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It’s costly and has unpredictable consequences

“It’s costly and has unpredictable consequences. That makes it a very bad business model. I suppose both companies have agendas that are not visible in court and perhaps Apple is signaling to other parties, and perhaps Samsung is using it to raise its profile. It still seems that unintended consequences may arise and the result could be very bad for everybody,’’ said Horace Dediu, founder of equity-research firm Asymco, in an e-mail interview with The Korea Times.

The above was a quote from the article  Samsung can’t afford to lose Apple fight by Yoo-chul Kim from The Korea Times. Yoo-chul contacted me via email with a series of questions. I want to share all his questions and my answers as well:

Samsung wides market gap with Apple, according to research firms.
You think the gap will further be widen and please tell me why

As Samsung converts its phone portfolio to be all smartphones, it is very likely to reach much higher smartphone volumes. One year ago Samsung sold about 56 million feature phones. Last quarter it sold about 43 million. The smartphone portion increased from 20 million to 50 million. At the same time, Apple has maintained a growth in its smartphone business of about 100% on a yearly basis. I expect that to continue into 2013 as well. Therefore it’s possible that Samsung could sell 290 million smartphones in the next 12 months and Apple could sell about 200 million in the same time frame.

However, it’s important to understand that the companies compete on different bases. What I mean is that what generates a profit (i.e. payment by the consumer above what a product costs) is different for each company. Apple is a platform company that sells access to the iOS ecosystem across many other device types. Samsung sells consumer electronics with limited “network effects” but desirable features. In this view, the gap in device sales is “asymmetric” and not reflective of the actual competition which is between Google’s Android and Apple’s iOS as forms of access.

Samsung’s rapid rises mainly due to the company’s heady dependence
on Google Android. If Google applies better software for Motorola,
then you think Samsung will face difficulties?

Think of Google as a supplier to Samsung. No manufacturer wants to have a situation where they are dependent on only one supplier, especially when there are huge substitution costs for another supplier. And even more especially if that supplier owns one of your competitors. However, it’s unlikely that Motorola will become a strong competitor to Samsung. I also don’t expect Google will damage their OEM “customers” by favoring Motorola. Motorola can’t become big enough quickly enough to be a threat to Samsung. What is more likely to be a problem for Samsung is ZTE and Huawei. They are on the same trajectory that Samsung was on 10 years ago. For Samsung to beat them in the future it will need to develop products that nobody can copy.

How about software? Samsung is good to roll out price competitive
models, however, software is always problem. Any advice for this
issue?

Software is hard and expertise can’t be quickly acquired. It takes time. Only advice [I have] is that efforts must be patient and there need to be many experiments like Bada and Tizen. Google started with Android in 2005 and Apple started with iOS in 2003 or 2004.

How about the patent dispute with Apple and Samsung. The patent war
is helping Samsung see a rise in its brand awareness and that also
worked for Samsung to grab more shares in smartphones?

It’s very difficult to measure the impact of litigation, both in the positive and negative. It’s costly and has unpredictable consequences. That makes it a very bad “business model”. I suppose both companies have agendas that are not visible in court and, perhaps, Apple is signaling to other parties and perhaps Samsung is using it to raise its profile. It still seems that unintended consequences may arise and the result could be very bad for everybody.

Samsung wants to become a market creator not just a fast follower.
For me, it’s quite negative for Samsung to create a wholly-new
eco-systems because Samsung’s edges are coming from manufacturing, not creative thinking. What do you think? If Samsung wants to be a
creator, what conditions should Samsung need and what things should
the company do?

Unfortunately, manufacturing excellence is not enough to remain successful long term. US companies were successful, then the Japanese, Taiwanese, Hong Kong, and now Chinese. Companies either adapt or become irrelevant. Building ecosystems is the new basis of competition but it’s not the only option. Unfortunately we don’t know what will be necessary to build the next basis. What matters is experimentation and the building of new businesses. I can’t offer specific recommendations as there is no recipe book for how to create new markets.

For your views, who is much better so far since the trial has begun
in the US. Samsung or Apple?

I cannot comment on this. Performance in court can only be judged by those present and I’m sure everybody present disagrees.

