsubsidized and the Note7 will start in the high $800s. That’s interesting in a market in which the high-end is peaking due to longer upgrade cycles and slower growth in new smartphone customers. Both Apple and Samsung have suffered from this saturation and slowing of the market, but Samsung is clearly doubling down on this end of its portfolio. Samsung, of course, also has a massive mid-market portfolio too, but its market share at the high end is far higher. It makes sense to continue to invest there, especially given the higher margins available in the premium segment. Samsung had a great Q2, largely off the back of a much healthier upgrade cycle for the S7 phones and needs to continue to do well in this segment to feed its recent recovery.

Positioning against Apple

As I mentioned, the launch date of the Note series has often allowed Samsung to position this device more directly against new iPhones, which typically launch in late September. This year, that meant a not-so-subtle dig at the reported lack of a 3.5mm headphone jack in those iPhones with a reminder the Note7 definitely still has one, as well as a more subtle reference to a 64GB starting storage capacity. But there was also an indirect reference to Apple’s Pencil and the fact it’s sold separately and requires regular charging, while the Note7 comes with the non-chargeable stylus in the box. In reality, of course, this is a matter of bundling and positioning – the stylus is a key differentiator for the Note series and always has been, while it’s positioned as an optional extra for the iPad Pro. I almost never use mine, for example, while others may so, while Apple’s approach gives users the choice, it lays the company open to charges of nickel-and-diming customers, while Samsung bundles it in with a more expensive smartphone.

Samsung also announced an iris scanner on the Note7, which can be used not just for unlocking the phone but also for other security features including a secure folder of data on the device as well as signing in to online services and apps. Having played catch-up with Apple on fingerprint scanners, Samsung is now looking to move ahead with other biometric security options and the iris scanner is a useful next step. We’re going to see more and more of this one-up-manship between Samsung, Apple, and others as competition over a dwindling premium market intensifies and the big picture hardware features come closer to parity across devices.

An interesting setup for the fall

All this is particularly interesting precisely because we’re only a little over a month away from Apple’s presumed unveiling of its new lineup of iPhones, which is rumored to include a possible third option in the form of a “Pro” addition. Given it’s only been two years since Apple bifurcated its portfolio and just a few months since the junior member of the family – the iPhone SE – was added, this is a rapid diversification on Apple’s part if it turns out to be true. But this is also classic mature market strategy, in which a larger set of products is deployed to meet consumers’ needs more precisely in a saturated market. This increased specialization will likely continue and it will be interesting to compare Samsung and Apple’s approach of several models with Motorola and LG’s more modular approach. I suspect the former will do better, while the modular approach quickly fizzles. We’ll see.

Samsung Gear VR – Training Wheels for Virtual Reality

One of the most iconic pictures of nerdom was taken at the last Mobile World Congress when thousands of people in the audience were captured wearing the Samsung Gear VR headsets. Although this scene has been lampooned and ridiculed as a geek-only experience, the fact is the Samsung Gear VR headset has become the training wheels of VR and giving people who use it a taste of what VR is all about and its potential.

I know that Google’s Cardboard blazed the trail in low-end VR experiences and, if you want to get technical about it, Cardboard got the consumer VR ball rolling. However, Samsung’s integration of a 75 Hertz optics, powered by the Oculus Store and the automatic upload of specific content has delivered a powerful approach to giving anyone who uses it a pretty good taste of what VR is about. If they have an analytical bone in their body, they can imagine how VR is a game changer for entertainment, business and education.

For that, I applaud Samsung’s forward thinking on this and for the foresight to kick start consumers interest in VR. But I also see it as laying the groundwork for what will be the best delivery method for VR. If you want a great VR experience today, you need to buy the Oculus or HTC Vive headset powered by a PC with a powerful graphics card. And it is a tethered experience.

But that approach is cumbersome at many levels. First, having to tie it to a PC to handle the processing and rendering to me is kind of a boat anchor. Add the fact it being tethered limits mobility, especially in games where the virtual experience begs for a lot of movement.

I believe that, for VR to really take off, especially beyond its use in gaming and vertical markets, the headsets have to be untethered and all of the processing power and intelligence needs to be in the VR goggles themselves. To an extent, that is what Samsung does with the Gear VR since it is drawing all of its power from the Galaxy smartphone. But at moment, smartphones are too underpowered to deliver the same kind of experiences one gets with higher end models like the Oculus Rift and HTC’s Vive.

The good news is, in talking with all of the major folks in the VR component and device business, they all understand that, for VR to really gain broad adoption, it has to be through an untethered headset. More importantly, at least one key semiconductor player has already optimized one of their low power processors for use in a VR headset where all of the power and intelligence is in the goggles themselves. And other major semiconductor companies are also working on similar processors.

The way I see the VR market developing is it will get its first boost through the gaming sector. VR is a game changer for this $90 billion dollar industry and, while the VR technology is OK today, it will only get better and greater gaming apps will emerge and bring even more people into the world of gamers. It will also gain serious traction in vertical markets.

In past columns, I have written about VR’s impact on travel, cruise lines and real estate. In the case of the cruise lines, the idea is to put prospective customers in the cabin they might want to book or to virtually explore the ship they are interested in cruising on. VR goggles could also be used to deliver VR-based armchair travel experiences. As for real estate, they want to be able to let a person interested in a house actually walk through it via a VR experience regardless of where they are in the world and use it to shorten the buying cycle.

The ad world sees it as a whole new storytelling medium. Last summer, the folks from Patron Tequila came to my office to show me a VR ad. It started by allowing me to walk the fields in Mexico where they cut the agave plants. It then transported me to their distilling facility to see how Tequila is made. Finally, they highlighted all three of their tequilas, discussing their flavor profiles, all in about 2 minutes. But the experience of viewing this in VR made the ad so memorable, I can still envision the whole thing today as if I had just seen it.

We know sports teams and broadcasters are looking at ways to use VR to make it possible to feel as if you are in the front row at a game. Also, the entertainment industry is starting to embrace VR for future storytelling content.

For the moment, both the gaming and vertical industries will tolerate a tethered VR experience. However, I am convinced these industries would prefer an untethered solution if it was available. I suspect over the next 2-3 years, gaming and vertical markets will be the prime users of VR solutions but I have to admit the Samsung Gear could be a sleeper that drives demand with a large group of consumers sooner rather than later.

Samsung’s Gear VR headset is selling well and reports by those consumers using it like what it offers. The Oculus store gets new VR apps each week and is broadening its reach through apps like Netflix and Hulu. In fact, I watch all of my Netflix shows on the Gear VR now.

The other unknown when it comes to VR adoption in the consumer market could be Apple. They have been conspicuously silent about VR but we all suspect they are working on their own VR headset and expect it to be untethered, tied to an iPhone and connected to Apple’s ecosystem of apps and services.

Should Apple enter the VR market with an iPhone-based solution, they could accelerate the adoption of VR in the consumers space. I doubt it would come to market this year but it would not surprise me if they offered their own solution in 2017.

The market for VR will be interesting to watch since it really is a game changer in terms of the way we can play games, visit places as if in person and interact with a VR world for play, work and education. It is too early to tell how big the VR market can be, but the signs point to VR being a disruptive technology that eventually could touch many markets around the world.

I believe that, for it to take off, the headsets must be untethered so the users could have more mobility and freedom to interact with these VR apps and services in unrestricted ways. In that form, and with lower prices, VR adoption could move faster than any of us can dream.

Fairly Confident Predictions for 2016

A couple of other Tech.pinions contributors have already outlined some predictions for 2016 but, in my first Insiders post of the year, I thought I’d chime in too. The predictions below are mostly ones I’m fairly confident about, but I’ll sprinkle in a couple that are a little more “out there” and identify those clearly.

Amazon: Both AWS and E-Commerce Driving Growth

The big success story for Amazon over the last several years has been AWS, even as its e-commerce business seemed to lose some steam and margins evaporated. But, in late 2015, it became clear Amazon still had a lot of headroom left for its e-commerce business, as that business regained momentum and the combination of AWS and better-performing sales in e-commerce helped boost margins. I still believe Amazon faces some major obstacles in replicating its US model (which relies heavily on infrastructure density) in some overseas markets like India and China, but it’s likely to have success in 2016 in expanding in the UK and other markets where its infrastructure is already strong and the geography and population density are more favorable.

