How Apple’s Business Model Burned Samsung

I have been amused by Samsung’s current TV ads saying they were first to market with a smartphone over 5 inches and staking claim to being the one who blazed the trail and showed the market there was demand for larger smartphones. In a recent interview with Bloomberg, Google Chairman Eric Schmidt reinforced this idea when he was asked about Apple’s success with the iPhone 6 and he stated:

“I’ll tell you what I think,” Schmidt said. “Samsung had these products a year ago.”

Bloomberg reporter Stephanie Ruhle quickly pointed out, however, that Samsung’s Galaxy device launches failed to spark the fervor witnessed at Apple Stores around the world, where customers eagerly lined up to wait overnight — in some cases, days — to be among the first iPhone 6 owners. Apple later announced first weekend sales hit a record 10 million iPhone 6 and 6 Plus units.

The question was again rebuffed, with Schmidt repeating, “I think Samsung had the products a year ago, that’s what I think.”

I am not sure how long Schmidt or Samsung have been following Apple’s business model but being first is not always a good thing. In fact, Apple’s strategy is basically centered around not being first — letting others do the R&D and early market development and then coming in with their own version and besting any similar product with design, applications and services. I saw this first hand in the late 1990’s. At the time, I was doing a consulting project for a company called Diamond Multimedia. Although they were mostly doing PC based media products, they had a skunk works project on what was one of the early MP3 players. I realized when I saw this product it had the potential of replacing Sony’s Walkman but was concerned with the actual design of the product and especially how difficult it was to get music into the MP3 player itself.

Of course, Steve Jobs saw the early MP3 players and realized the same thing I did and that this represented the future of portable music players. However, he did not just create a competing hardware product. He spent the next two years working with the record labels and designing a very easy way to purchase and then listen to music on what became the iPod. This basic business model has been replicated ever since. They did not invent the smartphone. They made it better and, along with an ecosystem of apps and services, delivered a ground breaking product that revolutionized the cell phone market.

Apple did not invent the tablet. Again I saw this first hand. In 1991, I was asked by Microsoft to consult on what was their first pen-based tablet. In 2000, I again worked on Bill Gates’ second attempt at a tablet. But these tablets had terrible UIs and could not get the software community to back it. The bottom line is, in both cases, the technology was not there to create a tablet that could be easy to use and was touch, not pen-based. As we know, 20 years later Apple put the pieces together to create the iPad and finally brought the tablet to the masses.

History is repeating itself again. But this time to the chagrin of Samsung and Google. Samsung was first with a phablet and I am pretty sure Apple is willing to thank them for blazing the trail and doing the market research for them. It is true Apple resisted doing larger iPhones for a long time based on the fact Steve Jobs truly believed people wanted to use them with one hand and that drove their designs through 2013. However, Samsung’s Note phablet, while not a huge success in terms of driving mass industry adoption, showed Apple there was legitimate interest in a 5.5″-5.7″ smartphone in China and parts of Asia, as well as in other parts of the world. By the way, we are still predicting the mix of smartphones Apple will sell will be 65% iPhone 6 vs 35% iPhone 6 plus even though early demand seems strong for the 6 Plus.

To say there was pent up demand for an iPhone with larger screens would be an understatement. One of the things I found out when talking to people waiting in lines for the new iPhones at Apple Stores is many of those who bought the Samsung Note 3 did so because it was the only one out there with this size screen. But now that Apple had one with basically the same size screen, they were going to switch to Apple. I also talked with someone familiar with Samsung’s own research on what prompted people to buy a Note 3 thinking it might be the pen or the larger screen. Interestingly, what they found is that many people, especially in Asia, believe bigger is better and that the Galaxy Note in their mind was a premium product. Now that Apple has one of their own, it too will be viewed as a premium product in all of these markets and there is no doubt Apple is going to capitalize on this fact in a big way.

