How sustainable is Samsung’s Android business in the long term?

January 24, 2013

Samsung-Galaxy-Premier

Samsung is currently king of the hill amongst Android smartphone manufacturers. In fact, Samsung leads the pack, and has far outpaced Apple in terms of handset sales. As such, the argument is that Apple may have won in the legal arena, with its billion-dollar patent win against the South Korean firm in August of 2012, but Samsung has proven itself in the market, with demand for Galaxy smartphones jumping, whilst interest for the iPhone wanes.

But Samsung cannot just rest on its laurels, argues industry observers and analysts. The chaebol (South Korean conglomerate) may be at the peak now, but if it does not take heed, its business model might follow that of the old guard, which saw their sales and market sale flourish during their golden ages, but were fast superseded by then-emerging technologies.

We can point out a few cases in other industries here, such as the PC industry, which had been the bailiwick of HP and Dell in hardware and Microsoft in software and OS. Emerging trends today are shifting power away from the product-oriented businesses in favor of services. With the rise of cloud computing, suddenly your desktop-version Microsoft Office is not so relevant after all, even in a business or enterprise setting.

Even the smartphone industry itself was once led by once-mighty brands and platforms such as Nokia’s Symbian and RIM’s BlackBerry. Where are they now? Even Microsoft was at the top of the PC business, and yet mobile devices like smartphones and tablets are fast gaining on traditional desktops and notebooks in terms of growth and sales.

Chris Dixon writes that Samsung is now considered the “fifth horseman” of tech, alluding to the four horsemen of the apocalypse, of course. The Galaxy Note 2-maker is now in the leagues of Amazon, Apple, Facebook and Google. As such, Samsung has the power to influence the industry, being the leading non-iOS device maker. However, there are a few things Samsung must watch out for.

Stratification

“Will the smartphone/tablet industry stratify the way the PC business did?”

The concern here for Samsung is that technology markets will inevitably stratify, and the important thing will be whether the company will be able to remain relevant even as it does not keep control over the entire ecosystem and user experience. In contrast, Apple’s business model relies on the integrated approach, where it builds both the hardware (iPhone, iPad, iPod touch) and software (iOS), and runs the application marketplace, too, with the App Store.

Samsung’s smartphone business heavily relies on Android and the app ecosystem surrounding it, both of which are run by Google. As such, there’s no stopping yet another smartphone brand from dominating the market in the future. Samsung also does not get direct returns from app sales, and its only revenues come from handset sales.

Even Microsoft is betting on an integrated approach, with its Windows 8 platform and its latest Surface tablet, plus the fact that the Redmond company is heavily banking on its cloud-based approach to both consumer and enterprise computing to remain relevant in today’s cloud-centric business environment.

The other side of this argument, though, is that tech markets eventually “overshoot the needs of its customers,” and in this regard, Samsung may be in the best position to remain viable, given how it covers everything from the low-end to the high end of the market. The next question would be whether this would be the most viable business model, considering where the money goes.

Profit share

“If the industry stratifies, will the lion’s share of the profits go to the OS and application layers as it did for PCs?”

Again, the big issue here for Samsung is whether its business will remain viable if the ecosystem is stratified enough that it no longer has any control over the revenue sources. Samsung can earn profits as far as handset sales go, but not from app sales, in-app purchases, subscription, content and the like. There is a question here whether it’s the hardware layer or the OS and apps layer that will prevail. Samsung’s competitors, like HTC, Sony and LG are “just one hit product line away from stealing Samsung’s position.” On the other hand, the OS and app layer — again owned by Google — will require huge investments not only in the app infrastructure itself, but also the developer ecosystem.

Given this argument, Samsung is currently in a position of power being the incumbent in terms of market leadership. But this is a precarious position because it does not hold they keys to the kingdom, so to speak. Google owns Android, and Samsung might just be a speck among multitudes of Android device makers a few years down the line.

Samsung’s strategy?

And so Samsung’s future success would rely on whether it can take advantage of this stratification enough that the significant profits flow to its own business. It seems that Samsung is aware that hardware can only take so much profit, which is why the company has been hinting at developing or supporting an altogether new mobile operating system.

But of course, Apple and Google are in control of their respective ecosystems today, with iOS and Android, respectively, and it’s not likely that a new OS contender would make a dent into their dominance, at least in the near future. Take Google, for instance. It can afford to lose money on handsets and hardware and even its own OS development, because it earns so much from its other core businesses, including web services like search and advertising.

How sustainable can Samsung’s mobile business be, then?

