The cost of selling Galaxies

Nov 29, ’12 7:27 PM

Author Horace Dediu Categories Financial, Market

In the post “Google vs. Samsung” I compared the profits of Google and Samsung Electronics’ mobile (aka Telecoms) division. It showed how Samsung has grown its mobile business to such a degree that, if sustained, could conceivably influence the way Android is controlled.

However, we should not analyze Samsung’s mobile group in isolation of the entire company. Samsung relies on internal transfer of technology and capacities of production which are quite unique for device vendors today. In other words, Samsung is a relatively integrated enterprise. Understanding the whole is necessary before understanding the part.

The following graph shows the sales and operating profit for Samsung Electronics as a composite of its divisions since early 2008.

As one would expect, the mobile group (Telecom) is the source of both top and bottom line growth. The group has also been leading in terms of margins and increasing those margins steadily.

The margins averaged 11% during 2007 and 17% during the trailing four quarters. This 54% increase in margin has been matched by a 55% increase in average selling price (from $151 in 2007 to $234 in the latest quarter).

One could argue however that a 17% operating margin from a group that is now leading in volume and price is still a bit weak. At its peak Nokia enjoyed a 25% operating margin, RIM 30% and HTC 27%. Apple’s iPhone operating margin is around 45%.

I think a large part of the margin story is a relatively high level of spending on SG&A (Sales, General and Administrative) which includes advertising, sales promotion and commissions. In the case of Samsung Electronics, as sales has grown these expenses have grown in proportion. As a percent of sales SG&A have held relatively steady at around 17%.

Note that as Apple’s sales have grown its SG&A has grown less rapidly resulting in a smaller percent over time. We might see Apple’s SG&A drop to 5% during the present quarter, an all-time low.

So one of the more remarkable aspects of Samsung’s success has been their willingness to increase promotional spending. Considering that their other divisions don’t require as much “marketing expense” (semiconductors, LCD certainly, and TVs and Appliances to a lesser degree due to a smaller sales growth) we can imagine that the vast majority of this promotional spending has been in support of their mobile brands, Galaxy in particular.

In fact, we can obtain advertising spend data from annual reports.

The chart above shows comparable ad spending from a cohort of technology companies as well as Coca Cola and Samsung Electronics.

It might be surprising to note that Samsung spends considerably more than Apple and Microsoft. But it also spends more than Coca Cola, a company whose primary cost of sales is advertising.

However, advertising is not the only form of promotional spending. Samsung also pays commissions and “sales promotion“. The following chart shows the value of these sales promotions relative to the ad spending budgets above.

We don’t have data on the current year since that is released after year’s end, but it’s interesting to note that promotions cost more than ads, which themselves are substantial relative to other companies.

The company also reports “Marketing Expenses” every quarter[1]. These figures appear to be the sum of Ad spending, Sales Promotions, Public Relations and a portion of “other” expenses as a part of SG&A.

When considering all marketing expenses, Samsung Electronics’ sales efforts begin to look quite astonishing.

—

Notes:

The data used in the latter three charts are available as a Google spreadsheet here.

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SA

And Apple’s success is because of it’s marketing….!

http://alexandersmith.co/ Benjamin Alexander

Yeah the first time Horace mentioned those numbers I laughed.
http://nmuppala.wordpress.com Nalini Kumar Muppala

Yes. In the real sense of the word marketing — understanding the job and designing products around the job and conveying the value. Agree?

JohnDoey

You just described design, not marketing. Apple’s marketing tells the story of their design work.

The original poster is quite correct that the typical criticism of Apple from Microsoft and Samsung fans is horribly ironic once you look at what Samsung spends to make 1 sale.
Gui

Marketing at Apple means something different. Schiller, head of marketing, is integral to product development.
http://www.asymco.com Horace Dediu

Unfortunately our business vocabulary is woefully limited. “Product marketing” is a design question but “marketing” in general has come to mean promotion.

ragsmobile

Who needs marketing when you have so many tech bloggers working free for them deriding rival products/companies, their strategies and defending/praising everything Apple does, dumb or otherwise. Marco Arment, Siegler, Gruber and so many others who pop up every now and then with their extraordinary thoughts – such people do not exist or do not attract much attention in rival planets.

randomness9090

Right, nobody out there in the blog world writes negative stuff about Apple.

