Who Is To Blame For Samsung’s Bad Fortune?

As the profits plunged on Samsung’s smartphone business, the web has been awash with reasons.

Ben Bajarin has shown very nicely that the largest problem that Samsung faces is the decline of the high-end business, which is also mentioned by a Samsung executive in the Guardian article.

The high-end of the business has been dominated by Samsung and Apple and still is. This means that there are two possibilities.

  1. Apple took away Samsung’s sales in the high-end. That is to say, users of high-end Android phones (who were mostly using Samsung devices) switched to the iPhone.
  2. The high-end market for Android smartphones saw a sudden shrinking. That is to say, mid-range smartphones were perceived as good enough and hence there was no need for customers to purchase high-end Galaxy devices anymore.

I suspect that both of these happened but I want to analyze them in isolation because it makes the situation easier to understand. Although these two look similar, they are actually very different. The first means that Apple was able to steal market share away from Samsung. The second means that vendors of mid-range smartphones (including Samsung of course) captured the customers who previously bought high-end phones. We will look at each separately.

Apple is stealing away the high-end

This is obviously happening. All reports point to Apple selling huge numbers of iPhones and it has been suggested that a lot of these are switchers who have abandoned Android phones.

The important thing is why. Of course the triggering event is the increased screen size of the iPhone 6. However, what is more important is why couldn’t Samsung match the iPhone 6 before Apple threw down the gauntlet. Why was Samsung left clinging to screen size as the only feature that could keep it competitive in the high-end.

Although design and/or Apple’s brand could well be a factor, it is also as likely that iOS and its app ecosystem could have been perceived to be superior than Android. If this was the case, then the blame would have to be put onto Google. Google failed to create an operating system and ecosystem that was competitive against iOS. The only reason that the high-end Android market existed at all was because Samsung had large screens while Apple did not.

If it was design or branding, then it would be harder to place the blame on either Samsung and Google simply because Apple is so good at these. Either way though, the result is that the high-end Android market cannot exist anymore.

The high-end Android market is shrinking

This is a completely different dynamic. If this were the case, then we should be seeing customers who previously owned the flagship Galaxy devices either downgrade to mid-range Android devices or to extend their replacement cycle. I have not yet seen a statistic that suggests that this is happening, but it is plausible.

This can only happen if Android smartphone hardware is starting to be considered as good enough, even by previous high-end purchasers. This also has to happen while at the same time, on the Apple side of the fence, Apple customers are not considering iOS hardware to be good enough. There must be something very different happening to Android customers and iOS customers.

The good enough of hardware is determined by software. If the software can take advantage of new hardware and create a true benefit for the customer, then old hardware will not be good enough. On the other hand, if the software does not have any compelling features that require new hardware, then old hardware will be good enough. No matter how much the hardware improves, whether customers will demand it depends on software.

In the case of iOS, the OS made full use of the 64-bit hardware to enable much faster processing of photos and movies. The OS made use of the TouchID sensor, which is also now being used by the Apple Pay service. Apple has given each piece of new hardware a significant reason for existing, and that is why customers want new devices.

On the Android side, that has not been the case. Google has not moved quickly to 64-bit, it has not worked hard on corporate level security, and it has not introduced software support for biometric sensor technology. Instead, Google has introduced a lot of software technologies that enable low-powered devices to smoothly run the latest operating system. Instead of adding new features that would take advantage of new high-end hardware, they focused on making sure that the mid-range and low-end hardware would be able to run the latest operating system and to take advantage of all of its features. In summary, Google actively designed their new operating system so that Samsung would have a hard time differentiating itself.

Although I’m not sure whether Google did this intentionally, it has made it very difficult for high-end Android smartphones to compete with mid-range ones. This is not only a challenge for Samsung, but it will also be a challenge for any OEM that plans to move upmarket. It will mean that companies like Huawei, Lenovo and Xiaomi will not be able to move up-market unless they gain significant control of the OS.

So what should we blame?

I think that Google was targeting the low-end from the start, but Andy Rubin was not. I genuinely think that Andy Rubin was much more focused on the high-end and he didn’t seriously consider making Android work better on low-end devices. I think he wanted to make Android as good as or even better than iOS. The fact that his reign coincided with when Samsung was strongest is no coincidence.

When Andy Rubin was removed and Sundar Pichai took over, it became rather clear that instead of fighting with iOS, Android would focus on the low-end. In fact, most products that Google creates (many of which were under the supervision of Sundar) aim at the very low-end where prices are normally zero. Google Docs is a prime example of this, as is Chrome OS. Google’s strategy is to commoditize all markets except for search and advertising, by providing a good enough product for free.

