Samsung’s Real Threat to Apple

on May 10, 2013

When the iPhone was introduced, a Sr. Apple exec put the iPhone on a table in front of me and asked me what I saw? I replied by saying that I saw a black piece of glass on the table. He pointed out that what I saw was correct and then added that the real magic of the iPhone was the software. Over the last five years, smartphone vendors have continued to increase the size of the glass, put more physical bells and whistles on the hardware in areas such as audio, cameras, etc., and tried to make the hardware the real gem of their new smartphones.

If you look at the iPhone, the physical design has pretty much stayed the same. In fact, some could say its design is minimalist compared to the newer smartphones hitting the market today. Of course, that is not true. Apple has made it sleeker, put faster processors and higher resolution screens and better cameras and audio in every next generation of the iPhone. But as far as I am concerned, its crown jewels are iOS and the total ecosystem behind it that makes the iPhone sing and dance.

All of Apple’s competitors understand this but most are saddled with a core mobile OS like Android that, while getting better, is the same OS that all Android licensees have access to as well. While that is good for most, to really be competitive against Apple, vendors also know that differentiating around hardware, software, and services is what will ultimately make them competitive.

Separating From the Pack

HTC was one of the first to add its own UI layer on top of Android. Amazon and Barnes and Noble also use specialized UIs on top of their Android OS in order to make them easier to use with their own software and services. While basic Android is the same to all, one key thing that Google does allow is their partners ability to add their own UI on top of Android to enhance their devices and differentiate them from other Android vendors. This is one of big mistakes Microsoft has made with Windows Phone. All vendors can only use the Microsoft Windows Mobile UI and so all of their partners devices look and work the same (this is true of Windows 8 as well). [pullquote]While hardware may differ, the magic is in the software and from the start Microsoft gives their partners a real disadvantage when it comes to allowing them to differentiate in the area that counts the most–with software.[/pullquote]

It’s no wonder that Apple has 57% of all of the smartphone profits and Samsung 43% of smartphone + feature phone profits for the quarter. Incredible, really, when you think about it.

I have been watching Samsung very closely for many years. In fact, from 1990-1998 I consulted with them on their US retail strategy and always saw them as a major player in tech, even through their PC business in the US struggled. One of the things I understood, even back then, was their vertical integration. This means that for the most part, they make their own components that go into their devices. This gives them a real advantage over other vendors who have to outsource all or most of their components for their products. This is one area that continues to be a threat to Apple as Samsung’s vertical integration gives them quite an edge.

However, when it came to software and services I saw that this was an area that they were very weak at. This remained true until about three years ago, about the time they started going to school on Apple’s successful model. Like all of Apple’s competitors, they now know that for them to succeed they have to deliver very competitive hardware, software, AND services. To Samsung’s credit they have really taken the software challenge to heart and have been expanding their skill set and expertise in software design and development in a big way. In fact, we hear that a big part of Samsung’s facility expansions in San Jose, CA will be focused on software development.

This is really evident in the new Samsung S4 smartphone. I have been testing one for the last week and am very impressed with their software prowess. It is clear to me that while Apple’s software skills, expertise, and ecosystem is still much stronger then Samsung currently, in my opinion, I have no doubt that Samsung is serious about software innovation and is building up the team to give them the skills needed to compete with Apple head-on at the software level. They are still weak and tied to Google when it comes to services, but even here there is a chance Samsung could enhance their service position in the future.

Going Down Their Own Path

Two features really stick out among the dozens of new UI enhancements in the S4. The first is called Air View, which allows you to hover your finger over an email or message and the first 5 lines with the subject and email or message pops up so you can see the gist of the email without opening it. The other feature is called Air Gesture, which allows you to just wave your hand to answer a call or turn a page. Both of these new features tell me that Samsung understands the need to innovate at the software level and that they racing forward to do it. Regardless of how you feel about these features or whether they are gimmicky, strong hardware + software chops were required to execute.

On a side note, Samsung’s recent decision to integrate their own OS called Bada, into Tizen, an open source mobile OS backed by Intel, is also strategic. For Samsung to be successful over the long-haul they must control their own destiny. By using Google’s Android as a core OS, they are still beholden to Google for their OS directions. I personally think that over time they will eventually migrate completely to Tizen but only time will tell if this will actually happen.

Although reviews of the Galaxy S4 have been mixed, I believe that this phone starts a new chapter in Samsung’s strategy in which software is now seen as the crown jewel and for Apple and all of Samsung’s competitors, this becomes an area to watch closely as they try to use it to really set them apart from Apple and the rest of the Android vendors they compete with.

The biggest threat Samsung poses to Apple, and others for that matter, is their goal of further becoming a software company. Only time will tell if they can forget their own software path but regardless they are going to try.