Apple: Continued Growth, Including iPhone

The biggest single question about Apple in 2016 has to be whether it will grow revenues significantly, which in turn is heavily dependent on its ability to grow its iPhone business. I wrote a piece a while back in which I did something of a deep dive into the various factors driving (or holding back) Apple’s growth in 2016, so I’ll refer you to that for the details. But I believe the iPhone will grow for Apple in 2016, albeit at a significantly slower rate than in late 2014 and 2015. However, I don’t think the iPad will return to growth just yet, even with the launch of the iPad Pro. I also think we’ll see significant investment from Apple around iMessage in its 2016 software releases, including peer-to-peer payments and other advances. My long-shot prediction for Apple is it will launch its own smart home hardware in 2016. Its HomeKit strategy just doesn’t seem to be delivering results, and I think the only way to fix that is for Apple to get into the business itself.

Facebook: Another Acquisition, Possibly an Asian Messaging App

Facebook has made several high-profile (and high-value) acquisitions in recent years, including Oculus, Instagram and WhatsApp. I suspect it’s not done yet and one big gap in its strategy continues to be messaging in Asia. As I and others have written about here, Asia continues to be a fragmented market when it comes to messaging and Facebook’s presence in Asia in general continues to be weaker than elsewhere. Acquiring one of the major Asian messaging apps might be one way to help address this weakness, with LINE and Daum Kakao being the obvious candidates.

Google: Alphabet Split Reveals Dichotomy in Businesses

One of the biggest things that will happen in Google’s world this coming year is the first reporting under the new structure created by the new Alphabet entity. What we know is this reporting will come when the company reports its results for Q4. What we don’t know is what those financials will look like and financial analysts have widely divergent views on the performance of the “other bets” business in particular. My prediction is the core Google business will emerge from this new reporting structure looking better than ever but, conversely, the other businesses will look pretty awful from a financial perspective. That increased transparency will, in turn, lead to more pressure and scrutiny for those “other bets”, and my out-there prediction is one of these businesses will be shut down, spun off, or otherwise scaled back as a result in 2016.

Microsoft: Surface Phones Launch, With as Little Success as Lumia

With the launch of Windows 10 and new devices optimized to work with it in 2015, Microsoft has got some of its biggest news out of the way already. But there are signs and reports Microsoft still intends to launch a revamped line of Windows Phones, possibly under the Surface brand, and it’s possible this will happen in late 2016. However, I predict these phones will ultimately suffer from the same fundamental challenges as Windows Phone in general and Nokia/Microsoft’s Lumia line in particular. As such, Windows Phone will continue to struggle, though it will likely limp on in some form indefinitely, especially if it gains any sort of meaningful traction in the enterprise, which is clearly a major focus now.

Samsung: Smartphone Business Fades, Chips Ascendant

Samsung spent 2015 stabilizing its smartphone business, at least in terms of revenue and shipments, but at the expense of margins. 2016 will likely see more of the same, even under new leadership, with an inevitable tradeoff between driving shipment growth and falling selling prices further pressuring margins. It’s going to become clearer than ever in 2016 that Samsung’s heyday as a consumer electronics powerhouse is behind it and that its future lies at least as much in providing components to other manufacturers as in making its own consumer-facing goods. Its chip business should continue to flourish, driving more and more of its revenue and profits and helping to offset the poorer performance in smartphones and elsewhere.

Twitter: Still no Core User Growth, Slowing Revenue Growth

As a heavy Twitter user, I’m invested in its future and its success, but it’s becoming increasingly difficult to believe Twitter will get user growth going again. Jack Dorsey’s leadership seems to have breathed some new energy into the company and he’s outlined a plan for returning user numbers to growth, but I suspect we’ll see very little of it in the core, monetizable, user base (i.e. excluding “SMS Fast Followers” and “Logged-out Users”). As user growth continues to stall, it will be harder and harder for the company to grow revenues as it has to date and revenue growth will slow.

Consumer VR may go Mainstream Sooner than Expected

For Christmas, I bought myself Samsung’s new Gear VR Goggles to get a better handle on the basic consumer VR experience and to find out if it is any closer to being technology consumers will embrace anytime soon. To use these goggles, you need one of Samsung’s Galaxy models and to download the special Oculus software that lets it deliver 360-degree photos and videos that allow you to play games and see movies in 3D. I had tested the Oculus Rift Goggles a number of times in the last 18 months so I already knew how great an immersive VR experience could be, but the Oculus Rift setup cost about $3000 and needs a pretty powerful PC to drive it.

But at $99.00, Samsung’s Gear VR Goggles were more in my price range and would give me a more consumer-focused view of VR’s potential impact on our computing experience. To my surprise, this product and the Oculus software and apps delivered a relatively good consumer VR experience. The 360-degree photos were spectacular and the few short videos they had were very cool. It also was quite a hit with the granddaughters as they both loved watching a 360-degree tour of Disneyland and watching divers under water checking out the wildlife. In fact, the girls kept fighting to get to use it and they clearly loved the experience. One note about this experience though – Don’t watch one of the roller coaster videos if you have equilibrium issues. This particular video is not for the faint of heart.

While these Goggles do deliver what one would could call a VR experience, the optics are very poor, and the actual content available for it is minimal at best. But, at $99.00, it made my Android phone come alive and deliver a fun, albeit limited, VR experience for the holiday. Of course, Samsung and Oculus will bring in more content and with many new 360 degree cameras coming to market, users will soon be able to create their own 360-degree images and videos for use on this system. Yet, this product and VR for consumers is still clearly a work in progress and will probably take another few years before it gains real acceptance with a broad market.

As a researcher and analyst, my use of this product has given me a glimpse into VR’s consumer potential and makes me a real believer that VR has a bright future that will have a dramatic impact on our overall computing experience in the not too distant future. The actual trend behind VR, AR and other highly visual products like Microsoft’s Hololens, is something called “Immersive Computing”. It seems to be the buzzword for 2016, at least, when it comes to the big PC vendors who all are going down this path to give their PCs and laptops new UI functionality. However, I am starting to think that, while adding things like Intel’s Real Sense Camera, 360-degree images and video and better sound and gestures to PCs, the real consumer VR experience will come through some type of 3D VR goggles and a smartphone.

At the higher end, and probably used more for gaming and vertical applications, there will be the more expensive and more powerful VR Goggles like Oculus Rift and HoloLens. These systems require a lot of processing power and are not cheap. But they will deliver the best of breed VR and, for users, they will bring a new dimension to their personal computing experience. In normal market conditions, these higher-end systems would start the market development of this category. While the audience of users might be small, they would define the market for personal VR for the first few years before the second tier of users adopt them as prices come down, and optional devices become available.
However, if the smartphone delivers the actual VR experience and low-cost goggles like the one from Samsung can get better optics, and more 360-degree content and apps, an actual consumer market for VR could develop in tandem. With the current version, you can buy some popular 3D movies and, if app developers get behind creating more applications like the one’s Oculus Rift has for Samsung, consumers could start enjoying the virtue of VR much sooner than I had thought.

I actually find it interesting that Google and Samsung have led the way with this and, most likely, will develop the early stages of the consumer market for VR. However, it has me wondering if, in the end, Apple is the one who gets the most mileage from this concept.

As you know, Apple does not invent categories. But once they see a category gain serious consumer interest, they jump in with a superior device and a rich ecosystem to support it. They did not invent the MP3 player but made it better and a giant worldwide hit. They did not invent the smartphone, yet their iPhone, while not the world leader regarding units sold, brings in over 73% of the revenue for all smartphones. They also did not invent the tablet, yet their tablet rewrote the rules for personal tablets, and the iPad is still a solid, well-selling product for Apple that taps into over 800,000 apps and a multitude of services. Just imagine if Johnny Ive designed Apple’s VR iGoggles or whatever they call it and sells it for twice as much as Samsung’s current Gear VR Goggles. Quality would be at the heart of their design and, in the end, it would probably outsell Samsung’s version three to four times more with a host of new apps and services tied to their program.