AdamChew

Were you paid by Samsung to say that.

Looks like lots of nice comments about samsung smartphones are written by people like you who are on the take from them.

Walt French

Try out the idea that @SA was being sarcastic, hence the 43 (as of now) positives with no negatives on a site dominated by interest in Apple’s success.

http://www.facebook.com/people/Koen-van-Hees/1301049198 Koen van Hees

I think a lot of people don’t know the meaning of the word marketing. Apple is a great technology drive marketing machine, which is why they make great products that actual people want the moment the products exist. Most companies spend their marketing budget on advertising. Which is backwards – but nice for all those creative young people in ad agencies

SA

Fascinating analysis, can you include Apple’s Retail costs to the chart so that we get a better picture on what Apple vs Samsung product promotion costs look like?

http://www.asymco.com Horace Dediu

We don’t have a figure for Apple’s Retail costs but they are a part of SG&A. In the last quarter Apple’s SG&A was $2.551 billion and Samsung’s SG&A was Won 92,187 hundred million or about $8.5 billion.

Stefan Constantinescu

Using that data, would you say Samsung stores are an inevitability?
http://www.asymco.com Horace Dediu

It’s tricky because for Samsung that would create significant channel conflict.
Relentlessfocus

Samsung has had an electronics store on Tottenham Court Road London for years and now have one in Selfridges. They are just about to open their own phone shop in Westfield in London which is Europe’s biggest shopping mall . They also have a store in Harrods
http://twitter.com/aloknandan alok nandan

They also have a store in Westfield in San Francisco (one of the biggest malls in Northern California).
Shane77

This must be quite embarrassing for them because I cannot imagine people waiting in line for days to buy the newest Samsung Galaxy phone. Do the stores feature all glass staircases and a “Super Smart Helpful Person Bar”?
Stefan K

Why is that embarrassing? They (all) care about money not the line of waiting people..
Shane77

Because they’ve spent millions on ads making fun of people lining up for Apples products, or have you not seen http://youtu.be/Iqtljc24_cg
Shane77

Also Stefan,
anyone who thinks all Steve Jobs cared about was making money knows nothing about creative invention, intuition, and passion. You can speak for Samsung if you like but don’t speak for someone like Jonathan Ives
http://twitter.com/alexbrooks Alex Brooks

That may be true on the surface Shane but the shareholders of Apple care that the company makes money which means that it is at least some concern of senior management and certainly Jobs.

http://twitter.com/narenbalaji Naren Balaji

An interesting perspective would be to compare Samsung’s marketing/advertising budget with LGs – might probably indicate why LG’s Android phones aren’t a big hit

oases

Good idea.

http://twitter.com/ChristianPeel Christian Peel

Minor: In the last graph, the line labeled “Marketing Expenses” is for Samsung; would it be more clear to label it “Samsung Electronics Marketing Expenses”?

http://www.asymco.com Horace Dediu

Yes.

RichLo

Based on the data shown what Samsung is doing with their marketing strategy would make many MBA professors proud.
lesiu

So Samsung is paying AT&T and Verizon sales staff to push Samsung devices?

http://www.asymco.com Horace Dediu

Shocking, no?

http://twitter.com/ogun7 Robert Vitalis

We need to see if spending continues at this rate next year since Samsung spent a lot sponsoring the Summer Games in London.
http://www.asymco.com Horace Dediu

https://twitter.com/asymco/status/273137411633057792
http://twitter.com/aloknandan alok nandan

Isn’t this standard operating procedure? MSFT, HTC everyone does it.
http://www.asymco.com Horace Dediu

Not everyone.

