Samsung Gets Mugged in Androidland
Here’s the story of the past couple of years in the smartphone business, as told through the clever plot device of listing a bunch of Samsung Electronics earnings headlines in chronological order:
"Samsung Rides Smartphone Sales" (WSJ, April 27, 2012), "Samsung reports record quarterly profit" (FT, Oct. 26, 2012) "Samsung Primed for Record Profit as S4 Phone Sales Set to Start" (Bloomberg, April 5, 2013), "Samsung Cuts Its Forecast as Sales Growth Slows for Its Costliest Smartphones" (NYT July 4, 2013), "Samsung Electronics Hit by Earnings Decline as Smartphone Sales Slow" (NYT April 8, 2014), "Samsung to shift focus as handset profit collapses" (FT, Oct. 30, 2014).
Then came today’s (or yesterday’s -- it’s an International Date Line thing) news, reported variously as "Samsung Predicts Big Drop in Its End-of-Year Quarter" (NYT), "Samsung Returns to Roots in Components as Phones Stall" (Bloomberg), "Samsung Earnings Hint at Recovery" (WSJ -- the story is a lot less hopeful than the headline).
What just happened here? What happened is that Samsung had a fun little run as the premium maker of devices in a burgeoning technology ecosystem it doesn't control, and now the inexorable forces of competition, commoditization, modularity and the like have brought it back to earth. It’s still the world’s biggest maker of smartphones, by a lot, it’s just that selling smartphones is turning out to be less lucrative than it looked to be a couple of years ago.
This shouldn't surprise anyone who was reading the business pages in the 1990s. Think of Compaq or IBM’s PC division as the analog to Samsung’s smartphone business, and you get the idea. Still, history never repeats itself, it only rhymes, so there are also differences between the smartphone business in the Teens and the PC business in the Nineties. The two big ones:
- Nobody controls the Android ecosystem the way that Microsoft and Intel controlled PCs. Google created it, but it doesn’t charge for the software and lets others modify it. And while Qualcomm and Samsung are the big two wireless chipmakers, their combined market share (34.6 percent in 2013, according to IDC), is markedly less than Intel’s in computers (42.9 percent -- I got this data via Bloomberg Intelligence on the terminal, hence the lack of a link).
- Apple has done a much better job this time around of defining a role for itself. It’s got a small share of the overall smartphone market -- 11.7 percent to Android’s 84.4 percent in the fourth quarter of 2014 (again according to IDC, but this time with a link). But that 11.7 percent represents the most affluent, profitable customers, and after a bit of Samsung Galaxy envy a couple of years ago, they now seem pretty happy to stick with Apple.
I have no idea how long Apple can maintain this lock on unimaginative affluent people. (I needed to buy a new phone this week, spent about 30 seconds thinking about it, then ordered an iPhone 6.) It’s clearly a situation that fits the Herb Stein aphorism, “If something can’t go on forever, it won’t.” Forever doesn’t seem to be a very useful concept in business or investment, though.
Out there in the much bigger and rowdier -- if also poorer -- world of Android, it is at least clear that things are going to be exciting. “One of the most exciting insights from our research about commoditization is that whenever it is at work somewhere in a value chain, a reciprocal process of de-commoditization is at work somewhere else in the value chain,” Clay Christensen and Michael Raynor wrote in 2003 in "The Innovator’s Solution." I’m not exactly sure what that means either, but it could describe the different paths that the Android and iOS ecosystems have taken over the past few years, or maybe the current situation within Android in which upstart Xiaomi -- which has almost no smartphone profits, by design -- is gaining ground by, in Ben Thompson’s words, “selling a lifestyle.”
Although Xiaomi has started getting a lot of attention outside of China, the emerging markets where all the smartphone growth is now are full of other device makers most Westerners have never heard of. In India, for example, Samsung is No. 1 in market share, but it has been losing ground to Nos. 2, 3, and 4, Micromax, Lava and Karbonn. It doesn’t even stop with Android -- venture capitalist Zal Billimoria just decided that Microsoft’s dirt-cheap Nokia 215 “semi-smartphone,” based on the old Symbian operating system, is “the most interesting thing that’s come out of CES this year.”
Interesting is cool. It’s not the same thing as profitable for device manufacturers or software creators, but that just means somebody else is benefiting. In the strange case of the Android ecosystem, it looks like it’s consumers around the world -- especially less-affluent consumers -- who are getting the windfall. Thanks, Google! Sorry, Samsung! And now let me go check if my new iPhone 6 has arrived yet.
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