Comments

  • ijks

    From what Samsung is doing (not just in their mobile division), I think their vision is far bigger then grabbing larger market shares for their mobile devices. The next step after smartphones and smartcars, is obviously smarthomes. Samsung wants their TV, refrigerators, washer/dryer, and all other appliances inside the homes of everyone and to connect their homes up online. Also, Samsung has the best homeground to test future smarthomes since South Korea is the most connected country in the world.

    The reason every tech company all over the world are watching Samsung isn’t just because of their dominance over mobile devices, but the fact that Samsung makes and researches everything from medicine all the way to military weaponry, robotics, and back to pretty much every single consumer electronics devices ever.

    • taz89

      Just about to say the same…the end game isn’t to be just no1 in mobile but everything…

    • Unnuhybyb

      How are u going to dominate the home if u cannot control the software android. All smart devices need an operating system.

  • On a Clear Day

    Let’s not forget all those iPhone buyers who WILL ultimately be switching to Android – satisfying them as they disgard their outdated technology should keep things humming along at Samsung for at least a few years! lol

    • robblerobble

      How is the iPhone outdated? iPhone 5 is faster than Samsung’s flagship phone, Galaxy S3.

      Not to mention, Samsung phones are outdated for months until Samsung decides to release OS updates … and some of their phones never get OS updates (the Galaxy S2 STILL doesn’t have Jellybean… but iPhone 3GS, a phone that’s 2 years older has iOS 6…)

      Until Samsung becomes more responsible about customer support and phone support, Nexus devices and iDevices will always be better.

      Only geeks worry about specs.

      • keyster21

        gs 2 DOES have jb, and the iphone 3gs running ios 6 lags harder than anything you’ve ever seen.

        and the iphone 5′s os is severely dated, it shows its age. People get bored after the same thing over and over again for the past 4 years.

        go pull the wool over your eyes tightly and keep preaching to the fanboy choir, sheep.

        • robblerobble

          lol fandroid is getting upset.

          Jelly Bean is being released to SOME carriers for the S2.

          MOST carriers aren’t going to update them.

          But NEXUS phones and iPhones get OS updates the same day they’re released.

          How long has Jellybean been out, 6 months? What a joke.

          • keyster21

            You’re wrong again. Since you’re specifying by which carriers do or do not update…how’s this one for ya.

            “But NEXUS phones and iPhones get OS updates the same day they’re released.”

            galaxy nexus on verizon didn’t see jb for months upon months after it was released.

            So don’t act like you’re stating factual information when it’s just all wrong. sheep.

          • robblerobble

            Wait, wasn’t the latest Android OS, Jellybean 4.2, released in November?

            And G3 STILL hasn’t received this update?

            LMFAO what a joke. Samsung sheep are the funniest. Always trying to justify their shitty purchase.

            Nexus devices and iDevices are still way better. Admit it, Samsung sheep.

          • keyster21

            why did you completely turn the topic around because i proved your to be nonsense wrong? acknowledge the galaxy nexus fact i stated; it didn’t receive updates from verizon for months, you ignorant tool. so none of your “factual” claims are true. idiot.

            and gs3 has had jb on major carriers for awhile now, i have no clue where your heads been the past few months.

            oh ya, up your ass.

            like i said before, pull the wool over your eyes, put the wool in your ears, and keep screaming apple over and over again you little sheep. gotta work now, won’t be checking your childish posts anymore. have fun talking to nobody.

          • robblerobble

            LOL Samsung sheep rage quit.

            Samsung Galaxy S3 doesn’t have the latest OS of Android.

            That’s why Samsung phones AREN’T a good buy. They aren’t supported very well, like Nexus phones or iPhones.

            Deal with it.

          • Adam Abdelaziz

            But the G3 does have jelly bean.. are you fucking retarded?

          • Geehest

            Samsung Galaxy S3 has Jellybean 4.1, which is behind the latest version of Jellybean, 4.2. JB 4.2 is faster and more refined than 4.1.

            4.2 came out in November, while Samsung was rolling out an already outdated OS to their devices.

            So, do your research before you call people “fucking retarded”, because it makes you look fucking retarded.

          • guest

            Jellybean is jellybean. Minor updates do not undo that undeniable underlying fact. Sorry but you are fucking retarted

          • Geehest

            Wow you sound upset at the facts.

            The fact is the Galaxy S3 isn’t running the latest version of Android.

            There’s no need to cry about it.

          • Ya boiii

            4.1 isn’t 4.2.1

            That’s like saying Windows Vista (6.0) is the same as Windows 7 (6.1)

            Samsung is slacking.

