Samsung's Four (Easy) Steps to Mobile Dominanceby
Can anything stop the Samsung (005930:KS) train?
That’s what you come away wondering, after looking at a series of revealing charts from mobile analyst Horace Dediu. In them, he tells a good story:
How Samsung became the world’s largest handset maker (eclipsing Nokia, which had that spot for as long as anyone can remember), going from zero to market dominance in less than three years:
How that rise was fueled by abandoning simple feature phones and embracing smartphones and how that embrace led to higher revenues:
Which, in turn, led to higher profit margins:
And how all this has led to a striking statistic: Samsung is earning more profit from its mobile division alone ($5 billion+) than Google is earning from all its operations (less than $3 billion):
The irony here is that Samsung’s success is directly tied to its having adopted Google’s Android operating system. Google gives the OS away and—it would appear—much of the money that goes with it. Samsung can skip the hard work of developing an OS and get to the more profitable hardware side of the business.
I asked Dediu to talk a little more about this—to walk me through it. He pointed out that Samsung did four things to help it get where it is:
1. Samsung saw where the puck was going. The company moved aggressively into smartphones, jettisoning the lower-margin feature phones to which other manufacturers (such as Nokia) held on to support their business. “Samsung could see that this is where the market was heading,” says Dediu. Was this due to clairvoyance? Perhaps, but as Samsung is not only a manufacturer of its own products but also a supplier to others, the company may have also held an advantage. “Apple was Samsung’s largest customer,” says Dediu. “Did that affect Samsung’s decision? Apple was certainly indicating something when it started ordering large quantities of mobile displays and processors. Samsung was in a unique position to see that.”
2. Samsung had the capacity to build large and fast. As a maker of many things for many companies, Samsung can pump out Galaxy S IIIs by the million. Few other companies have access to that kind of manufacturing muscle. “For Apple, it’s a struggle for them to make 50 million units in a quarter,” says Dediu. “Samsung already shipped 55 million smartphones in Q3.”
3. Samsung could spend on advertising. Do you feel like you’re seeing more Samsung ads than you did, say, a year ago? That’s because you are. According to Kantar Media, an ad-research firm, Samsung’s spending on ads increased 1,329 percent from the first half of 2011 ($7 million) to the first half of 2012 ($100 million, according to this chart on Business Insider).
4. Samsung already had relationships with wireless carriers. Remember that you can make a great phone, but unless you’re Apple—with your own robust retail operation—it’s exceedingly hard to get your product in people’s hands without the help of carriers. They become your marketing assistant, your sales force, and your customer-support division. If you’re a company that’s new to the game, such as HTC (2498:TT), you don’t have the same relationships as a Nokia, Motorola, or Samsung. “Samsung already had relationships with more than 500 carriers around the world,” says Dediu. “Going from feature phones to smartphones was a flip of the switch for them.”
Perhaps another issue operated at a near-philosophical level. Google’s path to mobile success has always been a circuitous one: “We’ll create an operating system that we’ll give away, but in creating a new ecosystem, we’ll drive more people onto the Web via mobile, creating new opportunities for search and advertising. Eventually, that search and ad money will flow back to us.”
Samsung has taken a more direct approach: “We’re gonna make some phones and sell ‘em for more than it cost us to make ‘em.”
It’s simple, but it works.