Samsung could have tried harder to take control of Android so that they could create software that took advantage of high-end software. In fact, they tried. Considering that Samsung was mainly a hardware company, I don’t think that they ever misunderstood that they needed good software; it was just that they didn’t have the resources or the culture to create great software. It’s hard to blame their strategic thinking for this.

Google could have tried harder to preserve the high-end. However, it’s priorities were clearly in the low-end. It’s hard to focus on both.

I would say that the only strategy that we could actually blame was Samsung’s decision to team up with Android. Samsung should have seen that Google would ultimately aim to commoditize their own OS and all hardware vendors using their platform. Samsung should not have helped Android to gain market share, and instead waited for a contender whose priorities aligned better with Samsung’s goals. Of course, that is what Nokia did.

Misguided Expectations for Replacements Cycles

Many people have blamed the slowdown of iPad sales on the fact that the replacement cycle of iPads is quite slow. In fact, we don’t really know what the replacement cycle is yet because the device is still very new (even the first replacement cycle hasn’t yet kicked in) and the second generation device, the iPad 2 (introduced March, 2011) is still used quite a lot.

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My question is, is the replacement cycle too long and should we be blaming Apple (as quite a few analysts are) for the lack of reasons to upgrade? Should we blame Apple for not introducing compelling improvements to the iPad that would drive users to buy new devices? Should we blame Apple for mismanaging the App Store to the effect that not enough exciting titles are being released for iPad?

This hinges on what the natural replacement cycle for a tablet device should look like. If the natural cycle should be something like two years, then yes we can blame Apple. If it is however something like 4 years, then we cannot conclude that Apple is doing a bad job.

Therefore, I think we should give some thought on to what the natural replacement cycle for a tablet device should actually look like.

Smartphones

The replacement cycle for the phone market varies from less than 2 years to over 10 years (interestingly, Android phones seem to have a much faster cycle).

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Recon Analytics sums up the reason for differences in replacement cycles as follows;

Based on the data and analysis outlined in the report, it is conclusive that over the last four years, handset subsidization is the dominant factor influencing the handset replacement cycle. The percentage of subscribers on postpaid and prepaid plans, as well as the relative income level in the countries, had a negligible impact on the handset replacement cycle.

Considering that the majority of iPads are WiFi-only and that these are not subsidized, we can expect iPad replacement cycles to be significantly longer that phones. There is very little reason to expect iPad replacements every two years.

PCs

The replacement cycle for business PCs in the US was a bit longer than 3 years. Why do they replace them so often?

  1. Increased productivity: If the old PC is much slower than the most recent models, then a new one would increase productivity.
  2. Escalating support costs: If the old PC tends to break down a lot, then buying a new computer may become cheaper than the maintenance costs.
  3. Software requirements: If the old PC cannot run new software, then it’s time to upgrade to a new PC.

Now how much of this would apply to tablets?

The amazing thing about the iPad, even the original model, is how fast it was on the limited hardware. Apple went to great lengths to achieve this, even sacrificing features that have been found on PCs since 2000 like multitasking in the background. Apple has kept third party software under strict restrictions, and this has helped keep software from bogging down the system. Apple itself has worked hard not to make iOS bloated.

As a result, the iPad 2 from 2011 still has enough performance to run the most recent iOS (iOS 8) with OK speed. Hence “increased productivity” does not apply very much to iPads and neither do “software requirements”. We also have to understand that iPads are mostly used by consumers, and so less emphasis is places on “increased productivity”.

Another amazing thing about the iPad is how durable it is. Without almost any moving parts, not even a keyboard, there is very little that can break. The build quality of the device was also superb from the onset. Also, unlike phones which you carry about you all day, you are much less likely to drop and shatter an iPad on concrete. Simply put, the cost of maintenance for an iPad is remarkable low.

Since none of the reasons for a 3 year PC replacement cycle apply to iPads, there is no justification for expecting similar cycles for iPads. It is very possible that the replacement cycle for an iPad is much longer than 3 years.

The one thing to note is that the iOS 8 is bearable on iPad 2, but stutters quite a bit. This is probably due to the fact that it only has 512 Mbytes of RAM and I think that it is unlikely that the next iOS version will support it. If so, then “software requirements” will demand a replacement next year.

Other consumer electronics devices

For most consumer electronics devices, we generally only replace them if they break down or our family gets larger (and we need a larger refrigerator or washing machine). Unless you buy them from a manufacturer that is seriously skimping on important components, they should last at least 5 years.

Summary

As we can see, the 2 year replacement cycle that many analysts were initially expecting for tablets was completely misguided, and hence we cannot blame Apple for a cycle that may be 3 years or longer.