        • Ya boiii

          wait! what?
          iphone 3gs wasnt a lag fest by any means! its a great phone.

          i upgraded to ios 6. it was actually faster than ios 5 for me. the only reason i got a new phone because the camera wasnt as good.

          why are you spreading lies?

      • th3d

        Outdated for months? My mominlaw is running GIngerbread and her Xperia does in no way feel outdated, despite being a single core scorpion. The ICS update i available for her phone but why does she need ICS? No need at all. Gingerbread is way more advanced and feature rich than iOS 6, so you cannot say Jellybean 4.1 is outdated just because 4.2 is out. If you wanna talk about outdated then have a look at iPad Mini, NOW things are getting grave.

        • the truth

          Any device running iOS 6 is faster and more useful than any device running Gingerbread.

          Gingerbread is buggy, slow and incomplete… anyone thinking otherwise is just a sheep.

    • Guest

      errr… isn’t the iPhone 5 faster than the Galaxy S3… Samsung’s “flagship phone”?

      The only technology outdated I see is Samsungs phones… since they struggle to keep their OS up to date. It took them 4 months to get Jellybean on the S3… and the S2 doesn’t even have Jellybean… But all of Apple’s phones since 2009 have iOS 6

      Until Samsung becomes more responsible and offers better customer support and phone support, Nexus devices and iDevices will always be better consumer buys.

  • cycad007

    I don’t think Samsung’s profit margins will be sustainable for long. The Android smartphone hardware business is and will continue to become more & more commoditized with the introduction of the Chinese players. They may not hurt Samsung this year…but within 2-3 years, they should be caught up to Samsung in terms of technology. The only real technological advantage Samsung holds now is in their display technology…but that too will erode given that Japan,Taiwan & China are all eager to match or exceed Samsung Display.

    This is precisely why Samsung wants to differentiate…to maintain their business. But Tizen isn’t the answer and frankly, their hyped multi-window feature is really a gimmick…mostly supported by Samsung apps and 2-3 3rd party apps. The golden days where Android was extremely profitable for headset makers will be gone soon enough….for EVERYONE. That’s just the way the market & world works.

    • (anon)

      Right….you do realise that Samsung are a conglomerate company? Their mobile division is literally but a drop of their earnings

      • joser116

        Actually, most of Samsung’s profits come from its mobile division

        • robblerobble

          LOL why are people downvoting you?

          Samsung posted a $6 billion profit this quarter, and $5 billion was from mobile.

          From the same article, Samsung even admits that it’s sales will “decelerate” in developed countries.

          • joser116

            Thank you sir! :)

      • cycad007

        Of course…I realize that. You, of course, don’t seem to realize that their mobile division (Samsung Electronics) is the most profitable subsidiary. That’s why its considered their *FLAGSHIP* subsidiary.

        Do some research next time *BEFORE* putting your foot in your mouth. :)

      • robblerobble

        “the operating profit for Samsung’s mobile division more than doubled to about $5 billion for the quarter.”
        http://mashable.com/2013/01/25/samsung-earnings-record-profit/

        Either that’s a really big drop, or a really small bucket.

      • th3d

        No, the mobile division is their biggest profit. By far. You dont seriously think washing machines and microwave owens are great profit? Then Electrolux and AEG and Siemens would be the most valuable companies in the world.

        Without mob

        • th3d

          You know, washing machines dont have the gagdet factor for most of us. Im happy for you if you change your washing machines to the latest and greatest samsung model every year, and always have your kitchen up to date with the latest appliances, but most of us just dont care, and we are not willing to pay the premium for a premium refrigerator.

          When you change your phone it is good news, you are happy, but when you have to change your freezer its like “Efff! Need a new freezer, demn it..”. See, its just not fun, and therefor it will never be very profitable to manufacture as well.

    • bobdole

      They won’t be caught up within 2-3 years, what in the world are you smoking? The display tech is not the only advantage samsung has; it produces many of its core internals for smartphones. That way they can keep cost down, and manage to push cutting edge tech on their devices such as the galaxy series and note series. The chinese may be able to match cost, but then they will have to sacrifice quality.

      And even if display tech was the only advantage (which it is not) , what makes you think China can catch up to that in 2-3 years? Samsung has produced industry leading screens for tvs, monitors, smartphones, tablets for over a decade now. You think the chinese can just jump into the deep end of the pool and match that degree of screen technology in a matter of years?

      I don’t know the sustainability of Samsung’s profit margins, but I do know the sustainability of their hardware business.

