Four Reasons For Samsung’s Trouble

If you read the headlines in the recent few months, it seems like the iPhone is still on the rise despite the naysayers, Xiaomi is gaining ground and the previous king of smart phones, Samsung is in trouble. It seems hard to believe as Samsung is perceived as the market leader for smart phones in Malaysia, particularly Android phones.

Samsung’s Troubles : The Background

Samsung, which once flexed its muscles with the various versions on Samsung Galaxy phones and posting a 31.3% of over all smart phone sales world-wide (2013) ¹ while building the Tizen OS, has struggled in the recent months with its profits down by 60%. ² Profits, which has been down 25% year on year, have also seen Samsung losing out on market share. And it is interesting, because 76% of Samsung’s profits comes from their smart phone division.

To double confirm our suspicions, we fired up Google Trends and did a comparison between the major players in the smart phone industry for Malaysia. It was no surprise to us that Samsung lost out to iPhone, but to see Xiaomi’s continued increase in popularity is interesting. Blackberry, has declined and does not show any signs of reviving. Never the less, we dug around and found the following clues on why Samsung is in trouble.

1) Samsung’s Troubles : Lacking their own OS

For many years, Samsung has leveraged upon the Android OS. However, they overlaid the user interface of the OS with their own TouchWiz and installed their own apps on their Android Smart Phones and Tablets. The TouchWiz interface and additional Samsung apps are one of the causes two year old phones like the Galaxy S3 runs slowly with a visible lag between pressing the screen and seeing some action.

The TouchWiz continued to be an issue to even the Samsung Galaxy S5 ³ as it took up a lot of space and memory, causing the phone to lag in performance, compared to similar phones without the heavy TouchWiz interface. Samsung’s not-so secret attempt to seamlessly switch over to Tizen OS while maintaining the looks via the TouchWiz interface back fired as well, as Google bought over Motorola Mobility to make their case. ⁴

Checkmated by Google

With Google having bought Motorola and pushing through with their Vanilla installation Android phones, Samsung was in trouble. Even though Samsung had 81 percent of Android’s marketshare, they knew that they had to follow Google’s guidelines or be removed altogether from having Google Mobile Services.

With the pressure of Motorola, Samsung gave in and signed an agreement with Google. But among part of the agreement was that Samsung had to tone down on the TouchWiz interface and focus on core Google apps, while cancelling their upcoming Magazine User Experience interface.

The problem with Android, is that anyone can make an Android stock phone, even though they might not have the Google Mobile Services, which provides apps like Gmail, Chrome, Google Maps and Google Plus. And with the agreement, plus Samsung’s switch to focus on Android instead of covertly trying to switch users to their upcoming Tizen OS, Samsung became vulnerable to other smart phone manufacturers who could put out a similar phone for a lower price.

And that is where Xiaomi, Huawei and the rest of the China smart phone manufacturers come in. Without their own platform, Samsung is doomed to a price war, and price wars are a race to scrape the bottom of the barrel where there are no winners.

2) Samsung’s Troubles : Too much focus on hardware

You see, other than lacking their own OS, Samsung was driven by hardware. For a long time, Android fans would boast that their Samsung Galaxy smart phones had more clock speed or a larger battery capacity compared to Apple’s iPhone. But not many people knew that the iOS driven iPhone was much more efficient compared to Android devices. And no, mobile phone shops that rely on selling accessories won’t tell you that, would they?

And as we mentioned in our previous section above, being hardware driven is not a good long-term solution. While Samsung was busy milking the cow with releasing multiple smart phones with various configurations of hardware, they were only doing well with the lower end market. In the premium segment, where margins are good, Samsung was barely cutting it, especially if you consider the aggressive marketing budget spent on putting up posters, newspaper and magazine ads and the large number of inventory left unsold. Samsung was following the traditional marketing route and there were holes that they could not patch.

In comparison, Apple was releasing more efficient processors while revamping their iOS to improve on performance and reduce power consumption. With a slower processor, the iPhone was able to achieve better performance which leads to better apps and happy customers. And because Apple was so good at what they do, they were able to sell their phones at a premium price. And all that led to a 10x profit compared to Samsung’s Mobile Division with much lesser phones sold. (2013)

 

3) Samsung’s Troubles : Google’s Play Store is not a playground

As we mentioned before, a smart phone is only as good as the apps installed on the phone. Many times, the best apps that are available on the Apple Appstore, are not available on the Google Play Store. Or if they were, they didn’t have the features nor the polish of those made for iOS.

iOS apps were superior because while there are hundreds of different models of Android smart phones out there, with a variety of screen sizes, graphics card, motherboard and RAM, there are only a limited amount of variations between the various iPhone and iPad models.

As such, it is much easier to develop and support apps for the iOS device compared to Android. Some developers found that 80% of their margins come from the Apple Appstore, while 80% of their problems and complaints comes from the Google Play Store.

If you were a developer which would you choose to continue developing great apps for? Sadly, the solution for Samsung would be to focus on Tizen OS and build a small amount of devices which would be easily compatible, as Google’s plan with Android has always been to gain more devices and hence, more ads. Would Samsung be able to make the decisive move?

If Samsung were continue to play safe, they are slowly but surely to suffer a slow decline. Even Shin, the CEO of Samsung Mobile conceded that the recent flagship, Samsung Galaxy S5 lacked ‘eye-popping technology’. ⁵ However, in our humble opinion, it is not the lack of eye popping technology, but the fact that Samsung emphasised on hardware gimmicks without being able to solve the software issue.

4) Samsung’s Troubles : They offended Apple

While Samsung is Apple’s largest competitor for smart phones and tablets, they are also one of Apple’s largest suppliers for the iPhone and iPad. However, with Apple offended and switching to other manufacturers like TSMC and LG the last two years, Samsung began to lose out on economies of scale which helped push down their costs for their own smart phones. ⁶But not only are costs down when you have such an economy of scale, but profits will increase as well.

The problem with the economies of scale issue is that, Samsung phones are already around twice the price of a similar handset from Oppo and Xiaomi. But remove the economies of scale and it will be harder for Samsung to reduce their costs, as they already carry a huge amount of staff and spend heavily on ads.

Conclusion : Can Samsung do an Apple iPhone?

The issue with Samsung’s problem was previously its strength. While in the beginning, Android provided Samsung the opportunity to focus on developing multiple models of their smart phone to suit different market segments. With the OS taken care of, Samsung could freely dominate the lower end market, while knocking players like Nokia out from India.

However, in the long run, the lack of control over the OS meant a lack of barrier, and that any manufacturer could jump in a create a similar phone for much lesser. Xiaomi, Oppo and Huawei are among those who leveraged on the internet to drive sales and handed over the savings to the consumers. Because Samsung’s main market for their Mobile Division were those who were price sensitive and value conscious versus Apple’s iPhone, which was targeted towards the upper end, premium market who preferred paying more for a better phone, Samsung’s Mobile Division looks bleak, while Apple’s continue to shine even brighter.

You see, in the end of the day, it isn’t about just looking like an iPhone, but possessing Apple’s strengths, which Samsung lacked. Perhaps Samsung should have built and launched their own Tizen OS phone earlier.

What do you think? Do share your thoughts here 🙂