Of course, Apple getting into mobile VR is pure speculation on my part but, if the consumer market for mobile VR does take off, Apple’s version of this product would not be far behind. Regardless of whether Apple does jump into mobile VR, my experience with Samsung’s version suggests VR going mainstream may come sooner rather than later especially if we can get better goggles that are relatively inexpensive and more related apps and services to support the products. If you have a Samsung smartphone, I suggest you get the Samsung VR Goggles to check out how it works. The experience will be enlightening and fun.

RIP $500 and Above Android Phones

Today, Samsung launched the Galaxy Note 5 and the Galaxy 6 + Edge. Neither device will change their declining fortunes in the smartphone landscape. What Samsung is up against is something many struggle to internalize. Most understand Samsung’s issues as being eaten alive from the middle price tier of Android. There is truth to this and I’ll address that. However, it is their losses in the high-end of the market most did not see coming and it is going to get worse as subsidies disappear in the US. I’d like to start by addressing this dynamic, then the change in premium Android pricing.

Change in US Subsidy Structure: The US market is largely a replacement market. The initial belief was the change in subsidy structure would hurt Apple because, once consumers could see the full price of the iPhone, they would choose a less expensive device. The fault in this thinking is a consumer was not going to go from an iPhone to a sub $200 Android handset. Furthermore, the structural shift to installment plans is the icing on the cake for Apple and the nail in the coffin for Samsung.

Carriers knew early on moving to installment plans would not hurt the premium tier. They also had a hunch it would help Apple, but it was just a hunch. US consumers like payment plans and they like putting things on credit. The massive amount of US consumer credit card debt is all you need to look at to understand this point. Nearly all research in this area shows US consumers have no problem paying a monthly fee to get something they otherwise could not afford to get it right now. I recognize the unhealthiness of this, but it is reality.

Let’s look at this through the lens of pricing. Take the cost of an iPhone or Samsung phone and divide it up over 12 or 24 months. You get an average of $25-$30 depending on the SKU. Now, let’s use some logic that says a competitor wants to undercut Apple on price to drive sales. Say Motorola wants to launch an amazingly competitively spec device to Apple and charge $350 for it. Their assumption is a device nearly half the cost of the iPhone will be attractive. And, yes, looking at a price of $350 vs. $649 or even $749 looks attractive. However, most consumers are not going to drop $350 right there to pay full price. Therefore, they will still likely utilize a payment plan to get this $350 Motorola phone. Take $350 and divide it up over $24 and you get $14. The consumer is now looking at $14 vs. $25 per month. Not quite the same differential as $300. What is happening is many consumers opt to get the device they want to begin with when looking at the monthly plan dynamics over the full price of the device.

Samsung seems to be using some of this logic, without realizing the real math, by offering the Note Edge 6 + for more than the Note 5 and the iPhone. The problem is a few dollars isn’t going to make any difference and one can argue they hurt themselves by not being on par with the Note 5 or 6 Plus price-wise. While Samsung has certainly benefitted from payment plans, this may all be about to change. Android OEMs who want into this country understand this dynamic. What is still being settled, in their mind, is what the true price differential needs to be to entice a consumer to buy the phone outright and not opt for a payment plan. Let’s say an Android OEM offers roughly the same specs as a premium Samsung phone but for a price of $250. Would that do it? Maybe $199? Somewhere in that range could make a difference and, believe it or not, there are a few handset companies out there who can make money in those prices ranges. As the costs of components come down as well, we could see premium Android devices get under $199. This would make life miserable for Samsung and I believe things are heading in this direction for Android in the US over the next few years.

All the while, the change in the subsidy structure and the move to installment plans could be the driver that puts Apple over 50% market share in the US. I have even had folks at carriers tell me 60% is not out of the question for Apple. Lastly, a data point. From my sell-through tracking model, Apple captured 85% of the sales of smartphones costing more than $600 in Q2 2015. (Yes somebody on the earnings call suggested 90%, but my data suggests 85%. Either way it is high.)

Overall, premium Android is shifting. Look at devices like the OnePlus or Xiaomi’s phones or Micromax in India. All over the world, extremely competitive phones, specification-wise, are popping up in the $300 range and defining the new Android premium price and spec range. Even in this country, a brand like Alcatel sees growth signs from this strategy with the Idol 3 — an incredible phone for $250. I actually use this device as my primary Android tester phone.

These devices are changing the shape of Android premium phones and, remarkably, there is still a roadmap to keep specs high and drive the price even lower. R.I.P. $500 and above Android phones.

The State of Samsung

As you know, Samsung has many different business units. However, the semiconductor and mobile group are the largest contributors to the company’s operating profit. Samsung’s tale has been quite the roller coaster and, while I feel things may be stabilizing for them, I don’t see their mobile division (the one that makes Samsung-branded smartphones) getting the company back to its peak revenue days, which happened some time ago. Here is what they pre-announced with regard to earnings.

Screen Shot 2015-04-06 at 5.32.14 PM

Interestingly, the report highlights that operating profits were up even though sales were not. There are a few dynamics playing into this.

First, the Korean Won has depreciated one percent vs. the US dollar during 1Q15, which was estimated by financial analysts to have a positive impact on component profits. I saw analyst forecasts upping their component estimates as high as 5% based on this point. Component revenues contribute a great deal to Samsung’s operating profits, sometimes more than 50%, and this clearly helped this quarter, perhaps more than many realize.

In my view, the component side of Samsung’s business is the most important and has been for a long while. I’m fond of saying Samsung is a component company and that the brand has historically been used to move those components in volume. But as Samsung is finding out, it is beginning to require more than their brand to move key components in volume. This is ultimately why I feel Samsung is getting aggressive on the semiconductor side of things. Their flash memory and semiconductors business has long been a key contributor thanks to their partnership with Apple. However, it seems they are looking to broaden their semiconductor efforts.

Some time ago, Samsung acquired an ARM architecture license which gave them the ability to fully customize, in ways Qualcomm, AMD, Apple, Nvidia, Broadcom and others have, ARM cores. The benefit to being an ARM architecture licensee is differentiation. The companies above, with the exception of Apple, sell their cores to customers and add their own proprietary value to separate their offering from the traditionally lower priced generic ARM core ones. Making this move can only mean one of two things. One, Samsung intends to focus more heavily on the premium parts of the smartphone market or two, they intend to compete with Qualcomm, Mediatek, and even Intel, in selling their cores more broadly to other OEMs. Of course, a mix of both could be true, but development costs surrounding being an architecture licensee and customizing an ARM core to create a proprietary ARM architecture are not cheap. Therefore, one has to monetize this investment. I’m not sure Samsung can do this by just focusing on premium, let alone their own premium offerings.

Regardless, this side of the business may have more upside than their branded mobile division and it will be interesting to see how they navigate through it.

On to Samsung branded smartphones. Most analyst estimates have Samsung smartphone shipments in the 80-82m range. Interestingly however, the release stated earnings were a beat on estimates but sales were not. The sales figures of smartphones are not disclosed, so those of us who estimate will have to do the hard work.

Samsung is tough to estimate because they promote shipments not sell-through. While these numbers generally correlate at some point in time, we know Samsung likes to stuff the channel to make their shipment numbers look good. Sometimes in excess of 5m units or more could be pushed to channel and not sold through. So I generally take any estimates with a grain of salt until we get a clearer sell through picture. Personally from my own channel discussions, I’m not sure Samsung got to the 80m range but rather mid 70s perhaps — flat for the quarter. This will still put them back as the number one smartphone seller by volume but most of those sales came from the low end.