We could even argue that having compelling new features is only rarely a reason why people ever upgrade their devices. This is for the most part irrelevant to the upgrade cycle. In fact, the main pain points cited for upgrading PCs are mitigated by stricter control of third-partly applications, better hardware build quality and simpler hardware design on iPads.

Pear Shaped Android

From an IDC press release;

In fact, AndroidOne will go further and effectively create a bipolar “pear shaped” environment where the high end will be dominated by the likes of Apple and Samsung with their iPhone and Galaxy flagship devices; and the low end will increasingly converge around the $100 Average Selling Price (ASP) benchmark.

Note that the high-end Android market depends on Samsung.

Without Samsung, Android might be low-end ($100 ASP) only.

That’s a pretty bad situation. I think Google should be treating Samsung better.

Nokia HERE Maps for Android

Nokia has just announced a beta for their HERE Maps for Android. Interestingly, the beta is only available for Galaxy Phones and can only be downloaded from the Samsung Apps Store, but they will apparently target the general Android user base in a following release.

The main feature of this app seems to be offline capabilities. It also seems to be quite good with the basics;

Nokia has built up an extensive database of geographical information in 196 countries, including indoor maps for more than 90,000 buildings around the world. It supports turn-by-turn navigation for driving or walking as well. But the biggest advantage is the offline capabilities of HERE Maps. Google Maps has offline support as well, but it’s fairly limited by comparison: You get very little information about the points of interest and search functions won’t work.

The question is of course, will this be able to successfully compete against the pre-installed Google Maps that comes with Google Play Services licensed Android devices?

I would like to put down some notes related to this;

  1. The Opera mini browser was quite popular in developing countries, apparently even on Android devices. This was because it used a technology that reduced data usage, making it very useful for people with very limited data plans.
  2. Nokia HERE Maps will also appeal most to users who have limited data plans, many of whom are in developing countries.
  3. For users with generous data plans, the appeal of Nokia HERE Maps will be limited.
  4. Hence Nokia HERE Maps will probably see the greatest penetration in developing countries.

Windows is Cheaper Than Android

I have written quite a few posts on the topic of how Android hardware OEMs are losing their position inside the value chain.

  1. Android OEMs and The Law Of Conservation Of Attractive Profits
  2. What Happens When Hardware Makers Can Make No Profit
  3. Will Attractive Profits in the Android Ecosystem Move to Component Makers?
  4. Understanding Hardware Modularization in the Android Ecosystem
  5. Samsung Mobile’s End Game

What we are currently witnessing is a macroscopic trend that is working out almost exactly as Clayton Christensen’s disruption theory would predict. The way that Samsung is losing both market share and profits is typical disruption. However at this point, it is still not clear where the attractive profits will shift to.

As I discussed in the second article (What Happens When Hardware Makers Can Make No Profit), hardware OEMs tend to do funny things (crapware) when they can no longer make direct profits. You can’t blame them because they are fighting for their survival. What Google is doing with Android One is quite extreme because they are effectively preventing OEMs from doing crapware. They are basically saying that we’re not letting you pull the tricks that you need to survive.

What makes this situation even more convoluted is the fact that although Google does not make any direct profit from Android, Microsoft makes huge amounts of money. In fact, Samsung paid Microsoft 1 billion USD last year for using Microsoft’s patents in their Android phones (based on the number of Android devices sold). This amounts to 1% of total handset revenues. It is well known that Microsoft has similar patent agreements in place with many other major smartphone manufacturers. This is almost all pure profits and hence it is almost certain that Microsoft is making more profit from Android than Google itself.

Adding a further twist, Microsoft is now handing out Windows for free for devices with a display that is smaller than 9-inches. This will no doubt include the right to use Microsoft’s patents as they are included in Windows. Hence compared to Android, Windows will be 1 billion USD cheaper for Samsung. For OEMs, using Windows is much much cheaper than using Android.

Now let’s look at this from a hardware OEMs viewpoint.

  1. They cannot make money through hardware differentiation and are now scrounging for pennies.
  2. In the PC-era, they would have added crapware and bloatware because of the pennies that it would bring in. This was more important than any sales lost due to a worse customer experience (customer experience wasn’t the main concern).
  3. In the smartphone-era, Google is stopping them from placing their crapware in prominent locations on Android. OEMs will be more desperate for pennies.
  4. If OEMs decide to use Windows instead of Android, then they can save pennies. Microsoft might also be less strict with crapware. Windows might be significantly cheaper for OEMs compared to using Android.