Tatil_S

There is something fishy in the plot for Samsung’s profits by segment. Y-axis seems to go up by “2 Trillion Wons” between each tick, but it jumps from 2 to 5 in the middle, even though the visual size stays the same.

http://www.asymco.com Horace Dediu

Yes, it’s a mistake where I removed the decimal precision and changed the number of grid lines. Each grid line represents 2.3 billion won. The second grid line rounds up from 4.5 to 5. The correct version is attached below:

Tatil_S

Horace, do you think ASP figures are bit misleading if Samsung is spending $7 billion on sales promotions? That is roughly $35 per phone. I suppose it was also spending that much per phone in the past, so the rise in ASP looks real, but I am curious whether other phone makers such as Nokia or Sony have been spending similar amounts per phone.

http://www.asymco.com Horace Dediu

The spending per phone is not in the same order of magnitude for Nokia. Quite the contrary, Nokia receives a payment for each Lumia phone in terms of “platform support payments” from Microsoft ($1 billion per year). I don’t have data for Sony.

Matt

Would you not agree that Apple’s worry would be minimal? With an operating margin of 45%, and the massive difference between the cost to produce their device and the profit, they have plenty of room to lower prices if they begin to feel threatened, no?
http://twitter.com/designker designker

Latest stats show apple with over 50% of smartphone sales in the USA. Samsung are possibly incentivising the sales staff in Verizon and AT&T shops to push the Galaxy and still more than half the people walk out with an iPhone. Seems the desirable power of pull is winning over the brutish attempts at push.
Test

Test1
http://www.asymco.com Horace Dediu

Yes, but it would be wrong to assume that Apple acts on the basis of “feeling threatened.” As I pointed out in a podcast, the pricing of Apple’s products is a specific signal to the market not a response to market conditions. Price is part and parcel of product design.

http://www.facebook.com/bob.arker.731 Bob Arker

Take a company like HTC, with terrible marketing, and look at their product, compared to Samsung’s. There is really not much difference. Both are made of cheaper quality materials, have large screens and run a recent version of Android. There really is no software moat that Samsung has. What is the moat then? Is it marketing, is it in house hardware production?

oases

I’ve heard anecdotes about HTC hardware failing. Not seem empirical data though…but I wonder if they’ve been letting people down.
simon

I’ve heard similar things as oases however HTC has always done fairly well in customer satisfaction so I’m not sure if that’s necessarily the reason.

Also Samsung can spend far far more than HTC because they have other income sources and also benefit in terms of the name recognition. They also have the added bonus of having a very strong domestic market with intense royalty toward Samsung.
defasio

HTC phones typically have poor battery life, lack of memory, and an obstrusive skinning of andriod

http://www.facebook.com/bob.arker.731 Bob Arker

From the comments, it seems like everyone here has heard a lot of negative things about HTC phones. I wonder if this is representative of old HTC phones, because I have tried the newest HTC 5″ phone and compared it to the Galaxy S3. They’re pretty much the same in terms of battery life and memory. The HTC is actually faster as well.

“High end” smartphones today, including the iPhone 5, of course, have gotten to a point where rendering a web page is essentially a non-issue.

Furthermore, this is not really only about HTC. LG has released their nexus phone, which has the “pure” version of android. It’s likely that eventually it’ll get true 4G LTE. So why can’t they compete with Samsung? I really doubt the add-ons that Samsung has put into their fork of Andoird help their sales.
JohnDoey

Samsung sells in way more locations than HTC, and Samsung spends more to get a customer. HTC is barely profitable, they have no money.
http://www.facebook.com/bob.arker.731 Bob Arker

I think that’s obvious to everyone here. Please re read the OP to understand the question we are trying to answer.

http://twitter.com/designker designker

Great article again Horace. Is there any way to gain insight into what kinds of Sales Promotions Samsung typically engage in? I wonder if this is how they are solving the problem that consumers have access to devices with the same Android software and similar specced hardware, yet are instead leaving the shop most of the time with a Samsung. Based on my own experience with awful Touch Wiz layer they add it cannot be software customisations that are sealing the deal.