You think Apple is enjoying its so-called a homeground advantage
for the trial and is there any possibility that the issue to go for
the highest court in the US. My Samsung contacts say that’s the
possibility, though.

Again, I don’t have an opinion on legal matters. Broadly speaking, IP litigation is similar to playing the lottery.

Need your perspectives about Google’s support for Samsung. Google
confirms its supports for Samsung for an united front against Apple
because the fight between Samsung and Apple is a kind of version that
represents Google and Apple fight.
Any comments about that?

I believe Google does support Samsung. I question however how this relationship will develop over time. I attached below commentary from a researcher at Deutsche Bank on Android in China. I think it has some clues about how Google treats its partners.

What are pre-conditions before Samsung making an action to sign a
peace treaty with Apple?

It depends on the motives behind Apple’s actions. I think they want to see a “no copying” rule. They don’t mind competition and Android could be a help in the long run by moving users from feature phones to basic smartphones which could later be upgraded to Apple phones. But what I think they want is to signal to others that direct copying is unacceptable. Essentially, the work of their designers is very important to them and copying destroys [the designers’] incentives to do breakthrough products.

See also: Who Cares If Samsung Copied Apple? by James Allworth – Harvard Business Review

  • Tytus Suski

    Similarly Apple cannot afford to lose Samsung as a supplier. Why? Because if it could, Apple would have cut Samsung orders off, already. Why feed competitor with early design information during components sourcing, enabling it to update products at the same time Apple does?

    It seems, that Samsung is a sole place guaranteeing Apple both core technologies and volumes for mobile devices. Mobile includes here Airs and new Macbook Pro that run on Samsung flash memory and controllers.

    True pact with a devil, from which currently Apple does not see an obvious way out.

    • http://twitter.com/c_mcmanus Christopher McManus

      Apple is already moving key components to new vendors. For display, they are sourcing from LG, Sharp and Japan Display. I expect volume from these providers to ramp quickly. And, Apple has made a proxy investment in Sharp via Foxconn.

      In memory, Apple is moving to Micron and Hynix. Micron’s purchase of Elpida will accelerate this switch as Micron is able to compete at scale vs. Samsung.

      The processor is designed and owned by Apple and manufactured by Samsung. I expect they will move that over to TSMC or like when new manufacturing processes and yields have been refined. I have to believe this is a top priority for Apple and their next area of focus. Samsung does bring great semi manufacturing skills to the table.

      For laptop SSD, there are a variety of vendors although Samsung has the best performance at volume. I think this is lower on Apple list, as the volumes and profits to Samsung are lower than the other items I mention above. But, there will be other options for Apple here as well over the next 2-3 years

      The switchover is happening before our eyes. I would not be surprised if Apple is Samsung free within two years.

      • twilightmoon

        That will cost Samsung billions annually. Far more than Apple can hope to gain financially from this lawsuit. Ergo this lawsuit is not about the monetary damages.

      • Tytus Suski

        The fact that Apple is trying doesn’t need a proof. Of course they are.

        The problem is, switching vendors is not a spreadsheet exercise. Look how many companies tried to grow AMD to offset Intel’s dominant position. AMD simply was not able to deliver.

        Similarly, Samsung’s dominant position is not result of supply chain managers forgetting that there are some other companies that were waiting for orders, but somehow could not be found in a phone book.

        If Samsung has got better yields, good luck fighting with that.

      • DaveChapin77

        AMD was tiny tiny tiny. The non-Samsung Flash and CPU Fabs have far more scale than AMD did — and getting AAPL’s business could be just what they need to push that scale at or beyond Samsung. And speaking of Intel. I hear they make CPUs and eventually could be the ultimate long term counterpoint to Samsung. Either by licensing ARM tech, making Atom so good Apple switches, or a combination of both.

      • Tatil_S

        TSMC is usually the default fab for high end CPUs for fabless semiconductor companies around the world. For Apple to hand its business over to Samsung, it must have offered either a much better price or exceptional service, such as giving some CPU related IP, a customized process in some respects or opening that fab in the US. I would be surprised if Samsung would build a US fab if Apple did not guarantee some minimum order to run over many years. The deal may have been signed before Samsung became such a strong competitor in smartphones, but there is probably some value in having the fab in the US for Apple, and TSMC may not want to expand its operations to the US.