The current situation is very complex, and it is hard to say whether Windows will manage to grow through its price benefit. It will no doubt be fascinating to watch as the knots get untied.

The Moment of Truth For High-End Android

AnandTech published their preliminary iPhone Plus and iPhone 6 Plus benchmark results yesterday.

The results are damning for Android.

Without going into detail, both the iPhone 6 and the iPhone 6 Plus posted solid but not incredible improvements compared to last year’s iPhone 5s.

The problem for Android is that none of the high-end Android phones that were released in the previous year (HTC One, Moto X, Galaxy S5, Xperia Z1s, LG G3, etc.) could even beat last year’s iPhone 5s. In browser based tests in particular, the iPhone 5s still managed to leave high-end Android devices in the dust; definitely an embarrassment for Google which continues to brag about their browser’s speed on the desktop.

The question is whether or not Android can catch up.

Android has two major cards that it can play to significantly improve performance.

One is to move to 64-bit hardware. Most Android devices, even the high-end ones are still on 32-bit. Apple managed to dramatically improve processing power as they moved to a 64-bit architecture and the hope is that Android might also see a good speed bump.

The other is Android RunTime (ART) which is the successor to Dalvik and will be introduced in Android L. Google has said that this can significantly boost performance.

Up till now, I have not seen any encouraging results. Benchmarks of Android L (on 32-bit hardware) have not shown performance improvements. On the other hand, a 64-bit Android phone (the HTC Desire 820) has been benchmarked (on the 32-bit KitKat OS), and the results are not impressive relative to high-end 32-bit Android phones.

I do not intend to draw conclusions from these preliminary benchmarks, none of which directly tell us whether 64-bit hardware on Android L will be significantly faster or not.

What I would like to say is that the next few months in which we can expect the official release of Android L and 64-bit hardware, will tell us whether or not Android will continue to lag behind iPhone or not.

If Android cannot match the iPhone 5s, let alone the iPhone 6, even with Android L and 64-bit hardware, then there we will have to accept a situation where Android can no longer compete in the high-end.

Is Apple Going After Google?

On The Charlie Rose Show, Tim Cook was uncharacteristically harsh on Google, or so it seemed to my eyes.

Some quotes;

Our business is not based on having information about you. You’re not our product.

I think everyone has to ask, how do companies make their money? Follow the money. And if they are making money mainly by collecting gobs of personal data, I think you have a right to be worried, and you should really understand what’s happening with that data, and the companies I think should be very transparent about this.

I’m offended by lots of it.

Tim Cook also mentioned prior to this quite strongly that Apple’s competition is not Samsung but Google. (32min 20sec on this video)

I find this very interesting. Steve Jobs tended to divert attention when asked about his feelings towards Google, although we know for a fact that he was mad at them copying the iPhone with Android. As far as I know, Tim Cook’s words are the most critical I have heard from an Apple executive.

With the launch of iOS8 and iPhone 6, many analysts have observed that the advantages that Android (and Samsung) had over Apple are mostly diminished. Hence at least in the United States, it is very likely that iPhone will take market share away from Android. Apple has also improved its Maps application, and it seems that iOS users are mainly using it over Google Maps. It is also common understanding that Google is paying Apple to keep Google as the default search engine on mobile safari. It looks like Google is quite reliant on Apple as a partner, but that Apple is increasingly gaining a stronger bargaining position.

On the other hand, Apple’s attempts to keep Android at bay through patent litigation has proved to be for the most part unsuccessfull. In some cases the courts have found that Samsung has infringed on Apple patents, and as a result, some features have been removed. This hasn’t however prevented Android from gaining in popularity and market share around the world.

My hunch is that Apple has changed its strategy from simply trying to block Android through litigation, to a strategy where Apple will try to damage Google’s core business and revenue source, that is collecting user data and using it for advertising.

The motivation of such a strategy is quite simple. Outside of its core business of search and advertising, Google consistently tries to undermine a successful business by giving away a similar product for free. This is what they did to Microsoft Office with Google Docs and to the iPhone with Android. They are also aiming to do the same with Chrome OS. As Apple introduces the Apple Watch, Google will inevitably modify Android Wear and give that away for free, which may cause headaches for Apple. Google can do this because it makes so much money from advertising. They use this money to fund unprofitable businesses with the goal of commoditizing that market.

Apple has found that they cannot directly block the free products that Google creates. The patent litigation process takes too much time for it to be effective in the fast changing tech landscape. Instead, Apple might be thinking that preventing Google from earning so much money from search is the better approach.