DesDizzy

Great article and interesting comments as always. In the UK Samsung offer free tablets with their LCD TV’s.

http://alexandersmith.co/ Benjamin Alexander

[Disqus just ate two of my posts?? I was linking to some Samsung promotional pages to illustrate a point. Am I flagged for spam or something?]

http://twitter.com/WalterMilliken Walter Milliken

I lost a post I was editing yesterday here, so something’s at least slightly wrong.

http://alexandersmith.co/ Benjamin Alexander

I was editing a post right after i made it, maybe thats what happened. I very briefly saw it flash “comment awaiting moderation” – maybe its related. It looks like it went through to Horace though as its showing up now.

But I’ve noticed Disqus has been a bit buggy lately, for me at least. Not sure how to describe it, but it reminds me of CDN issues or query caching.

oases

Why is ‘handsets’ broken out in sales but not profits? Is it you or Samsung?

http://www.asymco.com Horace Dediu

Samsung does not offer details on handsets profitability (or units, or anything else). The pricing data I mention later is based on a consensus of analyst estimates of units.

oases

If you have an estimate for handset sales and an estimate for ASP, can’t you estimate handset profits?
http://www.asymco.com Horace Dediu

All the data presented here is based on actual reporting from the company. I don’t want to introduce estimates based on guesswork into the verbatim data.

oases

Buying pre-eminence seems to work in Samsung’s case (assuming pre-eminence is self-perpetuating)…
http://alexandersmith.co/ Benjamin Alexander

We really should be looking at the expenses of other consumer products companies that Samsung competes with, although I’m not sure they’re symmetrical with anyone.

I’ve always felt the Samsung brand was rather bland. This may be by design, enabling any retail brand to “plug in” the Samsung lineup and modulate their advertising, marketing and pricing strategy appropriately for their market.

We’ve seen that Samsung and Apple have gobbled all the profits in mobile. Why isn’t that same pattern repeating in TVs, washing machines, refrigerators, etc.

Relentlessfocus

Maybe because those are relatively mature markets playing a zero sum game?

http://alexandersmith.co/ Benjamin Alexander

Most of those markets aren’t mature in the developing world, where Samsung is staking its claim. In developing nations the pattern is that people buy mobile devices before they buy TV, washing machines or refrigerators. And they’re sensitive to quality in a very real way.

If your family can only spend $1000 on consumer goods a year, what’s the best heuristic for choosing where to spend it?

Samsung seems to understand that design adds value, and at scale it becomes a tremendous competitive advantage.

http://en.wikipedia.org/wiki/Samsung_Electronics#Design

orienteer

As I can recall, it was in the early 90′s that Samsung retained the Arnell/Bickford agency to bring a very high-end, “fashion” look, in black and white, to their appliances- beautiful, athletic models in very dynamic poses balancing the products. I think this coincided with the product design itself becoming very minimalist, lots of gloss black surfaces and sharp-edged form factors. Smartphones were of course not even on the consumer radar, but I’m curious who at Samsung decided on a very comprehensive aesthetic upscaling of the consumer branding and implemented it rather quickly. I’d say it worked.

Fast forward 20+ years and the loss of the context- the layouts, the typography and Herb Ritts photography- and the need for “modular” partnerships does indeed expose the lack of substance and blandness of their products.

http://alexandersmith.co/ Benjamin Alexander

Interesting. I’m curious too, I wonder if there are consistent elements that could be considered a design language across product lines, like the ubiquitous Apple roundrect.