        I don’t think Intel has a chance. Even if Atom ever becomes competitive with ARM CPUs in a purely specs perspectives, ARM will still be the more customizable alternative. Each company will have the options of pairing the CPU with the exact GPU and memory bundle rather than just the few options provided by Intel. If Apple did not mind buying off the shelf CPUs, it could have already bought from a number of ARM processor makers, such as Qualcomm, Samsung, TI etc.

    • Walt French

      Either a pact with the devil, or just as Apple put it to Samsung during visit in 2010:

      we can all get along, competing, if you honor our IP. We’ll remind you about that IP if you forget, but know that we mean it. It’s a big business; let’s see who excites customers the best.

      Businesses cannot afford enemies, just as nations cannot be at war with any country with which they have some significant difference.

  • JJ

    As I read the piece on KT, and see the damage amounts (<3B$) vs. the business transaction planned (11B$) a thought occuered – this is the fight to be the underdog. 'Us vs. them' is an effective tactic to motivate folks especially if there is not much else (biggest company, admired products, excellent customer satisfaction ratings). The legal fight helps and confirms how Apple would like it's customers and its employees to see itself. And this article shows that Samsung views it no different (and uses it internally – reading the responses of the 'inside' managers).

  • http://www.facebook.com/people/Minsoo-Park/100001265179164 Minsoo Park

    I think the litigation may serve one purpose. It will slow down the development speed since legal teams will force R&D to review designs at every milestone event……

    • normm

      Companies can be careful to avoid direct copying. They can’t really avoid reinvention of patented ideas, since any complicated piece of software invents thousands of small incremental ideas. In practice, tech companies amass a war chest of patents to use for cross licensing, in order to nullify incremental patents as much as possible. That still leaves patent trolls (“non practicing entities”) who they have to pay off.

  • ptmmac

    I really enjoy this blog because it is so thoughtful about this arena of competition. I came here because of research into Apple’s business model. I remain because of the integrity of viewpoint that is posted here.

    “Broadly speaking IP litigation is like playing the lottery.”

    Wow, that really puts the trial between Apple and Samsung in perspective. There is a report that there are last minute talks between Samsung and Apple. I can’t think of a better explaination of why this is the case. A settlement will never be more in both companies best interests. Both have had their chance to say what they think in a court of law. Now is the time to put down the guns and talk about the awesome opportunity facing both of these companies.

    The other reason I like this blog is I am usually learning even from the comments.
    Thanks, Horace, for making this a blog about ideas rather than egos or money.

  • Roderick

    Horace, can you include the Deutsche Bank commentary?

    • oases

      Seconded. I want it.

      • http://twitter.com/handleym99 Maynard Handley

        Horace may not be able to distribute this. I don’t see the report on the web, and it may be more or less confidential or copyrighted or whatever.

        I think this summary
        http://www.dailyfinance.com/2011/01/24/iphone-vs-android-is-the-smartphone-race-in-china-already-over/

        refers to the report Horace has in mind, and it’s probably as good as we’re going to get without subscribing to Deutsche Bank.
        (Though it doesn’t address the Samsung vs Google issue.)

      • oases

        Thanks for a link.

      • http://www.asymco.com Horace Dediu

        The article, unfortunately, misses the gist of of Goldberg’s argument.
        I’ll quote a few passages:

        Alas, things are not so simple.