      • cycad007

        Bobdole – Go back and read my post…I was talking about specifically about *profit margins*. I stand by my view…Samsung’s profit margins will go down. The smartphone market is starting & will be commoditized. Whether you acknowledge this or not is up to you…but the writing is on the wall.

        The Chinese can already beat Samsung in cost…just not in hardware technology. 2-3 years that will change that. Japan & Taiwan OEMs already have IGZO to compete with AMOLED. Bendable AMOLED displays? They have prototypes for them as well! I actually think 2-3 years is an optimistic scenario….for Samsung.

        To enter China’s market, you actually have to share technology with the Chinese. That’s the game they play. Are you really native to think China will just let Samsung dominate their market without having a look at some of their crown jewels?

        Sure…Samsung will still be around for a long time *BUT* their (and every other company’s) profit margins will be squeezed in the not too distant future.

        • bobdole

          wtf are you talking about? i specifically stated in my post that i wasn’t referencing the profit margin argument you made. i was pointing directly to the tech quote you said here: ” They may not hurt Samsung this year…but within 2-3 years, they should be caught up to Samsung in terms of technology. ”

          Before you tell people to go back and read your own post and …like a condescending douche with a false sense of superiority, go read my first thoroughly first then reply.

          …capiche?

          • cycad007

            Fine…let’s talk tech. What technology (other than display) does Samsung have a gap over everyone else?

            Software? No. Google evens the field for everyone. Samsung’s multi-window feature only works for custom Samsung apps with *VERY* limited 3rd party support.

            S-Pen? Licensed tech from Wacom. There are plenty of talented software developers out there to duplicate any features the S-Pen currently has.

            Process technology? Sorry…TSMC owns the 28 nm node. Plain & simple. Even Samsung’s clients prefer using TSMC here.

            Proccessor? Qualcomm is currently the speed king here. While nVidia can utilize its developer community to produce better looking graphics. While I am fully aware the Octa is coming, let’s wait & see how it performs vs Qualcomm & nVidia. Its 8 cores…sure…but can only use 4 cores at once.

            The Chinese OEMs don’t have to build everything by themselves at first. They can mix & match until they get caught up…and they will eventually get caught up. This has always been their strategy. You do realize that some of their models already have *BETTER* specs than the Samsung Galaxy S3, right? You do realize that Lenovo is projected to surpass Samsung as the #1 smartphone manufacturer in China, right?

            Last, don’t talk to me that way. I haven’t read anything from you that demonstrates more than a shallow understanding of the market. Give me specifics, reasons & counterpoints to your statements. I can talk technology all day, back up my points, and give you references. Can you, douchebag?

          • guest

            You sir are totally off. The new exynos octa quad is faster than anything qualcomm has – including the unreleased snapdragon s4 pro 800 – 2x faster – and that’s preliminary testing. I am pretty sure stweaks will allow all 8 cores at once.. developer community….remember…

            In fact it is faster than every chip slated to come out this year. Multi-window works fine with any app…

            The s-pen is a collaboration BETWEEN samsung and wacom. Wacom did not just make it and hand it over….

            Touchwiz is the best Oem UI and its gett I ng better… its actually very impressive and getting better every iteration…

            Display is samsungs milk and honey… have you been behind their r&d top secret doors?
            Think they DON’T know about the chinese?
            They ve been owning that field for years…where would apple be without them?

            That stands for tech too.

            Sounds like you just like to hate samsung.
            Can’t wait for my g note 3
            So glad apple is getting what they deserve.
            Keep it comin Sammy!

          • cycad007

            Really Mr. Guest?! Really? How is it that you would know that the Octa is 2x faster when there are no official benchmarks for either processor? Are you counting the number of cores?! So by your logic…the Octa is 2x faster because it has 8 cores, right?

            If so…you’re an *IDIOT*!! First…even if it was possible to utilize the 8 cores, it would *DEFEAT THE WHOLE PURPOSE* of big.LITTLE…which is power-saving!! Second, four cores on the Octa are A7s and four are A15s. Even *IF* you were able to utilize the 8 cores simultaneously, it wouldn’t be 2x faster than the SnapDragon 800. You must be just an end-user because you have *NO CLUE* what you’re talking about. Please *SHUT UP* and go read about the Octa, big.LITTLE, SnapDragon 800, etc.. before putting your stinking foot into your big mouth again.

            Multi-window *DOES NOT* work fine for every app. It fundamentally breaks the Android CTS and thus any app that is enabled for it must be “opt-in” at the discretion of the developer.

