Samsung's Success

Chris Dixon, in ["Samsung's Predicament"](http://cdixon.org/2013/01/20/samsungs-predicament/): > Samsung’s predicament is: their current strategy succeeds only in the scenario where both (a) the industry stratifies, and (b) significant profits flow to hardware. Samsung seems to understand the improbability of (b), which is why they’ve been hinting at throwing serious support behind a new OS. Getting traction with a new OS will be difficult, to put it mildly. Google and Apple have vastly more experience making software and a huge head start with developers. Moreover, Google’s strategic position is even stronger today than Microsoft’s was in their heyday. Google makes so much money from web services (mostly search, for now) that they can afford to lose money on handsets and OSs indefinitely – a very scary fact for Samsung and everyone else in the mobile hardware business. Dixon's argument, which is getting wide play in the Twittersphere this evening, is unfortunately not far off from those predicting doom-and-gloom for Apple. Namely, it spring from a fundamental misunderstanding of Samsung's success. Gruber is more honest [about his befuddlement](http://daringfireball.net/linked/2013/01/07/samsung-mg-siegler): > There are only two companies making any profit in the mobile handset industry: Apple and Samsung. Would anyone a few years ago have expected Samsung to hold such a position? In some sense, what Apple has done is easier, or at least easier to understand: they have their own exclusive platform, iOS. Samsung has eked out a strong second place position selling a platform, Android, that was supposed to be a commodity. Why is Apple number one? Because they have a unique and superior exclusive offering. Why is Samsung so far ahead of HTC, Motorola, LG, et al? That’s a lot harder to understand. The reason it is hard to understand is actually weirdly related to why Wall Street doesn't seem to understand Apple — while analysts do not know how to properly value design and product focus, tech observers do not know how to properly value business fundamentals like channel, marketing, and value chains. Samsung is the master of all three. 1. Channel: The single most pertinent factor of mobile is actually best exemplified by the iPhone: Apple Stores [sell only 21 percent of iPhones](http://www.idownloadblog.com/2012/10/03/most-iphones-not-sold-by-apple/). Or, to put it another way, carriers sell 79 percent of iPhones, and even more of nearly every other type of phone, feature phones included. Serving the carrier channel well has bottom-line implications for every handset manufacturer. Samsung plays an important role for the carriers. They fill the channel completely, at every price point, from feature phones to entry level smart phones to top-of-the-line. This gives them great latitude in pricing, discounts, placement in stores and marketing, and makes them indispensable to the carriers in a way a smartphone-only provider like HTC or Motorola never could be. This matters, especially when magnified by the literally millions of carrier storefronts globally. 2. Marketing: Samsung's marketing budget is well-known: [nearly $12 million a year](http://www.asymco.com/2012/11/29/the-cost-of-selling-galaxies/). Less well-known is what that is spent on. I don't have exact figures, but I believe a very significant portion of this spend is sent directly to the carriers in the form of co-marketing, product placement, and (especially) sales incentives. It actually makes a significant difference to your friendly representative's paycheck as to whether you walk out the door with a Galaxy III or an iPhone 5 (hint: he'd prefer the former). There can really only be one player here: the salesman is going to push you on Samsung, or HTC, or Apple, not all three. Samsung's financial muscle lets them own this, with the net result that they earn much more than their competitors, compounding their advantage. It's actually quite strait forward, and it's devastatingly effective. 3. Value Chain: Samsung is able to leverage its strengths because of the unique value chain in mobile. Phones, unlike the computers to which Dixon is comparing them to, are not sold to customers but are sold to carriers. End users traditionally do not choose a phone, but rather choose a carrier, and only then choose the phone that fits their price range and needs as laid out by their friendly salesperson (who is heavily incentivized to push Samsung). Samsung understand this value chain in a way the other handset makers do not. I've already described their willingness to meet the carriers needs at every price point, invest in co-marketing and willingness to incentivize carrier's sales forces (and implicitly support lower salary costs for the carriers themselves). They have also avoided mistakes made by competitors who seem to misunderstand the mobile value chain: - HTC: HTC famously [unlocked their bootloader](http://www.htcdev.com/bootloader) in 2011. 2011 also happened to be when their market share began a dramatic decline. If you believe that carriers are the key point in the value chain, is this a surprise? Needless to say, Samsung's are as locked down as possible. - Motorola: Motorola staked its comeback on the Droid smartphone, which was a massive success for Verizon in its attempt to counter the iPhone. Motorola compounded their success with the Droid Eris and Droid Incredible…oh, wait, Those were released by HTC. Motorola's comeback phone was branded by Verizon. No one cared who actually manufactured it. HTC has made similar mistakes, allowing the same phone on different carriers to carry different names. Samsung, on the hand, leveraged its power with the carriers to insist that its flagship phone be called the Galaxy on every carrier, magnifying their other efforts to promote their phones with increased consumer awareness. - Apple is the exception who proves the rule. Apple went over the carriers head and appealed directly to the end user. But even then, Apple needed a carrier who would grant them the power to own the customer experience; they ended up with AT&T, who was being crushed by Verizon, and even then, had to promise exclusivity for 5 years (later shortened to three-and-a-half). Samsung certainly strives to be in the customer's mind, but has otherwise played by the carrier's rules. None of these points — channel, marketing, or value chain — have anything to do with product. And that's why most folks don't really understand Samsung's success. Make no mistake, I strongly endorse and believe in putting product first. I believe this delivers a superior experience for the end user. But it does not guarantee success in any industry, including technology, and to fail to understand the nuts and bolts of business is as silly a blunder as those made by analysts ever predicting Apple's doom.