        First, it is no secret that Google is not well liked by the government in China. As a result the company is somewhat constrained in its operations here, and cannot do much to fully support the growing Android ecosystem.
        But even if they did not face these political realities, our sense is that Android is just not that concerned about providing any support. Outside the big two handset vendors, we know of no Android engineering support going to any China handset vendor. And from what we can tell, Team Android is not doing that much support work with the major baseband vendors. The company does some work with Qualcomm, and to a lesser degree with Mediatek, but not much. The company has worked a bit with the carriers, but even that is complicated with all three carriers in various degrees of building their own OS.
        This approach could be described as laissez-faire, or just plain ambivalent.
        There is a second problem – fragmentation. By our count, there are now a half dozen Android-like OS in China. These include offerings from Alibaba, Baidu, 360 and China Mobile, among others. Not all of these companies admit it, but the bulk of the code behind their OS is Android, with a few tweaks to the UI. True, these OS will not run all Android applications, but then again not all Android phones can run all Android applications. One of the big problems with Android fragmentation is that consumers have been numbed into accepting that every Android phone is a little different, each with its own quirks and compatibilities. We think this confusion leaves the door open to competitors. Consumers will look at a device and not know (or care) if the phone is Android or AliYun or Baidu. Is it touch screen? Yes. Does it have ‘apps’? Yes. Ok, I’ll take it.
        Realistically, we assign little probability of success to any of these alternatives, but they can be in the market long enough to thoroughly muddy the waters, confusing developers and consumers alike. Ultimately, all of these other OS suffer from a lack of hardware adoption. Even China Mobile with its immense resources has only a few vendors building iPhone devices. Porting an operating system is not easy, and if the Android tools were a little better, we think there would be no room at all for alternatives.
        Finally, there is a third concern – Google is struggling to monetize Android in China. Globally, we believe they make about $10 per Android phone per year in search revenue. We do not have hard figures, but we would estimate the figure in China is far lower. This is in large part due to the company’s standing with the government. Google search is unreliable, as are many other of the company’s services like Gmail and Maps. On this trip we heard rumblings that this situation may worsen further still. The government recently issued rules that give them the ability to prohibit the pre-loading of certain apps on phones. The rules are broad enough that this could include a ban on Google apps being preloaded on Android phones. There are no signs that Android itself would be banned, but without the preloads of Google’s main monetization tools there would be no easy way for them to monetize all the growth in Android phones in China.
        We caution that there is still a lot of uncertainty here. Google has little direct relationship with China’s handset vendors. Instead, these vendors get access to their Android builds from their chipset suppliers. In theory, Google services (which we are going to refer to as the Google API) like Gmail are only available on devices that are approved by Team Android. It’s true that anyone can download the Android kernel, but this does not come with access to the Google API. Google rations access to the API as one of its major tools for corralling handset vendors and limiting fragmentation. However, there are a lot of Google phones coming online in China and some of these appear to have access to the API. All of this just leaves many questions open, the most important of which is will China-built Android phones ever get a clearer path towards accessing the Google API. The political side of this is beyond our ability to comment on, but there is also the interesting question as to what is Google’s strategy for this portion of Android.
        In our conversations with Team Android, we have the distinct sense that they do not fully grasp the scope of their opportunity in China. This is understandable in some ways, since there are few accurate market estimates for China phones. Last month, we revised our global handset forecast to better account for these units, and it resulted in our raising our historic estimates by as much as 20%. We also had a second impression that Google does not have a clear baseband strategy, particularly with regards to the reference design model on which the China smartphone industry is built. Or maybe they have a baseband strategy that just does not include those designs.
        Either way, our conclusion is that we are reaching an important crossroads for Android in China. Over the next 18 months, the OS will either surge into enormous volumes or fragment along several unpredictable and probably uncontrollable paths.

      • oases

        Thank you. Sort of what you’d expect really – if you’re ‘off message’ you’re shunned.

  • http://twitter.com/handleym99 Maynard Handley

    “Software is hard and expertise can’t be quickly acquired. It takes time.”

    I do wonder if by using the single word “software” we are reducing the acuity of our thinking.
    One can split “software” into at least three concepts:
    – algorithms
    – architecture
    – user experience/design

    For at least some purposes, it is likely the case that South Korea has “arrived” in algorithms. I say this based on the fact that South Korea had a surprisingly large amount of input into h.264 and, though I haven’t looked at h.265 closely, they seem to have had some input into that.

    User experience/design, on the other hand, seems to be a universal problem. This is not the place to hash out old arguments, but we all have our opinions here regarding such old stalwart US companies as MS, or Google, or RIM. Samsung’s growth here seems as much a crapshoot as in any company. It can probably be improved by having execs who care about the issue (*cough* Steve Ballmer *cough*), but even then it requires hiring the right people and then restraining them from their more idiotic ideas (*cough* leather *cough*).

