Samsung And The Smartphone Leader's Poisoned Chalice

Samsung just announced a forecast 25% profit drop in Q2 2014 results with softening smartphone sales the key culprit. Samsung is learning the same hard lesson that Nokia did: that the smartphone game is the most volatile mainstream consumer electronics sector in the global market and that without a services play today’s hit can be tomorrow’s flop.

Just like pop music the smartphone market is a hits driven business. But whereas record labels have the benefit of being able to rely upon selling old hits to pay the bills if their current roster isn’t doing so well, smartphone companies have no such luxury. A smartphone company is only as good as its latest hits and if those flop it can suddenly find itself an also ran. Just look at HTC.

Of course some smartphone companies fail much more steadily due to fundamental business issues, as was the case with Nokia, but Samsung’s current plight illustrates the volatility of the market. Samsung is not about to suddenly become an also ran over course of the summer, but at the same time this could herald the start of a very swift descent down the rankings. Within a few short years Nokia went from mobile handset market leader to niche player. There are few other CE sectors were such a transformation can take pace with such rapidity. Samsung will be looking at its TV business with fond affection right now, longing for that sector’s relative stability despite being highly competitive.

Smartphone customers are much more fickly though, because:

1. Replacement cycles are shorter

2. Purchase decisions are often shaped by tariff options rather than features

3. Phones are fashion items

As Samsung is now realising, being a leader in the smartphone business is in many respects a poisoned chalice. Now that Samsung has deeply pivoted so much of its business around its phone division it will be asking itself whether ‘tis nobler to be a solid, but smaller, TV and traditional CE company, or a smartphone leader that may burn brightly but quickly.

Samsung’s Three Non-Device Challenges

While it ponders that one, Samsung has three key non-hardware issues it must formulate a response to:

Google doesn’t like being Samsung’s de facto OS: Samsung’s dominant market share effectively transformed Android into Samsung’s operating system. It was not meant to be this way. When Google embarked on the Android journey it was meant to be all about levelling the market, transforming it into a patchwork of medium sized companies, each dependent on Android making Google the effective ruler of client states. Google does not care much for Samsung’s dominance nor does much of the rest of the mobile value chain. No one likes a dominant leader. That’s the price to pay for success. But it is when you start your trip back down from the top that you find out who your friends are and you will reap the harvest sown by how you treated others on your way up. The arrogance of a top dog can quickly come back to bite it in the proverbial posterior.

Too many of Samsung’s smartphones have dumb users: For all of the criticism Apple receives for its inability to take Samsung on in the scale game, it still has the world’s most valuable collection of smartphone customers. Though the iPhone user base is diluted by later, it still has a massive rump of super engaged early adopters with disposable income and a proven willingness to pay for content and services. Though Samsung also has a core of super savvy users, its scale came with the 3rd wave of smartphone adoption: the mass market. Consequently Samsung’s smartphone user base is skewed towards users who do not even use the smart functionality of their phones and bought them simply because they were what the sales reps upgraded them to.

Samsung lacks a content and services strategy: OK, let me rephrase that, Samsung lacks as content and services strategy that works. Apple has proven the value of an integrated ecosystem with premium content and services. Amazon made it work on the Kindle and is now extending it into smartphones and tablets. Google gave up waiting for Samsung et to get their collective acts together and is instead building its own around Play and Chromecast. Samsung tried much but never made anything work, least of all its ill fated Hub strategy. Samsung is left with the same problem ISPs has in the late 2000’s. They realised they had become dumb pipes. Samsung has become a dumb device provider, with all the value being extracted by third parties.

Samsung has perhaps a year to 18 months to turn around its fortunes. The nature of R&D cycles means it has effectively very little it can do with its handset strategy in that time as the devices it will launch in the next 12 months are already largely built. So addressing those three key non-hardware challenges will be key to whether Samsung turns around its fortunes or ends up following Nokia’s lead down, down, down.