Looking at some of their appliance and gadget designs over the years I can definitely see this trend. Some of it is really good stuff.

http://www.asymco.com Horace Dediu

All’s fair in love and war, but the ethics of spiffs is not clear cut. http://en.wikipedia.org/wiki/Spiff

http://alexandersmith.co/ Benjamin Alexander

Spiffs! What a great word. Its certainly a grey area, and the kind of thing that snowballs if you aren’t careful.

My experience with retail marketing and pricing is limited to a large organic supermarket (not that one) and a large chain of auto dealers…but they were remarkably similar at the end of the day, so I imagine its the same story all over.

“Inventory is evil and if you have to sell at a loss or simply pass it through the system as a bundle in order to clear it out then so be it.”
http://alexandersmith.co/ Benjamin Alexander

I’m so dense. This is what the used car guys do all the time. And the evidence is one google search away. Geeez!
http://alexandersmith.co/ Benjamin Alexander

The discussions on the independent agent forums are unbelievable.

The incentives for these kiosk / strip mall salesmen are so much worse than I thought.

http://twitter.com/ogun7 Robert Vitalis

When I bought my wife’s iPhone 5 over the weekend at BestBuy here in NYC, the young man was telling us how horrific his first Black Friday was working in the store. The reason: the insane rush to purchase Samsung Galaxy 3′s at $50 US!!
KirkBurgess

Wow. That last chart is shocking.

Thanks for the first decent breakdown of Samsung I’ve seen.

That amount of money on sales/marketing is amazing, but can anyone argue that it wasn’t money well spent?

The Samsung strategy of quickly copying apple and using a huge amount of money to sell handsets seems to be very successful.

Can any other company follow this technique? Or has Samsung grown too big for its android competitors to mimic the strategy by matching its huge sales spend?

JohnDoey

What are they going to do when they can’t follow Apple anymore? Disappear like Palm and Nokia and so on.

The thing that has changed during my 5+ years of iPhone use is these days, my iPhone and iPad spend the majority of their time running Mac apps. Samsung has no such apps. Going forward, now that Windows PC sales are down 20%, there will be fewer and fewer Windows PC’s and users will expect PC class apps on their mobiles. Samsung can market their Java applets all they want — there is no way to make their little widgets cover all of a user’s PC needs.

Fuzzypaw

When they can’t follow apple anymore? You do realize that the new Galaxies look nothing like iDevices and have a plethora of features that the iDevices don’t have, right? You can’t look at a Galaxy S3 or Note 2 and say it looks anything like an iPhone.

Peter

I’m an auditor (gasp). When I see rapidly increasing revenue and SG&A that does not reduce as a percentage of revenue, I start to suspect that there is a quite a bit of grossing up going on in the numbers. A plausible guess is that telco rebates are presented as “costs”, whereas there is a good case that they should reduce revenue.

Tatil_S

I agree. When overhead rises in proportion to sales, it is quite likely either revenue is overstated or cost of goods sold is understated. On absolute numbers or for comparisons between companies following the rules and bending them, that is important, but I think it is more valuable in this case to concentrate on trends.
http://alexandersmith.co/ Benjamin Alexander

Assuming these are rebates/incentives is there any reason that they shouldn’t be subtracted from revenue?

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http://twitter.com/julianlimon Julián Limón Núñez

What about the appliances margin? Is it negligible or why hasn’t it included in the charts?

http://www.asymco.com Horace Dediu

Appliances were folded into Digital Media in terms of reporting of operating income.

http://twitter.com/kleptco Karl Klept

Apple’s physical retail stores, a cost of sales?

JohnDoey

Yes.

def4

Brute force seems to have worked wonderfully.
What is the biggest weakness or risk with this strategy?

http://www.facebook.com/bob.arker.731 Bob Arker

Anyone else should be able to use it.

def4

Anyone capable and willing to spend close to or more than Samsung.
How many is that?
http://www.facebook.com/bob.arker.731 Bob Arker

When Samsung started out selling phones they did not spend as much as they did now. Other companies can still use the same overall strategy.
def4

The question isn’t if Samsung spent as much as they do now back when they started out but whether Samsung started out their successful run by spending as much or more than everyone else was at the time.