    So I suspect when one says Samsung needs experience in software, I expect one means “architecture”.

    Apple appears to have, in the OSX/iOS frameworks a set of capabilities and design-patterns of above average ability. But they do seem to be hobbled by a language from the past. They’re doing what they can to patch Objective C, and they do make the common cases easier; but the uncommon cases are still a PITA. And while Apple’s OS foundation is sturdy, their are definitely painful elements that result from the UNIX heritage, and it’s not clear how this will play out going forward as they try to add in ever more non-UNIXy features (eg a very different security model) while trying to retain a UNIXy feel and API.

    MS seems to have a superior language, but they don’t seem to have created quite as useful a set of frameworks surrounding it. I’m not sure quite why that is. (And perhaps I’m wrong. Certainly they have rabid fans who would dispute this; I’m more interested in the opinions of those who’ve tried both for serious projects, and who don’t have an axe to grind.) They had the freedom to design a cleaner newer OS API learning from UNIX and, for the most part, they didn’t blow it.

    Google seem to have a language between Apple and MS, the same OS limitations as Apple (with, perhaps, even less willingness to modify the OS core, and without the Mach bits and pieces that allow Apple some flexibility) and (as far as I can tell) substantially less innovation in their frameworks, something a lot closer to the standard frameworks of fifteen years ago.

    So what do we learn from these comparisons? I think mainly that architecture is a lot harder than it looks, that it’s really easy to lock in mistakes for a long long time.
    In many ways the best way forward is the Apple path — start with people who’ve played around with a few toy experiments, then go through a long period where you have some level of commercial pressure to both improve while retaining compatibility, BUT without so much usage that compatibility is a straitjacket.
    MS have been able to follow something of the same path.
    Google were forced into premature compatibility too soon, without enough of a chance to noodle around with thoughts of what an ideal framework might look like in a world unconstrained by previous limitations, most obviously (but not only) in the GPU.

    Meaning, I guess, IF Samsung has had much the same people working on the frameworks for their earlier phones all this time, AND if they’ve been wiling to admit to and learn from mistakes, AND if they’re willing to start their (putative) new attempt from scratch, and with the confidence that they don’t have to look like the past, THEN they could create something insanely awesome.
    But honestly, I’m not sure even one of these three conditions holds, let alone all three. I suspect, rather, that if whatever they do ship as their own will continue to be what it is today: less than ideal languages, less than ideal frameworks, less than ideal OS, with far more concern about doing things the way they were done in the past, and the way they are done in competitor companies, than with doing them better.
    Which is to say, yeah, fight it out with Huawei and ZTE, but I honestly don’t care how all three of you do, because I don’t think any of you are ever going to ship anything actually innovative or glorious, because you’re all three too scared to/uninterested in/not even aware that you need to innovate in FRAMEWORKS.

    • Idlebandwidth

      @twitter-370908183:disqus interesting outlook on iOS being suboptimal. I remember trying to find an Objective C developer in 2007, and the resulting pain in terms of expense (very hard to find, thus costly), sophistication (leading to iffy quality) and of course TTM. But we were one of the first 3rd party apps. Now there are 100’s of thousands. It may not be the most elegant solution imaginable, but it doesn’t feel like we really have a big problem here in terms of # of coders, their productivity, or the quality of what they’re able to produce. iOS is still, I think, at least the first platform to target. Dealing with some of the UNIXy things feels like a very long term problem if anything. thoughtful stuff.

    • fiftysixty

      I view the three layers/concepts as rather inseparable, at least when it comes to how Apple does things. When I started doing iOS coding (back when it was still iPhone OS) and I started learning the frameworks, I got a very strong impression that a similar level of care has been taken to craft the “UX” of the frameworks as what goes to the iPhone UI. This, to me, implied that design thinking permeates the whole organization. That is nearly a prerequisite of innovations in anything, in my opinion, and that is also one of the greatest hurdles for many companies because culture change is glacial in speed. If you don’t have it, you can’t bring it in.

      Another issue, which you didn’t seem to mention, and which directly relates to software being hard is that of bugs. On large scale projects such as operating systems, it takes years of work just to hunt down bugs to arrive at a usably stable version. I feel that this aspect is something that is most often neglected, but it is crucial. In contrast, implementing new features is often trivial, but getting them to a stable state takes lots and lots of unglamorous QA work.