Samsung is at a crossroads in my view. They are losing low end smartphone sales faster than they are losing sales in premium. They don’t actually sell a lot of premium smartphones, less than 100m per year, but they make 70-80% of their profit from these devices. One could argue Samsung should just focus on the premium market and make a go at growing this business and the premium middle, devices in the $400-500 range, which is likely to become the new Android premium price point. This is the price where many vendors will focus their “premium” efforts and it makes sense for Samsung to focus in this area and the super high end against Apple rather than chase the sub-$200 market for growth. If they are doing what it seems like they are doing with their semiconductor strategy then this path seems plausible.

Lastly, Samsung may, and likely should, perhaps buy some of the less dominant brands in other markets. Oppo in China, for example, is one that is rising quickly, or Micromax in India, or even a smaller vendor in the region who is trying to separate with a brand identity. These companies don’t want just to chase the bottom but are looking to build a regional brand appealing to regional players. Samsung could buy these companies and use them to ship their own components like memory, chipsets, displays, etc., and thus have more brands helping their component business grow. This seems like the best way to address their brand struggles to move components in volume and help them avoid channel conflict with their own brand while trying to sell low end and high end smartphones.

2015 is going to be a defining year for Samsung as they navigate these waters. The choices they make this year will dictate their chances to be a global player in some capacity going forward.

Sony’s Challenges and the Future of Samsung

More news from Sony today as they look to spin off more groups from the company as wholly owned subsidiaries. Sony’s tough times are rooted in a basic fundamental point — they have not dominated a product segment with deep customer emotional attachment for some time. Sony is, in a way, a classic case study in disruption. They were a premium player in a market where good enough was simply good enough. Thus, they were undercut in high growth markets by companies who could offer similar specs at lower costs. Sony’s new strategy is to continue to play the premium tier and focus on higher margins but lower shipments. This is not a bad strategy on paper, so long as they have the a sustainable competitive advantage allowing them to offer higher prices. This should be the sole focus of these subsidiaries as the goal in this restructure is to focus on profits.

Sony is also reportedly backing off their smartphone efforts which, given the Android race to the bottom, makes complete sense. Sony is smart to focus on the things that are making them money. Their imaging group, both cameras and image sensors, are among their most profitable groups. And the Playstation 4 remains the leader in sales of game consoles. Sony is clearly in transition and the Sony we once knew is likely to transform into an entirely different company over the next few years as they focus their efforts. Sony is still an innovative company. However, it may be their future is in empowering others to commercialize their innovations rather than their own product brands.

All of this makes me wonder if Sony’s struggles foreshadow a fate for Samsung. Many of the same fundamental issues surrounding Sony also surround Samsung. Their branded products are facing rapid commoditization. Samsung has been able to fend off issues that hit Sony thanks to a massive marketing budget. They are mostly out of selling PCs for similar reasons as Sony. Their mobile unit continues to see steep declines as competing with smartphones with similar specs and lower prices becomes extremely difficult. Their TV business remains a top seller but you have to wonder how long that can last, particularly if the Chinese enter the US market with good quality 4k and then 8k, and then 4k and 8k OLED TVs at extremely low cost. One thing I have thought about is, how smart it would be for Xiaomi to first enter the US market with their low-cost 4k TVs? It’s a good way to disrupt and build a brand. I expect other Chinese brands to do this very soon as well, likely under different brands which US consumers know.

Similarly to Sony, Samsung’s component businesses seem to be doing the best. Their chipset manufacturing capabilities remain among the leading ARM fabs. Their display and memory businesses are similarly strong. One has to wonder how much of Samsung’s future, like Sony’s, may be in components with brands other than their own to commercialize.

While Samsung is in a different situation financially, thanks to the backing of their nation state, I can see some similarities to what is happening to Sony that could happen to Samsung should they not engage in some different courses of action.

Report: The Smartphone Market in 2014 and Beyond

Fascinating things happened in 2014 with regards to the smart phone market. Two striking ones from my predictions article happened in Q4 2014 rather than in 2015 as I predicted. I hedged my bet saying they could happen in Q4 2014 and, sure enough, they did.

Smart phone vendors sold more in the December quarter than the PC industry has ever sold in an entire calendar year. Apple also passed Samsung as the number one smart phone vendor in sales in the quarter as well. Both, in my opinion, were inflection points on the entire mobile industry and have striking implications going forward. Before diving into the takeaways, I want to walk through a number of data points.

Installed Bases

On of the things I work hard to track is the installed base of smart phone platforms. Here is my chart breaking down the installed base of each current platform.

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As we have been tracking this over time, you can see how Symbian essentially got eaten by Android. AOSP has been on a steady rise, thanks to China, and has an installed base slightly more than the iPhone’s. Blackberry continues to lose customers but may likely hold steady and normalize at some point.

Another interesting way to look at this is to show YoY growth.

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As you can see from a platform like AOSP, when you start from very small numbers and grow fast, you achieve huge YoY growth. But as your share size increases, the growth begins to normalize. I visualize this data this way to see what patterns may emerge. While Android and Apple are holding steady, we are still watching AOSP normalize. Given AOSP’s total addressable market is really only China for the time being, it is likely to hit a stopping point at some time as China becomes saturated. This growth chart will highlight that when it does. Windows Phone has modest gains annually, enough to keep their line in the positive but, in terms of size, we are talking very small numbers. I measure this YoY using a year ago quarter to track growth.

The last way I like to slice my installed base data is as a platform’s percentage of the installed base by quarter.

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The point is we are seeing a normalization pattern among the major platforms. Android continues to add modestly, as does AOSP, as does Apple. What makes Apple’s installed base interesting, however, is the continued growth from hand-me-down devices and the secondary market. By my installed base estimates, about 66% of all iPhones sold to date are still in active use. This can only be achieved by making products that last long enough to get handed down to family members or sold again in the secondary markets of China and India. All of which is a contributing factor to Apple steadily growing their active user base.


Quarterly snapshots give us equally useful views of the market. For this we need both a global picture and a regional picture. First the global view.

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As everyone knows by now, Apple sold more smart phones than anyone else in the quarter. While I don’t chart feature phones, it is interesting to note that Apple became the second largest phone manufacturer as well. Samsung was number one — selling ~95m phones, both smart and feature phones. Apple was #2 overall with 74.5m. Microsoft/Nokia came in at number three at 50m. It is a historic moment as the market rapidly transitions from feature to smart phones. While it is fun to appreciate Apple beating Samsung in Q4, we know it will be short lived as Samsung will be back in the top spot in Q1 2015 and likely sell in the 65-68m range. Apple will likely be in the 57-58m range but could possibly hit 60, largely driven by the Chinese New Year. I’ll update my Q1 2015 estimates closer to March.

Key Regions

I’d like to provide a snapshot of a few key regions broken down by smart phone vendor and by quarter. Let’s start with the US.

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The US has always been Apple’s largest market and this quarter they followed a similar pattern — gaining over 50% of quarterly sell through into the US market thanks to the holidays. Apple’s share of the postpaid market was well over 60% and their share of premium smart phone sales was over 70%.

In China, the number one vendor crown was very close between Apple and Xiaomi. So close we will again see analyst firms disagree on this. However, they all will agree it is close. I am able to see some live network data from Baidu/Umeng, which is a challenge because I see how many iPhones, roughly, are active but not all are sold just in China. Some are purchased or imported from elsewhere but still end up on the network. I’ve created a model to help balance this by using what I believe the percentage being imported vs. bought locally is using a range of data points. Based on this model, I have Apple as the #2 smartphone vendor in China but very close to Xiaomi. Here is my chart.

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With Chinese New Year coming, this quarter will be fascinating to watch. I’m fairly confident Apple will sell more smart phones in China this quarter than in US for the first time. They may also be the number one smart phone vendor in the region and, this time, it may not be close.

Samsung continues to have significant troubles in China despite being a top 10 brand in the region. Xiaomi also posted their first QoQ decline largely due to the larger iPhones. A key storyline I am watching in China is Motorola. Lenovo moves decent volume in China, but they are perceived as a lower end brand even though some of their hardware is quite nice. Motorola fits nicely into a higher price point, more in line with some of the Oppo and Xiaomi mid-range offerings. All our research continues to show significant interest in foreign brands. Chinese brands are having trouble moving upstream in the market and selling smart phones at higher priced tiers. This creates an opportunity for foreign brands. The key point is that, while ZTE, Huawei, and Xiaomi have their eyes set on international expansion, brands like Apple and Motorola are looking to gain share in the region.