Apple’s entering the phablet space with a premium competitor is going to have a major impact on Samsung’s fortunes. Samsung has already shown a serious loss in profits from their smartphone business last quarter and have already hinted to the street this quarter will be negative as well. We estimate Apple will sell around 63 million iPhone 6 and 6 Plus models in Q4 and if you add the sales of iPhone 5’s to the mix that are still selling well in certain countries, they could sell around 70 million iPhones during the holiday quarter. If this is true, imagine how it will negatively impact Samsung during this same time period.

In an article in the Korea Times last week, they point out Samsung is seeing the handwriting on the wall for their premium business. The article says:

To ride on the market changes, Samsung is paying more attention to the low end smartphone segment to entice more clients in populous emerging markets, including India.

I don’t expect Samsung or any of the Android smartphone vendors to actually get out of the phablet business. However, the Android vendors who until September had this market all to themselves now have to deal with Apple, a ferocious competitor. Given the cycle of cell phone contracts, I suspect demand for the iPhone 6 will be at record numbers well through most of 2015 and this will continue to contribute to Samsung’s woes, at least with their premium models. Apple is very grateful for the role Samsung trailblazed, although I am not sure it is wise to do ads about this fact.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

55 thoughts on “How Apple’s Business Model Burned Samsung”

  1. It’s telling that earlier this year, Apple and Samsung ended all patent disputes outside the US. This tells me that both companies have come to the realization that they compete in essentially separate markets, most likely delineated by disposable income; that most iPhone buyers never even consider Samsung in their purchasing decision and vice versa. The end to patent disputes in the US is probably coming as well.

  2. They should probably change Eric Schmidts name to Eric Spin. If anyone should be able to understand Apple’s business model it should be him, he was on Apple’s board of directors wasn’t he?

    Speaking of Mr. Schmidt, was he not also serving on Apple’s board when Apple was developing iPhone at the same time Google was deep into Android development? Conflict of interest? I guess he did not do any evil….to Google. Maybe that is what the motto stands for.

    Also, wasn’t Apple’s Newton sort of an early tablet? I always thought that the Newton was inspiration for Windows tablet.

    1. I had a friend that was a trainer (and researcher I think) in tech at IBM who was frequently sent overseas to do his thing. His favourite device was the Newton 2000. The ugliness and clunkiness of windows always bothered him even though most of his work was Unix based.
      I suspect you’re right about inspiration being Newton based, but the windows everywhere obsession nobbled their business. Never mind the lack of taste and sloppiness.

      1. Microsoft shares the same burden of many a tech firm, they have plenty of people who can author apps or even operating systems but making these things work well for ordinary people is priority that don’t have.

        One of the reasons that Microsoft got away with this is that they were given the keys to the IBM PC DOS. They ended up with the key part of platform that Enterprise standardized on. Worse yet, Apple invited them in to write Applictions for the Macintosh. They lifted ideas from Apple to get Enterprise to standardize on Windows. Success is easy when you are a monopoly and you control over 90% of a market. This is part of the reason Microsoft is so ineffective now.

        Instead of working harder to truly make great innovative products, they expend their efforts making products to try and leverage their old monopoly in order to get people to buy technology they do not want.

        Apple on the other hand somehow designs for non-programmer humans. They really go beyond other tech companies by starting with the overall experience and continually refining it until it is right.

  3. Please fix:

    ” As we know, 20 years later Apple put the pieces tougher to create the iPad and finally brought the tablet to the masses.”

    “Although they were mostly doing PC based media products, they had a skunk works working on what was one of the early MP3 players.”

    “In an article in the Korea Times last week, they points out Samsung is seeing the handwriting on the wall for their premium business.”

    I was just about ready to share this article, too.

  4. Can we shift “phablet” to tablet, maybe “pocket tablet” to talk specifically about 5-6″ tablets? Or Nano tablet. Or Shuffle tablet. Or contracted tablet. Anything but “phablet”, please. It seems the phone aspect is so minimal to not be anything more than an app on a tablet, no more than Skype.


    1. The phone realm is such an unpleasant communication forum anymore in any case. Solicitous calls, and the fact that there is an ever higher population of robots doing the communicating both outgoing and incoming, are making phone call channels ever more dysfunctional to me as a mode for personal communications.