If this is the case, we may see much more public relations efforts from Apple (and even maybe in concert with Microsoft) to educate the public that Google is collecting and using customer information for advertising purposes, and that we should be concerned. We can also expect Apple to move more aggressively with Spotlight in iOS so as to all but eliminate the need to search on the Internet. It looks like this is going to be done quite forcefully.

It will be fascinating to watch.

Update

On Sept. 18th, soon after the Charlie Rose Show aired, Apple posted a letter from Tim Cook on its web site. It reiterated what Tim Cook said on the show about piracy and about the practices of Google (without mentioning the name). It’s actually not a single letter, but a new privacy section of their website with a few more pages detailing how Apple handles privacy. It is now evident that Tim Cook’s comments on the show were not spontaneous, but was an initiative that Apple had planned for a while.

“A message from Tim Cook about Apple’s commitment to your privacy.”

A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product. But at Apple, we believe a great customer experience shouldn’t come at the expense of your privacy.

I expect we will be seeing much more comments like this coming out of Tim Cook and Cupertino this year. It will be very interesting if they can take it to the point where Google starts feeling like retaliating.

Can China Develop a Successful Operating System

Reuters reported that China is developing a homegrown operating system.

This is not the first time they have done this. However this time, they have a much better chance;

  1. China’s worries about the U.S. owning computing technology have largely been justified by the the revelations by Edward Snowden.
  2. China now is much more powerful in the computing scene. They manufacture most of the world’s smartphones.
  3. Chinese Internet companies have grown to the extent that they make a Google-less Internet a reality in China. Although they have yet to expand to other countries, China has demonstrated that they can develop viable alternatives to the most powerful Internet company.
  4. The dominance of Microsoft Windows has waned. In China, the majority of PCs ran Windows but only pirated versions of Windows XP. Now that Microsoft has ended support for Windows XP, China’s PC OS situation is up for grabs. This is even more so given that China has recently banned Windows 8 for government use.
  5. Although I don’t have hard data, it seems that the software industry in China is quite vibrant. There are many titles for both Android and iOS developed inside China. I suspect that there is quite a bit of software talent in China.

This time around, the Chinese OS seems to have a fair chance.

It’s obvious that this will be a Linux based system.

Lessons From the IPhone 5c (part 2)

Despite the speculation surrounding the next iPhone launch and a possible cheaper version, there is little discussion about the iPhone 5c and what Apple might have learned from it.

I mentioned this recently on my blog. In particular;

The sales of the iPhone 5c seems to have improved later in the product cycle. That is, the ratio of iPhone 5c as a percentage of total iPhone sales has risen. I have also anecdotally observed this in the super-subsidized Japanese market. Hence I suspect that the recent rise in popularity of the iPhone 5c is not directly related to price. It is possible that some consumers simply want a product that displays their individuality, like a fashion item.

A recent comScore survey supports this idea.

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We see the iPhone 5c being popular among teenagers and young adults. They are particular popular among women in this age group. This supports the idea of the iPhone 5c being popular among fashion conscious groups. This is definitely a demographic that Apple would be interested in targeting.

Also, comScore mentions that there were 15 million iPhone 5s users in the USA compared to 6.4 million iPhone 5c users. These is a large difference, but the iPhone 5c is still undoubtedly a very popular phone.

This suggests that Apple would continue to carry an iPhone 5c-ish product line. In fact, it is not unreasonable to predict that, instead of using last-year’s technology in their plastic-adorned products, Apple could decide to use the same flagship technology.

Since I have absolutely no inside information, I can only say that this is a possibility. It will be however interesting to see what Apple does with the iPhone 5c.

HTML5 Is Not Yet Good-Enough

Another company is moving away from HTML5 and into native app development for mobile.

“Gree admits failure with browser-based mobile gaming, shifts half of workforce to make native games for iOS and Android”

This trend is not new and ever since Facebook (a huge HTML5 proponent) admitted that HTML5 was a huge mistake, HTML5 development has been on the defensive.

What we saw and still continue to see is, whenever the user experience is an important feature, native app development is the better approach.

This doesn’t mean that every developer must ditch HTML5 and go native. There are many cases where user experience is not the priority. In these cases, it might be still more practical to chose HTMl5.

Rather than debating HTML5 vs. native app development, it is more worthwhile to try to understand what this continuing trend means for the evolution of smartphones. My view is that this trend suggests the following;

  1. The user experience of HTML5 is still not good enough. That is to say that users value the smoothness, responsiveness and beauty of native apps. Users notice the difference.
  2. This would also suggest that the smoothness of the iOS user interface in comparison to Android, is still highly valued.

What’s interesting is that PC users never really demanded smoothness or responsiveness, and were more or less content with Web interfaces. I wonder why.