Lastly, India. Other than strong continuous growth, India’s picture has not changed very much. Samsung is still the number one vendor, and Micromax is catching up. Apple is slowly but surely climbing but it is very slow.

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Where do We Go From Here

As we look at where we are today, we have to also make some points about where we are going. As I pointed out in my column yesterday, it is clear Apple is getting a near lock on the most profitable segment of the market. As Samsung’s strategy becomes clear, we will cover it for subscribers but the trend lines are not favorable for them to recover much, if at all, in premium. With all the future smart phone growth coming from lower end devices, the next phase of mobile is going to look nothing like the first. These markets will separate and it is unclear what the picture looks like for the next two billion smart phone users. To illustrate this, I’ve created this chart.


This chart is a picture of the current 2 billion smart phone owners. What I’ve done is illustrate the smart phone platform share of the current price tiers. However, at the bottom I have left it intentionally open to highlight that the battle for the next two billion smart phone users is anyone’s game. Certainly Android could grow to fill that gap or maybe it will be an Android fork or alternate platform like Cyanogen. Perhaps Windows Phone is positioned well for the next few billion. Or perhaps something out of left field like FireFox OS. What’s clear is if there is an opportunity for a third OS the opportunity exists in the gap pictured in my chart.

The majority of smart phone’s sold and in use at the end of 2014 were in the mid-range and high end price points. Increasingly toward the end of 2014, we saw an acceleration in phones costing less that $200. Which brings this nugget from ABI Research into light.


Why did Android smart phones decline? My answer is because the market for smart phones above $200 is drying up. The next phase, as we get out of tier 1,2, and 3 China and into the rural villages, will demand smart phones much cheaper than $200. Similarly in India, getting past the nearly 200m smart phone owners in the region and into the next phase of growth will happen with much lower cost devices. We are in a slight pause, as we look to re-accelerate growth as very good, low cost devices enter the market. Sometime in 2015, we will likely cross the 400m mark for smart phone shipments in a quarter. And this will be the new normal as we near 2b smartphones sold in a single year. To see how we believe that plays out, I’ll leave you with my chart on smart phone price tier forecasts. We will soon be living in a mobile first world.

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Where Can Intel Find Growth?

XScaleJean-Louis Gassée, a veteran executive, investor, and observer of the tech industry, wrote an accurate and depressing account on the position of once high-flying Intel. Like Microsoft, Intel was unable to to keep up with a rapidly changing world where the kings of PCs were being overrun by small, lightweight, mobile equipment.

The question is, how did Intel get into this mess and how does it get out? One thing to remember is Intel, again like Microsoft, has lots of problems but is not in dire straits. Its revenue and profits have both fallen slightly over the past three years but nothing in danger of putting it out of business. The server market, for which it owns the processor business, is strong and, while PC sales are weak, that business isn’t going away. But this can’t change the fact the market for Intel’s processors is far, far behind the demand for ARM designs in mobile devices.

Intel, of course, could be on top of the world of processors for everything from PCs to phones. In 1997, Intel agreed to acquire Digital Equipment’s StrongARM, a top-of-the-line ARM chip, to settle a legal dispute with DEC. The problem was that the x86 had all the real power within Intel. The x86 teams wanted to build smaller and cheaper chips of their own (of course, mobiles phones in those day did nothing but make phone calls).

Intel renamed the StrongARM XScale and it became a real contender as much more sophisticated mobile data devices, such as Palm, migrated into phones. But it never really counted as a central Intel product.

The classic test came along when Apple, which had already switched to Intel’s x86 for the Mac, expressed interest in XScale for the iPhone. But Apple drove a hard bargain. In an interview with The Atlantic, retiring Intel CEO Paul Otellini said:

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

Intel decided to leave the ARM business instead and sold the division to Marvell. Since then, it has been focusing exclusively on miniature x86 system-on-a-chip (SoC) for mobile devices but has failed to make a dent in a field dominated by the ARM products of Samsung, Apple, Qualcomm, Nvidia, and others.

Intel has been pushing its x86 Atom SoC for a while. It’s found a market for its Medfied, Merrified, and Moorfield systems on Windows and Android tablets and a variety of industrial products, but not very many phones. It has been able the shrink the SoCs ever smaller, but ARM has continued to stay ahead. Today Apple’s A7 processor, a Samsung-made SoC, is still substantially smaller at a die size of 102 square mm, compared to the 196 square mm Moorefield.

Intel is going to need a way to get into a phone device, and it seems unlikely to be x86. But Intel, unlike most of its competitors, is in the business of manufacturing its own chips and the drop in demand for PCs has left it with a significant amount of fabrication capacity.

It could get into the business of manufacturing chips for ARM designers. But while Apple would like to take its business away from Samsung, making iPhone chips would be a bitter move for Intel. Taking on the iPhone at its launch would have made Intel a successful partner for the decade’s most important product. But Apple has learned so much about chip design that Apple would be the leader and Intel just a hired fab operator.

To get back into real competition, Intel will probably have to find away to reverse the mistake of the XScale sale and get back into the ARM business. It would be a painful and expensive move, especially since there are no readily available ARM manufacturers on the market. But it may be Intel’s only way to find a growth market.

BlackBerry and Samsung: Will a security partnership help either company?

Yesterday, Blackberry held an event where one of their announcements was a deal with Samsung to help add a deeper layer of security to Samsung/KNOX devices. Given the criticism of KNOX’s security, questions surrounding its integrity aren’t surprising. In my view, it’s a recognition/admission that Samsung needed help in the security arena if they wanted to be viewed as a valid player in more secure enterprise accounts.

I view this deal more as a necessity for Samsung than for Blackberry. Blackberry’s BES 12 operating system already supports Android in general, along with iOS and Windows Phone. But Android at large continues to have a negative opinion held by many IT administrators and since Samsung is hands down the leading Android vendor in the enterprise, this view carries over to Samsung to a degree. This move could help Samsung fill the void in their offerings, assuming Blackberry is successful in growing their software and services accounts of BES 12 over the next year.

While BES 12 is a cross-platform enterprise mobility management product, iOS is still standing in Blackberry’s way. iOS continues to increase its dominance in many of the key accounts where Blackberry’s value adds are relevant. In fact, I have heard from many IT managers that more and more groups inside their enterprise are using or being deployed only iOS devices for their teams. For teams where heightened security is more of a need, this is happening even more frequently. If this trend continues then it raises the question of the need for cross-platform, outside of a very general solution to cover all employees which can come from many different providers.

Blackberry is at least moving in the right direction with BES 12. By bringing Samsung along for the ride, it gives them a partner they can have deeper integration with in the hopes a higher degree of cross-platform security is needed within a specific group or company function.

As both RIM and Samsung pointed out in the release, it is about choice. Ultimately, that is the angle they hope to exploit.

Takeaways from Samsung’s Developer Conference

At today’s Samsung’s Developer Conference, they circled around four key trends: digital health, Smart Home, wearables and virtual reality. From these themes, there were a few elements I thought were interesting.

1) Voice of the Body: This theme is a blend of digital health and wearables but as a focal point it is quite interesting. The overall concept is the combination of both sensor loaded wearables and big data to interpret what and how your body is speaking to you and helping you make key decisions based on what your body is saying. An example would be if your heart rate suddenly spikes, perhaps in reaction to anger or stress, you could be notified to calm down, take deep breaths, etc. Or, some day when a sensor can do blood glucose readings, if your blood sugar is getting low or trending downwards (before you even notice) it can alert you that you need to eat and perhaps even give you diet suggestions. This concept has merit because it is where wearable sensors begin to make sense and add value.