            Touchwiz being the best OEM UI is just your own opinion. Many people (including myself) will happily disagree with you…but that’s our opinion. To each his own….

            AMOLED displays is Samsung’s big & only advantage vs the rest of the smartphone industry. I’m sure they are well aware of the Chinese threat…but that won’t help their profit margins. Everyone’s profit margins will be going down…the smartphone market is becoming commoditized.

            Sorry…I was perhaps a bit hard on you. But you truly don’t know what you’re talking about. I can tell you are neither a software developer nor an engineer. You’re just an uninformed layman…who needs to read up on technology.

          • guest

            Ok… firstly there are four A9s… you SHUT UP and go read about it before you sout misinformation like you have been doing.

            You certainly are misguided in thinking that the mobile tech heads arent drooling over that new exynos.. you here on earth? Wake up – it absolutely stole the show at its debut.

            And it is on paper already faster than anything slated to come out this year, using the big.little design and function. Read more yourself since thats what we are all doing anyway..

            Common sense here – just because they are made to save power does not mean that they cannot work in sync.

            Idc about the market much in my opinion here. Consumers just want great products. What makes you so sure multi window doesnt work well with any app?

            Works fine with any app for me..

            You are way off

          • cycad007

            Please…I refuted your main point that the Octa is 2x faster. You have no benchmarks (nobody does) and my point is valid. All you did was *ASSUME* more cores = more power. In reality, it simply doesn’t work that way.

            The Octa has four *A7*s. Learn to read, moron! >:)

            Common sense?! Have eight processors work in sync?! Read about big.LITTLE…before you comment….you obviously haven’t. You don’t even know the whole point of big.LITTLE.

            You’re simply a lair. I see you’re clueless. You have no idea what you’re talking about and bring a world of false assumptions. Why don’t you stop talking before you thoroughly embarrass yourself even more? There are plenty of people how know their stuff around here….you’re simply not one of them! :P

          • cycad007

            Certainly looks like the Chinese OEMs are already starting to put the squeeze on everyone…

            http://www.theverge.com/2013/1/25/3914390/idc-smartphone-report-apple-samsung-huawei-zte-in-top-five

    • th3d

      Samsung is old news, they will go downhills from here. I am confident that Sony will see the most growth in 2013, the tradition at Sony was always to think ahead, if we were to find the most future proof product we simply cannot leave Sony out of the equation, the PS3 is still great, even the PS2 has just recently been retired and it continues to sell in low cost markets now when the PS4 is just around the corner. If Sony does this also for phones and tablets then it i just a matter of years before they are the number one smartphone manufacturer.

      I am ofcors talking about Xperia Z and Tablet Z, the designs are VERY future proof, and the lighter skinning on Sony JB looks like a perfect blend of vanilla and skined, the term would be “Skinilla Android”, and mark my words, the others will copy Sony on this! Samsung vs Sony on tablets? Samsung still didnt announce a Full HD Tablet, Sony is already very late but Samsung is nowhere to be seem. Off topic, I am now hoping for a ~8.5 inch Tablet Z with Full HD, that will be the most successful Android tablet to date. The Samsung Note 8.0 doesnt turn me on at all, i dont even click on articles about it, the only good thing about it is that someone has finally realized that 7 inch is too small. Even my 8 year old daughter dont want a 7 inch tablet, its too small for everything.

      • cycad007

        Well…I have no doubt Sony will experience growth. Its hard *NOT* too when you have almost 0% of the smartphone market. We’ll see how they do.

        As for Samsung…we’ll have to see. But I do believe their profit margins will be going down.

  • http://www.facebook.com/profile.php?id=696761688 Justin Rebar

    Its only a matter of time before people get annoyed by Samsung since they release what seems like 10 different versions of each phone a year. Samsung is the reason I never bought a Nexus phone until the Nexus 4 came out.

  • mimi

    samsung as company is a lot more bigger than just android.
    but yeah, they can put android on all of their product if they want to :)

    • Ya boiii

      not much bigger bro… phones account for 5/6th of their profit. meaning most of their money is coming from phones.

      • iSheep

        I think the number is more like 60%, no 5/6.
        And this is JUST the electronics division.

        • Topcat488

          More like 83.333%… But whose really counting right.

  • http://www.facebook.com/georgealexiouvalentey George Av

    this is just the start…..

  • Jason Hassler

    How is Samsung not making money off of app sales when they have their own app store? It came preloaded on my Galaxy Note 10.1, its called “Samsung Apps”.