There are multiple signals suggesting that the world's biggest smartphone maker, Samsung, is losing momentum.
On the surface, things seem great. Samsung dominates smartphone market share, accounting for one in three of all smartphones sold. Scratch a little more deeply, though, and you'll see that Samsung has accumulated customers by selling cheaper semi-smart devices at deep subsidy. In other words, Samsung has built smartphone market share at the expense of profitability. Is this a sustainable business model?
A bad quarter
The cracks are beginning to show. During Samsung's most recent financial call, the company said that despite its huge chunk of the smartphone market, operating profit for its Samsung Electronics division fell 18% from the previous quarter. That's a big decline. The electronics division has become deeply reliant on its mobile-device business, which now accounts for a whopping two-thirds of the division's profit. It is fortunate the parent conglomerate has such extensive business interests with which to finance its grab for smartphone market share, but have its expensive subsidies enabled Samsung to build the loyalty it needs to drop the subsidies? Let's answer that by asking another question: Has Samsung delivered experiences that surprise and delight customers? It has not.
Smartphones are part hardware and part software. They depend on good software design almost as much as they rely on great hardware. And together, those things offer personal experiences that are measurable by things like customer loyalty and usage.
Samsung's software isn't making the grade, acknowledged company vice chair and CEO Kwon Oh-hyun in November. Promising future improvement, he admitted that Samsung's software innovation has not kept pace with its hardware development.
When it comes to software, Samsung has a big problem: Google. Google develops the Android OS that Samsung's devices are built on, and until very recently also owned Motorola Mobility, itself a direct competitor at the high end of the smartphone market.
No matter how you dressed that up, it meant Samsung was reliant on a company it also competed with. This is why Google's recent patent deal with Samsung was good news for the smartphone maker, though the in tandem deal to sell Motorola Mobility to Lenovo will change the competitive landscape in time.
Despite those deals, the fact remains that much of the software experience of using a Samsung smartphone comes from an operating system it has no control over and that offers zero exclusivity —pretty much anyone can install Android on its devices, meaning Samsung faces an army of competitors in the low- and mid-range markets, but has no clear way to distinguish itself from them. With companies like Huawei snapping at its low end market and Lenovo gunning to take on Samsung and Apple at the high end, it certainly seems a tough business. All three companies still face Apple, which controls both the hardware and software experiences, and all three are reliant on the same OS. It seems inevitable all three will struggle to make their products distinctive in such a crowded market.
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