From a digital health perspective, wearables and the sensors they encompass, should help us make better decisions about our health, fitness, diet, and more. The “voice of the body” is a great narrative to understand how this vision can become reality. Interestingly, Samsung released a developer kit loaded with a sensor called Simband along with the SAMI digital health platform. It looks like a Gear S but has six sensors in it that function independently or together to do interesting things. The platform and SDK are available for developers to create software and leverage the extensive sensors on the band to come up with interesting applications and use cases. Here is a look at the sensors and you can visit this page for a more detailed look at each of them.

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2. Smart Home: Samsung bought Smart Things earlier in the year and are looking to integrate it into many other forms of smart home applications. Samsung again is making a platform play here, recognizing they can’t build all the hardware and hoping smart home companies will work with their platform for connected home applications. There is still too much fragmentation in this space and no clear winner yet for a standard. That being said, the programmability of the Smart Things platform is interesting. One of the elements of a connected home that is of value will be automation. Meaning, when something happens, a chain reaction of other automated things happens. In essence, your home becomes a computer. An example Samsung showed was an automated task one of their developers created where, as he got near his Scotch cabinet, a light came on and a symphony of angelic voices filled the room. Kind of cheesy but you get the point. The automation of a number of connected objects working in unison is a key element still missing in many mass market connected home applications.

Time will tell how this plays out for Samsung. Especially with competing ecosystems and standards being driven by other major players.

Virtual Reality: I’m quite bullish on Virtual Reality. Samsung is looking to take it as mainstream as they can. It looks like the price of their VR headset will be $199 and it only works with a Note 4 (which they will likely sell approx. 16 million of globally in the next six months). Regardless, Samsung is looking to take the lead in Virtual Reality and it is a category worth leading. They will of course not be the only player, but leadership also means development from time to time. VR has a bright future and we need as many companies as we can developing the market for it.

They released something that may help called Project Beyond. This project uses a camera custom built by Samsung which captures immersive 3D video in HD and from every angle. They intend to set these cameras up in key locations and when you use the Samsung Gear VR headset you can tap into these cameras and it will seem like you are there. The demo I tried was of a camera set up at a park in San Francisco. You put the VR on and it is like you are standing in that location and can look around to see all the vantage points. You could imagine putting these cameras up in major tourist locations. Not everyone can travel there in person but many can see what it looks like to be there.

We are just scratching the surface with VR and have a long way to go but, as I said, it needs backers to develop the market. Good for Samsung for taking a leadership position.

Ultimately, I feel Samsung should be expanding these efforts beyond their own ecosystem. I don’t believe Samsung’s is strong enough or large enough to truly drive these advancements on their own. Their VR solution, their Smart Home platform, even their wearables and digital health platform should be extended to other platforms like iOS for example. I understand why they are locking it to their hardware but, in this case, I think it is the wrong move. If Samsung believes their future is in services then they have to be cross platform and cross hardware.

Google’s Ads: Defense or Offense?

I recall not too long ago Google did zero advertising. “Just Google it” was spreading virally and Google was growing and had no need to spend money on marketing. Slowly but surely over the past few years, Google has stepped up its advertising efforts. Which, and some may disagree, I interpret as a sign of their slowing growth. Myself, along with others, have pointed out that Google’s long term growth prospects have been challenged. From internal discussions I have had with execs there it seems this is well known inside the organization. I have been observing two distinctly different advertising efforts and I have a few observations.

North American Advertising

Google has, all of a sudden, begun advertising Android in several prime time commercials in the US/Canada market. I see several fundamentals causing Google to get more aggressive in Android marketing.

  1. Samsung’s US dominance is declining. Samsung is currently in a very vulnerable position in the US. Many fail to realize Samsung’s aggressive marketing and sales commissions helped get them to where they are today in the US premium segment. Yet Apple still sells nearly ~2:1 more phones than Samsung in the above $500 wholesale price tier. Despite Samsung’s best efforts, and a massive internal effort to become the leading US smartphone vendor, they have yet to knock off the king of the hill. Furthermore, it is doubtful they will in the foreseeable future. It is not a secret that Google makes more money from iOS consumers globally but Samsung was helping them get the profitable US consumer more embedded to Google’s services. If Samsung’s growth slows or declines and it is not picked up by another Android vendor but instead by Apple, Google could be loosing key advantages in the US.
  2. Carriers backing iPhone 6/6 Plus more than other premium Android devices. In case you haven’t noticed, nearly every major carrier commercial running in prime time right now is for the new iPhones. This may very well be a part of the agreement between the carrier and Apple but the point remains. More promotion is going on currently for the new iPhones than any other US smartphone. Google must recognize Samsung alone can’t push the Android agenda forward in the US. Yet Motorola and LG are not equipped to embark on the same kind of marketing blitzkrieg Samsung can.


Google winning in India is not a slam dunk. I’m not sure many realize this. India is a completely green field when it comes to smartphones and smartphone ecosystems. In fact, Microsoft even has a chance in India. Google can not afford to be a minority player in India and they know it. Android One is Google’s push at getting Android deeply engrained into the Indian mobile ecosystem. Their challenge is things like Facebook, WhatsApp, and even other app stores/distribution methods, are more dominant than many Google services. Which is why Google is advertising on behalf of several Android One OEMs in India to help spread the word and drive the brand/ecosystem. I expect Google to be ruthless in competing for India. Which is fantastic for Indian consumers but may be quite challenging for competing ecosystems and even to a degree competing hardware vendors.

What Google has me thinking about with regards to their marketing strategy is a lot like Intel’s. When a vendor picked an Intel chipset, Intel offers marketing assistance as a part of that design win. Most PC OEMs do not shoulder the bulk of their marketing — Intel does. It is one of the main advantages they have had with OEMs over AMD. Intel’s chips may be more expensive but they will help/do the bulk of the outbound marketing for you. Similarly, Google is beginning to do the same. Understanding that their partners are not good at marketing nor can they afford big marketing budgets, it seems Google is willing to take on the marketing efforts for many of their partners.

What impact this has on their margins is a key metric to watch. Their growth is already stalling and they currently have the most profitable customers they are going to get to fuel their current business model. Spending marketing dollars to acquire customers who will they will reap less revenue from is both a necessity but also risks off-setting any gains.

Video Analysis: Samsung’s Fall From Grace by the Numbers

In this video analysis/padcast I take a look at some of the numbers behind Samsung’s steep revenue and profit decline.

If you have the Perspecive iOS app from Pixxa, then you can click this link and watch my story on the app, pause it and interact with my charts and data yourself should you please.

Video length = 7 Min.

[fluidvideo url=”//player.vimeo.com/video/110544905″]

My Apple vs. Samsung Conspiracy Theory

The Samsung issues we are seeing has me thinking about something. It’s a conspiracy theory with zero evidence but something that strategically intrigues me. Tim Cook said in a recent interview with Charlie Rose that Apple could have made a bigger iPhone years ago. So the question is, why didn’t they? The writing was on the wall that larger screens were trending upwards. The pundits read this as Apple’s inability to see market demands and hailed Samsung as the rising star who will dominate forever and ever. Apple must have known that all they needed to do to shut everyone up and crush Samsung in the high end Android camp, where it would really hurt them and Google combined, was to release a larger iPhone. Well, my theory is they did know this and they let Samsung and perhaps even Google have their time in the sun intentionally. In the art of war, this tactic is referred to as a feigned retreat.

A feigned retreat is a military tactic whereby an army will pretend to withdraw or that they have been routed in order to lure an enemy into a position of vulnerability. Feigned retreats are one of the more difficult tactics for an army to undertake, and require well-disciplined soldiers. This is because if the enemy presses into it, undisciplined troops will lose coherence and the rout will become genuine.

Samsung knew the large screen iPhone poised the greatest threat. Yet Apple had no sense of urgency. I recall many conversations with Samsung execs who asked with genuine surprise, “What are they waiting for?” Over time, I heard them convince themselves Apple just must not be interested in larger phones. That the one handed operation conviction will trump where the market is going. All the while Apple was sitting back patiently waiting to employ their thermonuclear war that had less to do with the battlefield of the courts and more to do with the battlefield of the market. Knowing that, once they released larger phones, they would gain share in the premium smartphone segment mostly at the expense of Samsung. From every data point I see globally that is exactly what is happening. In fact, I just read a report from Baidu today in China that highlighted data from a survey they did. Over 40% of current high end Android buyers are planning on switching or strongly considering switching to the iPhone 6 Plus. 21% said they would absolutely plan on buying it and 21% said they would strongly consider buying it. All primarily because of the larger screen.

