Is Samsung’s Exceptionalism Coming to an End?
I’ve always found it fascinating the two dominant companies in the smartphone market – Samsung and Apple – have such different business models. On the one hand, you have a company that approaches the market in a tightly integrated fashion, combining hardware, software and services in a proprietary way, encapsulating them in a very small number of high end devices sold at premium prices. On the other hand, you have a company which appears willing to try anything and to fill every possible niche in the market, from budget to high end, with its own hardware running third party software and services. The commentariat has always speculated about how sustainable Apple’s business model is, but I’ve always wondered the opposite: how sustainable is Samsung’s business model?
The framework my firm, Jackdaw Research, uses to analyze companies’ ability to compete in the consumer technology market includes five domains across which companies compete, as shown in the diagram below:
The really successful consumer technology companies, and especially those that hope to compete effectively in consumer devices, need to combine at least three or four of these five domains and then provide meaningful integration across them. The irony is, although much of the money in this space is in hardware, software and connectivity, those three domains are merely means to an end: namely, creating and consuming content and engaging in communication. Consumers don’t buy hardware, software or connectivity for their own sakes. They buy them because they believe they’ll be able to consume and create content and communicate with the people they care about. If you look at Apple, Google, Microsoft, Amazon and Facebook, they all compete across multiple domains in the chart above.
However, Samsung has always been something of an exception to this rule, and as such its success has been an anomaly under this theory. Samsung certainly checks most of the boxes on the devices side, making everything but game consoles, and also participating in the wearables category not explicitly shown. But it is very weak across the other four domains. In software, it relies almost entirely on Android and to a lesser extent Windows Phone for the operating system layer on smartphones and tablets. It has a major stake in Tizen, but has, as yet, not launched mainstream devices running that OS. It has software of its own, but it’s mostly a thin layer of customization on top of Android rather than a meaningful contribution of its own to the user experience. It has ChatOn, a communications app, but uptake has been limited and it hasn’t caught on like competing messaging platforms have. In content, Samsung has made investments in the past in its own stores, but has slowly wound them down. It now has the Milk Music service, and is reported to be working with M-Go to create yet another video service, but it’s an incredibly thin offering in such a crucial space.
And yet Samsung has been extraordinarily successful. The keys to its success lie in two major domains: marketing and a vertically integrated hardware operation. On the marketing side, Samsung has vastly outspent all other Android smartphone manufacturers and become the default option for people in mature markets looking to buy a mid to high end smartphone. And its vertical integration has allowed it to compete very efficiently and effectively with screen and other component technology. As a result, it has become the largest smartphone vendor by shipments and revenue, and dominates the Android market.
However, cracks have begun to show in Samsung’s model over the last several quarters. As growth in the overall smartphone market both slows and shifts to emerging markets, Samsung hasn’t been able to keep its revenues and shipments growing at the same rate. Revenues in Samsung’s Mobile business unit have stopped growing, as growth rates have declined dramatically since early 2012:
The challenge for Samsung has several segments to it:
- Overall smartphone growth is slowing, putting pressure on Samsung’s other device categories to provide stronger growth
- Samsung’s dominant position in Android is being assailed at the low end and in the mid market by a variety of competitors, many of them from China
- Google is reining in Android and looking to reassert its own position and services in the smartphone market, putting pressure on Samsung and others to tone down their customizations. New flavors of Android for wearables, the car and TVs will provide even less room for customization
- People are at any rate apparently tiring of Samsung’s customizations of Android and starting to look more seriously at smartphones which provide a stock Android experience or at least something more like it
- Samsung’s marketing spend is starting to experience the law of diminishing returns, where each dollar of spending no longer conveys the advantage it once did. It has effectively saturated the market and can no longer derive the advantages it once did from its far superior ad spend.
All these challenges have arguably been visible on the horizon for some time, and Samsung has therefore had quite some time to prepare for them by expanding out of the hardware domain and into the adjacent three domains: software, content and communications (connectivity is largely the province of carriers). As such, it is now poorly positioned to compete and differentiate itself effectively in the face of compelling hardware from competitors and the other challenges it faces. It seems to be selling lots and lots of tablets, but many of them are heavily discounted older models or are bundled with smartphones and TVs in the retail channel. Samsung’s growth in tablets has therefore been subsidized, and is likely unsustainable in the longer term. The question now becomes whether Samsung has done enough work behind the scenes to start dialing up its efforts in the other three categories it can reasonably play in, to bolster its position and start growth going again.
This past week, Samsung’s CFO admitted its second quarter financial results were going to be somewhat disappointing. This continues the trend we’ve been seeing in past results, but suggests a significant worsening. At this point, we all have to start wondering whether Samsung and Apple really have been pursuing equally sustainable though very different business models, or whether Samsung has been enjoying a sort of exceptionalism, a temporary immunity from the inevitable market forces that shape the consumer technology industry. Will Samsung be able to prove over the coming months it has what it takes to succeed long term, or will its lack of investment across software, content and communications, and the integration of all these, start to really hurt it? What are the broader implications if Samsung really does start to suffer, both for Google and for the broader Android ecosystem? These are questions I’m going to be looking to explore in the coming weeks and months. I’d be interested to hear your thoughts in the comments too.