  5. Nerds are obsessed with First! Heck, that’s still a thing in some comment threads, although I do see less of it these days, thankfully. But when it comes to Apple, nerds yelling “Apple wasn’t first!” is simply a desperate attempt to diminish the reality of Apple’s success.

    1. For people who see the world as a giant data set, first will always matter. For people who see the world as a rich interaction of complex subjective qualities: beauty, humanity, satisfaction, delight, grace, charm, and class, these qualities will always trump it.

      The former will always be confounded by the latter.

      1. Well said, and we’ve got a great example in the comments right above, but, but, but first matters, it matters!!!! cried the nerd.

    2. Well, there’s a reason for that. It’s called invention. First gets the patent, first gets the credit. We don’t credit the announcer for the home run, goal, or touchdown. Do we?

      1. Henry Ford gets a lot of credit for the automobile, but he wasn’t first. George Seldon held the first US patent for the Automobile and enforced it for years without producing a car.

        1. The Seldon patent is proof that the US patent system has been rubbish for over 100 years. Also, that Seldon patents were invalidated in court.

      2. In any sport, it is not who scores first, but who scores most. Sure, Samsung tossed out a fruit salad’s worth of large screen devices. People prefer Apple’s entry, though it be late by your reckoning.

        1. You can’t copy if someone else didn’t do it first. Mathematically impossible. The point wasn’t about “winning”.

          In obtaining a patent, there are requirements. The invention must be “novel, useful, and non-obvious”. Beyond that, first is all that matters.

          1. Seriously arguing that someone did a screen size “first” is an absurdity. There is no real invention there.

            That is like putting up a banner proudly proclaiming you were the first car company with a larger gas tank, or 17″ wheels. If you want to claim “first”, at least make it something of note, like for cars, the first use of disc brakes, or Automatic transmission.

          2. Oh, I certainly agree. Just as as silly as “rounded corners”. These are trade dress issues and have no place in patents and inventions, but alas, they do.

          3. Again, a false comparison. The rounded corners was just one of numerous elements which Samsung copied almost completely. Screen sizes have been universally variable on everything that has ever had screens.

            If Apple did the larger screen, AND added a stylus, AND moved to a plastic case, AND switched to an Android-style back button, AND did about a half dozen other things just the way Samsung did last year, then you would have a valid comparison.

          4. Again, a false comparison. The rounded corners was just one of numerous elements which Samsung copied almost completely. Screen sizes have been universally variable on everything that has ever had screens.

            If Apple did the larger screen, AND added a stylus, AND moved to a plastic case, AND switched to an Android-style back button, AND did about a half dozen other things just the way Samsung did last year, then you would have a valid comparison.

          5. This is, to me, an obvious point that I rarely see anybody make. Samsung gets some credit for having found that larger screens would be popular, but since they make just about every possible permutation of phone, that doesn’t really count for a lot.

            But the idea of “copying” a bigger screen is like the idea that I “copied” somebody’s idea of breathing because they were born first.

  6. I think Samsung is operating in desperation mode. This is a one-two punch square into Samsungs most (only?) profitable phones, the Galaxy S and the Galaxy Note.

    Until now Apple absence gave Android a profitable niche to exploit freely.

    IMO Apple just makes a better phone. Nicer design, better materials, better custom SoCs, better SW/HW integration, richer ecosystem. If you are going to spend Flagship Smartphone dollars, why not get an iPhone? Before you could argue screen size. But what can you argue now? Philosophical opposition to closed source? That is a very weak argument.

    More and more I think Android phones will sell only on price and that isn’t good for Samsung or any other HW OEM. It is a race to the bottom HW commoditization that made the PC business largely unprofitable.

    This is going to put the hurt on Samsung and all Samsung can really do is plaintively cry: “First”.

    1. Here’s the beauty of it…I don’t have to buy Samsung to have Android.

      A lot of people, myself included, buy Android for reasons that Apple won’t satisfy. But when my Galaxy S5 was recently snatched from my hands, I opted to get an LG G3. My original intention was (and still is) to trade it for the Note 4 when it comes in a few weeks. I may do that yet, but it’s 50:50 whether I do both.