      As for Samsung’s own work, I believe Bada development is done in C++. I’ve only taken the quickest of glances at the APIs, but they didn’t impress me. Tizen is probably on a whole another level, and a much more mature system, but then again it dates quite a long time back and has had some serious muscle behind it at various times.

      Oh, and for what it’s worth, Objective-C is a thing of beauty.

  • Walt French

    As Samsung converts its phone portfolio to be all smartphones, it is very likely to reach much higher smartphone volumes.

    It seems to me that Mr. Kim (apologies if Ms.; Google was unhelpful) has invited you to second-guess or analyze Samsung’s strategies and that you have given a very measured (humble) response. Let me try going a bit further.

    Although I think the chaebol business structure invites corruption and bad balancing between risk and opportunity due to family infighting, at its core the current dispute between Samsung and Apple is probably seen as a mere a speed bump for Samsung’s objective of growing its business in smartphones. Apple is not so much the enemy as simply in Sammy’s way. Just as I don’t see Apple trying to strangle competition as much as it’s trying to grow and protect its identity, Samsung needs to expand its business or risk going the way of Nokia, RIM, HTC and others. It’s a tough business, played with sharp elbows.

    I invite Horace’s readers to imagine themselves the head of Samsung’s phone business, charged with aggressive success consistent with the incredible industry growth — and with avoiding the huge costs of failure (extending to perceptions of other Samsung business lines). Yes, you probably would be VERY aggressive about business risks such as having a multi-billion-dollar judgement against you, because the cost of doing nothing, not copying the iPhone model, is WORSE. Of course, you’ll try to fight off lawsuits, but if one or two lands, at least you’ll have a going-concern business from which to pay the penalties.

    Apple is the current, most obvious potential roadblock, but long-term, signs are that you’ll need to ensure you’re not reliant on Google, either. One of your “Plan B” options ( forked Android; Tizen; others) is likely where you will be in two or three years, so you will be building out the dimensions of those so Google cannot restrict you if/when Motorola needs to compete with you.

    No matter what Google and Apple work out over time, this is not about the iOS/Android battle. Simply, how Samsung will succeed in its goal of delivering profits and growth thereof.

  • def4

    The article in The Korea Times is very illuminating about Samsung’s motives.
    It’s not simple greed and sloth like a casual observer might suspect, but pride.
    That’s why this is indeed likely to go all the way to the highest court in the land.

    That’s also why your usually excellent analysis misses the mark by miles in this case.
    This is indeed war, a clash of cultures and values that you may simply be unequipped to appreciate with your business school disruption glasses on.

    In a recent podcast you mentioned your fascination with the industrial miracle of the American WW2 effort. Just like WW2 was not about industry so is the patent war not about market share.

  • oases

    How does Google treat its partners?

  • http://twitter.com/portfolio14 John

    Hi Horace,

    You mentioned manufacturers didn’t like to have only one supplier. In the info tech world, I can see a couple of examples: IBM had AMD as a backup to Intel; MSFT’s WinNT originally supported multiple hardware architectures.

    This seems to support the rumour Samsung was in talking with RIM to license another OS.

    That said, Samsung’s current position in the mobile market is eerily similar to Dell’s or Compaq’s positions in the PC market in the last millennium. I can’t recall either Dell or Compaq ventured outside the Windows ecosystem as a “strategic insurance”.

    Comment?

    • http://www.asymco.com Horace Dediu

      Remaining in a single supplier relationship for a long time (e.g. a decade) completely depletes a company’s strategic leverage.
      It does not mean an end to growth or even profits, but it means an end to independent innovation.

  • Ed

    Apple may be thinking of moving CPU fabs from Samsung not because of the current litigation, but of technology. Samsung is fabbing their own Exynos processor using 32nm technology, but for Apple, they still using 45nm (except for the A5 for newer iPad2). Apple needs narrower semiconductor technology for smaller CPU footprint and use less power on the device. TSMC and Intel are the other 2 that can achieve this technology (Intel can do 28nm).

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