Obviously this is just a theory. I could poke many holes in it with counterpoints. Perhaps I’m giving Apple too much strategic credit. Nonetheless, I thought I would put it out there to spur some fun conversation.

Unprecedented iPhone Demand

As we lead up to this years “main event,” I wanted to share some initial points underscoring my read that there is unprecedented demand for Apple’s iPhone this holiday quarter and beyond.

Major Upgrade Cycle: This has been the source of many analysts’ upside, but I think it may even be larger than many realize. From data points I have from the US, China, and even parts of Europe, it appears there is an unusually large number of legacy devices (smartphones more than two years old) still in use in the world. This includes devices like the iPhone 4, and Galaxy SIII. Our own research revealed the average life cycle of an iPhone in the US is 2.8 years. That number is even higher when only multi-person families are included. Apple’s quality curse is they build such good devices they can and do remain in use for longer than the traditional 24 months.

Gaining Share with the Phablet: One of the more compelling theories for the existence of the 5.5 inch iPhone is it could steal customers away from Samsung who were previously fans of the Galaxy Note line, on the simple premise of screen size alone being the most premium smartphone on the market.

Emerging Market Growth: Perhaps one of the most interesting things Apple can do is use previous years’ models, as they typically do, but be even more aggressive at their price points and target them in emerging regions. Keeping the 5s, for example, at a 5c price would go over very well in China for the middle tier market. Keeping the 4s and pricing it even lower could do extremely well in markets like India and other parts of South East Asia.

All of this gives me the sense this could be more than just a typical growth holiday quarter for Apple but that they blow past most consensus estimates for the holiday quarter with ability to meet the demand their only limiter. While my job does not depend on making estimate predictions for shipments, I would not be surprised, assuming they can make sufficient quantities, that Apple sell mid-60’s of iPhones in the holiday quarter.

The other thing that will be interesting to watch is what happens with Samsung’s sales. Last quarter, Samsung shipped 78m smartphones and they stuffed the channel prematurely to mask some of their challenges. I think it is extremely possible, given the sense I get on both Apple and Samsung trend lines, that Apple and Samsung sales in the holiday quarter could be closer than people think.

As some recent comScore data suggests, iOS and Android are neck in neck as far as users go in the US. I have a sense Apple takes the majority share in the US by end of the year.

How to Turn Around Samsung

In my continual analysis of Samsung for many in the industry, I have frequently pointed out the fundamental issues that have led to their current struggles. I had a friend remind me that, over two years ago, I gave a presentation to his VC firm where I pointed out Samsung would face struggles. He reminded me that, at the time, it sounded crazy but in the end I was right. Through our discussion, the topic came up on how to turn Samsung around. I decided I would write up my thoughts.

The Heart of the Matter

Ultimately, Samsung’s fall was fully predictable. In modular ecosystems (ones where you ship a core part of your product or experience which belongs to someone else) will always be susceptible to text book disruption. Samsung wanted to compete with Apple, and they did for a brief time, but ultimately Apple was never really their competition. Other players in the Android ecosystem were, and unfortunately for them, other vendors created good enough hardware that is continuing to eat into their market share.

I highlight this reality in my post on the regionalization of the smartphone market. If you recall that post and the charts that accompany it, you recall in every market but their own in South Korea, Samsung is losing share to the local player who has home field advantage. In China, it is Xiaomi and a host of other Chinese vendors. In India, it is Micromax, XOLO, Lava, and a few others. In the US, they have never led in quarterly sales.

The culprit is the Shenzen ecosystem. This is a radically efficient and rapidly scaling ecosystem of groups of manufacturers who can take a product from nothing to time to market in less than a month. A leading SoC provider from China told me they can get a new customer up and running and in the market with new smartphones and tablets in less than two weeks. Any company can enter this ecosystem, and build “good enough” products to be extremely disruptive.

As an aside, I had a colleague mention, as we spoke about the Shenzen ecosystem, that all this ecosystem needed was a good idea. Now they have Kickstarter for ideas. The key point is product coming out of this region is getting really good.

The Shenzen ecosystem is enabling local manufacturers to build high quality, good enough products and challenge the foreign brands. We are hearing about new smartphone companies coming out of China, Brazil, Vietnam, Europe and more. Local vendors’ home field advantage fueled by a Shenzen ecosystem is starting to rival Samsung with scale and is the thorn in their side.

So what can Samsung do? The obvious answer is chase the low end. However, I think a more interesting alternative may exist.

Procter and Gamble

Why am I bringing up Procter and Gamble in a tech article about Samsung? It is because, as we connect the planet with consumer electronics at extremely affordable prices, I believe we will see similar dynamics to consumer packaged goods come to the consumer electronics industry.

What makes Procter and Gamble successful in global markets is how they regionalize their products and brands. P&G spends a great deal of time researching local markets, understanding consumers needs in those markets, and then creating solutions that meet the unique needs of a region. Often, they use a brand unique to those regions and they market these products differently everywhere. Consumer packaged goods is both commodity but also a continual fight for differentiation. As smartphones reach $10, and as tablets reach $25 it seems inevitable nearly all the dynamics of regionally focused brands, products, and solutions found in consumer packaged goods will come to the tech landscape.

For Samsung, it is essential they get scale. They are oriented in a way many of their core business components depends on the product groups to move significant volume. For the last decade or so, Samsung has achieved their scale by employing a fast follower strategy and executing that strategy at scale. I’m not sure any tech company on the planet is capable of doing this the way Samsung can. This is why they are the most interesting to follow a model like Procter and Gamble’s.

Samsung can ultimately combat the regional brands, who are eating their lunch, by creating regionally focused brands, product, services, and marketing of their own. This would require some significantly different ways of thinking within Samsung to actually do what I suggest. Yet other than just chasing the low end, I’m not sure how else they can recover their former scale. Following Apple is no longer a viable option for growth.

Ultimately, it can be argued the best thing that could happen to Samsung is for Apple to do something truly innovative. The problem is, by being modular, anything they do will be copied and at much more aggressive prices. Apple’s monopoly on iOS allows them to sustain a premium strategy. Samsung doesn’t have such a luxury.

Deeper Dive on Android vs iOS Web Usage

I gave a brief overview of my thoughts on global web usage in the Tech.pinions Insider weekly newsletter that goes out each weekend. But I wanted to dive into a few more points I think are interesting.

When it comes to the business model of so many companies in the smartphone, tablet, and PC market, usage is an essential metric. For online companies like Google, Facebook, Amazon, app vendors, and more, web usage or the extent to which one gets on and uses the Internet is even more essential. What we are seeing is the early signs of the problems connecting the next billion customers for many companies. For a long time, iOS dominated Android as a whole in terms of web usage. Interestingly, an online metrics service I track points out this specifically in their FAQ on their site.

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Android ships in larger quantities, but iOS dominates usage. Point number two is perhaps the most insightful. Not only are iPhones typically supplied with generous data plans but they are purchased by people who can afford to liberally use the web. Someone who can afford a $500 or higher phone in non-subsidesd markets can also afford a premium tier data plan. I’ve started using the term “data budget” to describe this. iPhone users have a higher data budget than the average Android user. Another point is broadband is not equal in many parts of the world. Many emerging markets have spotty and slow broadband. It makes the web challenging at times due to the lack of speed. These are part of the complexities I feel led to Android taking so long to pass iOS in terms of web usage, despite having more than double the usage base for quite a while.

While I recognize the disparity in methodologies of StatCounter and NetMarket Share,  I still find them both useful. StatCounter, measures total usage of a user and will count the same user as a page view every time that person views a website they track. That is why StatCounter has Android ahead of iOS in web usage and says it has been for some time.