      That would relegate my HTC One to being my EU phone. That’s what choice (and absence of fandom) looks like.

      1. I am not sure which point you are addressing. This story is mainly about Samsung, which is why I concentrated on Samsung. But commodization will hurt all the Android players.

        I will probably buy an Android phone next, but for me it is solely about price. I can buy a viable Android phone for $200, but it will be more like $600 for an iPhone. If I was willing to spend $600 on a phone, I would get an iPhone.

        1. The point I was trying to make is that choice of platform can and does impact choice of companies to buy from. So Samsung is doomed. Okay, not married to Samsung, there is elsewhere to go within the platform.

          Commoditization may hurt sellers, but it’s generally good for buyers. It closer matches value proposition to price, albeit imperfectly. In the PC world commoditization put extreme power in the hands of most households at a very consumer favorable price.

          1. I never said Samsung is doomed. But they are going to face significant decrease in mobile profits. But it will likely be even worse for Samsung’s Android competition. They are already struggling to make a profit.

            Commoditization eventually favors stagnation. Look that the years following the iPhone launch. Smartphones were a battleground, that many wanted in on. Screen resolutions quickly went past your HDTV, more cores than many desktop computers. During much of the same period people were lamenting stagnation in the PC desktop.

            The difference is that Smartphones had huge profit margins, where desktop computers had negligible profit margins. R&D will follow the margins.

          2. No you didn’t say that Samsung is doomed. Our article, however, is titled “How Apples Business Model Burned Samsung”. I brought up “doomed” as an extreme example. My point is, as long as there are acceptable alternatives, who cares?

            Yes, when stagnation kicks in, things have run their course and there’s less of an opportunity for buyers to overpay. Either a new paradigm or solution comes forward, or we have reached equilibrium, with “good enough”. At that point, differentiation (and marketing) is more difficult for sellers. They either add value, or reduce price. Good for buyers again.

          3. Stop being silly, without a margin there is no “D” or “R”. Both cost money and if you can’t make money on what your doing, you can’t do either.

          4. Some silliness may suit you. What about all the R done at universities and governments. You know, like the one’s that gave us the internet. Many corporations as well, do R and see what comes out, well before any D.

          5. It has also put nearly every computer company from the 90s out of business (except Apple), and even driven a few of the post-2000 vendors to declare “no more computers” in markets where there is no money (and in essence, no market).

            A market where businesses die is bad for consumers *if* you believe the product of that market is useful and empowering (as you say).

            The worst part was that largely, the 90s products *weren’t* good for buyers (hence why Apple nearly died and the others went out of business), creating a public culture of “computers as unreliable/frustrating” and the major software vendor that standardized that industry has spent the past four years trying to break out of that pattern.

            Commodization is a double-edged sword and not purely a benefit.

          6. Some vendors fell out (and are still falling out). That will increase prices eventually, so your point is appreciated.
            But really? In the ’80’s to the mid-90’s they used to say “The computer you want always costs $5000”. Today a $500 computer blows those away, and a $5000 computer blows the mainframes of those days away. There have also been improvements since commoditization set in, through the pressures to innovate out of it. SSD’s, OSX, Win7+, etc. Still the prices had not gone back to early day levels.

          1. Don’t you mean “I think the reason Samsung would spend money paying me to troll against Appple continues to diminish.”.

    2. “I think Samsung is operating in desperation mode.”

      You may be right, but if so, Samsung’s desperation mode is difficult to distinguish from its standard operating mode. That is probably a decent analogue for its general lack of class.

    3. Not only is the business model of Samsung what is wrong. Actually what is wrong from the very beginning is Android’s business model. A technological platform on which everyone loses money, even the creator of this platform, and there is only one winner (Samsung), can not be business for anyone, and there are several proofs of that: HTC makes great phones but loses money; Sony lost much more money, so much that it is likely Sony leaves the mobile phone business; LG is also losing money. Every single Android OEM are losing large amounts of money; now even Samsung has reported its first quarter loss and announced that this one will be even worse.