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StatCounter’s data will favor the heavier of web users, thus their data will give us a broader picture of how active on the web each platform may be. But it is also skewed toward the top percentage of users who more liberally use the web. It leads us to the conclusion that the Android data collected by StatCounter is likely heavily influenced by those Android users who are more like iPhone users in terms of disposable income, data budget, quality of connectivity, etc. That point is well understood when we look at the device vendor breakdown of StatCounters data. We see Samsung users have been driving the bulk of Android’s global web browsing in their network of sites. Samsung’s premium and mid-tier devices would have similar users where usage would be impacted.

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NetMarketShare presents a different picture and for different reasons. NetMarketShare only counts each user once per day on their network of sites, so we get a bit more holistic view of platform usage which is not skewed by the power users of either platform.

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One thing to point out on this chart is it is measuring absolute share. iOS’ line is not going down because iOS is being used less, only because Android is growing as a percentage of overall web traffic on their network.

It was inevitable Android would pass iOS in terms of overall usage. What this brings up though is the striking point that usage is not equal between the two platforms per users. Meaning the average iOS consumer will still use dramatically more Internet services than your average Android user. Given the many points I’ve made before that Google’s Android already has the heaviest web users and the most profitable customers to their ecosystem as they are ever going to get, the longer term trend is problematic to their growth if it remains solely tied to usage of Internet services. The same is true of Facebook. In both cases the next billion will have a lower data budget, less reliable and likely slower connectivity and will have to prioritize that data budget accordingly. In short, this next billion will prioritize survival over entertainment. They will likely use a messaging service like WhatsApp because that is how their commerce or trade gets done. That is a worthwhile spend of data budget. Those needs will trump entertainment for the foreseeable future.

While looking at iOS vs Android web usage is helpful, it is really still only part of the story. I track a range of developer toolsets that show web usage by particular devices as well. Often many of these include app usage as well since most of these analytics services are for app developers. Here are a few select countries of interest because they are big but also because they qualify as those I consider with a stringent data budget.

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All this does is emphasize in countries where the iPhone has a presence, even if only small, those users dominate the usage the landscape and often by a healthy margin.

Take Aways

What is becoming increasingly clear to me is at a platform level, the opportunity within iOS and Android for app developers, providers of web services or services in general, are simply different on each platform. You could make the argument the opportunity within iOS is very different than the opportunity within the Android ecosystem. Thus, each ecosystem may have an entirely different set of developers, services providers, and more.

For a more detailed view of this angle, listen to the latest podcast with myself and Andreessen Horowitz partner and analyst Benedict Evans on our latest mobile focused Tech.pinions Podcast.

Peak Samsung

Samsung’s Q2 earnings and smartphone shipment volume miss should come as no surprise to our readers. I highlighted the fundamentals of what I saw happening to Samsung in this insider article from last September. Samsung has made very little progress competing with Apple in the high end premium segment of the smartphone market and they are being attacked at the low-mid range by a variety of new entrants. Samsung rightly points out in their earnings release that one of the many culprits to their poor earnings and device shipments is increased competition. That is highlighted by this chart:

Smartphone sales by vendor

Yet the best visualization of what is happening to Samsung is in this chart:

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As you can see, Q2 2014 marks the first quarter since their global rise in smartphones that their line is trending downwards rather than up. This chart highlights Samsung has reached its peak. Samsung is trying to play this off as a short term issue and one they see being resolved with 4G. There is some merit to their logic, however, if they see any rebound it will be short lived.

It is important to note that outside of China, by my estimates, Samsung has around 60% share. Including China, Samsung has 36% share and an approximate installed base of a little over 500m smartphones in active use, again my estimates. I have mentioned this before but there is little to no brand loyalty in the Android ecosystem. Samsung has attempted to make its brand aspirational across the board and as chart number two shows, they succeeded at this for a short period. Keeping this momentum is the uphill battle they are up against.

4G is one area where they can see some rebounding in device sales. LTE is being adopted more rapidly than many initially anticipated. Samsung does have a short term lead in affordable LTE devices in their portfolio. However, that lead will diminish quickly since the markets where LTE is being adopted the fastest, Western Europe, US, and China, are all areas Samsung faces the most competition in all segments.

Differentiating outside of cost will be the battle hardware companies in the Android ecosystem face over the next few years. As I have pointed out many times before, there is little to no loyalty to hardware OEMs in the Android ecosystem. However, with the types of customers who will make up the next billion new smartphone users, I believe even loyalty to Google and their services will be challenged.

All of this brings up an interesting question. What is the “product” in the Android ecosystem? Specifically where are the revenue generating opportunities? As the answer inevitably becomes “not hardware”, the product offered must evolve. This is where the basis of competition will shift in the Android ecosystem. This shift will disrupt incumbents and open the doors to new entrants.

Global Smartphone Vendor Market Share and OS Installed Base Statistics

I’ve updated our global smartphone statistics and installed base estimates up to Q1 2014. There are several important observations to call out in the following graphs.

First, let’s take a look at the market share of each smartphone vendor going back to Q4 2009.

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The first major observation is what has happened to Nokia. As you look at the graph, you notice the shift in share from Nokia to Samsung. As we all know, Samsung “fast followed” Nokia and the graph tells the rest of the story. The second major observation is how Apple has maintained their share of the market and is holding steady each quarter going between 15-20%.

Another important observation is what happened when Chinese consumers started joining the smartphone conversation. As you can see the ramp in China happened around the end of 2011. At that point you see the local Chinese vendors like ZTE, Huawei, Coolpad, and eventually Xiaomi (Mi) helped make our chart (and the world) more colorful/competitive.

Let’s see how this looks from the volume shipments of the same vendors over time.

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What this chart does a good job of showing is the overall growth of the smartphone market in terms of volume.

If you recall from the first graph we saw most of Nokia’s market share go to Samsung. What this graph points out is the size of the scale Samsung reached. While their share of the market basically swapped, Samsung’s volumes were significantly larger than Nokia’s ever were. This graph shows Samsung’s steady and persistent growth when it comes to volume. Where Apple and others see pretty seasonal Q4 spikes, Samsung has stayed relatively steady.

Another important point about this slide is to look what happens when the China smartphone market began to ramp. As we see China coming online, we observe the rise of local Chinese manufacturers who begin moving enough volume to get them out of the “other” category and to be tracked as a vendor. Most notable should be Xiaomi. Xiaomi started selling phones in the third quarter of 2011 and by the end of 2012 were moving enough quarterly volume to get on our radar. Now after the first quarter of 2014 they are nipping on the heels of every other local Chinese OEM. In fact, if Xiaomi’s quarter-on-quarter growth rate continues, they may pass Huawei. That would put them at number three in the ranks of vendor quarter volume after Samsung and Apple.

Installed Base

While calculating the exact active installed base of smart devices is an imperfect science, based on historical sales data of devices factored along with active statistics of operating systems on major carrier networks and regionally dominant web services, we can get an approximate that is defendable. The following charts break down the install base of smartphone operating systems over time and where each stands today as a percentage of the active install base.

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As you can see, Android and iOS have been the biggest growth driver of the smartphone install base. Symbian was the biggest loser with most of its user base moving to Android. Blackberry held relatively steady in install base even though their quarterly shipment declines have been steep. What Blackberry’s numbers highlight was while their install base peaked in 2011, they have not participated in any growth and while maintaining a relatively small portion of the install base even at their peak, the next year will likely show steep declines in their install base.

The pie chart shows each smartphone operating systems as they currently stand as a percentage of the install base. Some of my numbers around Apple’s iOS smartphone share and Android’s seem counter to the narratives we hear that Android has 80% or iOS has 15-18%. This is because when most analysts use those numbers they are sharing the percentage of quarterly or annual sales by OS — not as installed base.

There are many fascinating evolving narratives that will continue to be fascinating to watch over the next year. The primary being as the India smartphone ramp starts to show up. India is where China was two years ago and is ramping fast. Karbonn, Lava, and Micromax to name a few may start showing up in our charts soon enough. I’ll continue to update these numbers each quarter and tease out the key observations over the year.