      Everyone loses money, how is this possible? The answer lies in the natural tendency of the market to lower costs as Android becomes more and more popular among Asian manufacturers, owners of more than a third of the population of the planet, to whom they sell phones 100 – $ 150, even cheaper or free. Thus, all are doomed to lose money, or abandon the platform. And to make things even worse, Google is also making its own hardaware, competing directly with his alleged business partners.

      From my point of view, Google will have to take on Android in some way before the platform starts to be seen as trouble maker or a bad brand. And we all know that Google no doubt to remove what no longer serves to Google.

    4. It’s worth noting that Samsung is the only maker of Android phones that makes any non-trivial money. All the others are break-even at best, or unprofitable.

      Google is now flexing its muscles to ensure that all the Android licensees include Google’s “stuff” in a suitable prominent location on the home screen. This serves them [Google] well but does nothing to help the viability of their licensees.

      In spite of Android’s huge marketshare it could mostly vanish in a year or so if the non-Samsung phone makers go to the wall. As looks increasingly likely.

      1. That’s not going to happen, people want smartphones and will pay for smartphones, therefore other people will make smartphones. The only question is where the profit is made. The great problem for android OEMs is that it looks like it not going to be in the box pushers ie those who assemble, distribute and market what is a commodity. This is to be expected as the natural profit margin on a commodity is ZERO.

    1. No it is much lower. We model this cycle differently due to aggressive carrier marketing and two new premium phones. In developed markets it was 20% last year which was our only previous year to see a mix with two current generation phones.

  7. The most amusing thing to me in this whole saga is that the “usual” convention has been turned on its head. Many have lauded Apple as “the inventor” and Samsung as the “fast follower”. In the instance of screen size, it’s Apple that is the follower.

    But wait – is that not also true for the other instances? Such the tablet, and MP3 player ??

    Of course it is, although in a somewhat different sense. There were tablets before iPad, and MP3 players before iPod. But they were not commercially successful – their technology and UI were not ready for prime time. So in these cases, Apple was the “make it work” company. A fast-follower perhaps, but clearly the one that brought all the pieces together – as no company had done before. So Apple was a follower in some sense but was also the creator and innovator in other ways. The iPhone UI being the best example.

    With the “big screen” there clearly was some level of demand. We can argue – and many have – that Apple’s delayed entry was due to issues with battery life and GPU performance. But that’s ducking the reality that, in this specific case, others in the industry read the demand and were ahead of Apple.

    Now I’m just waiting to see how Samsung’s new Note and Galaxy will do for a fingerprint sensor to rival TouchID, and a chip for “secure element”. Maybe it’s time for popcorn – this could be good !

  8. Isn’t this the opposite though ? Hasn’t Apple need for components, and unwillingness to compete in lower-price tiers nor more innovative formats/features allowed Samsung to establish themselves as a major force in mobile phones, and make billions of dollars ?

    Also, aren’t Samsung troubles caused more by other 1st tier Android OEMs either cleaning up their act (HTC, Sony, LG, Moto all have good flagships this year for the first time in a long time, Huawei is coming on strong and Lenovo not far behind) or 2nd/3rd tier closing the features+quality gap with 1st tier in the low and mid range ?

    Android sales as a whole are up, and mightily dominant. Whatever Samsung’s troubles, look for culprits within the Android ecosystem, not so much outside.

  9. “The best revenge is massive success.” – Frank Sinatra.

    “Revenge is sweet and not fattening.” -Alfred Hitchcock

    “Living well is the best revenge.” – George Herbert

    “Revenge is a dish best served cold.” – Sicilian Mafiosi

  10. Samsung’s business model runs out of date. Heavy budget on “big mouth” advertising no longer differentiates their products while competitors deliver the same and better offerings.

    Samsung smartphone segment death can be foreseen in 2 years if their current strategy remains unchanged. They are still trying to juice out the Galaxy brand. But losses will soon bite in due to ineffective marketing & research expenses.

    Missing sale estimate in the coming quarter will be a solid evidence (unless they’ll fix their numbers).

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