JohnDoey

The risk is it may only work once per customer.

When I moved in with my current roommates, it was 3 iPhones and 2 Samsung. Now it is 5 iPhones. The Samsung users never considered another Samsung phone. They were angry because they already thought they bought an iPhone last time, but spent 1–2 years discovering all the things their phone could not do compared to iPhone. They saw apps they couldn’t run, media they couldn’t get, accessories they couldn’t use, AirPlay they couldn’t access.

In other words, a Samsung iPhone is a gateway to a real iPhone.

You can lie to users who haven’t used your phone — but only once.

http://www.facebook.com/bob.arker.731 Bob Arker

Perhaps that is why In a recent survey 22 percent of android users were planning to switch to iOS and only 8 percent vice versa. Now if you look at the actual NUMBERS, that 22 pct is much larger than the 8 pct because of the larger android market share
def4

I wonder how many new Samsung smartphone customers are discerning enough to figure out everything your roommates did.

http://twitter.com/WalterMilliken Walter Milliken

One thing that intrigues me in this data is the recent sharp upturn in their LCD business profits. I wonder if this is a bit of a shell game, siphoning profits from one division (phones) to another (phone screens) — since the LCD business has been kind of anemic for them until recently. There is also a smaller uptick in the semiconductor profits which may be related.

I’m a bit reminded of the old Ma Bell trick of transferring revenues from the operating divisions to the manufacturing side, though I don’t know if there are similar external pressures that favor shifting money like that.

JohnDoey

People are getting the same crappy Samsung panel in HD sizes today as 3–5 years ago. It does not surprise me that LCD profits are up.

realjjj

You don’t compare rev in smartphones vs marketing $, plus ASP went up but on a shift from dumbphones to smartphones.They also have higher BOM than Apple at similarly priced handsets (bigger screens,battery more hardware insides) and they went for the low end too, nothing wrong with going for share instead of earnings (unless you ask most analysts). But look at their scale now and how big they can get in tech in general if regulators allow it.- they have and will have even more leverage.
Apple also does get free PR from the US press since nobody in the mainstream (mainstream meaning even the most popular tech sites) has good tech writers).

PS: try to have a look Apple’s share in non-english speaking nations,so exclude the US, UK and Australia at least

http://www.facebook.com/bob.arker.731 Bob Arker

This post seems to be a complete non-sequitur in relation to this particular article that Horace wrote.

I think every single person in here knows that Apple’s share in non-English speaking nations is relatively low. This actually is a big opportunity for Apple growth.
http://twitter.com/WalterMilliken Walter Milliken

Do you have a BOM estimate for the S3 from somewhere? I can’t seem to find one online.

Don’t assume that because the screen is bigger that it’s more expensive, it depends a lot on the technology used, and denser displays are generally harder to make. I believe the S3 uses a Pentile display, which actually has fewer subpixels than the standard RGB design Apple uses, which *might* make it cheaper. And the costs of LCD versus AMOLED tech could go either way. Apple’s iPhone5 LCDs are currently probably on the expensive end due to the new touch sensor integration, which is a new technology.

Similarly, more hardware isn’t necessarily more expensive, it depends a lot on the chips used. Apple also uses an expensive case-machining process.
JohnDoey

A tech writer who recommends a Samsung clone of an iPhone instead of an iPhone is a bad tech writer.

Same with a car writer who tells customers to pass on a $40,000 BMW and instead buy a $40,000 KIA. Bad writer. People are paying iPhone price points for much lesser generic Samsung phones because Samsung marketing says they are the same phone. They are not. You fell for it. You need to read better writers.

Samsung devices have no native C apps, no central software updates — they are not in the same class as an Apple phone. It is bait and switch on consumers. The whole reason industry writers exist is to warn consumers away from scams like Samsung phones.

http://twitter.com/calebcar Allan Levy

If you wonder why Samsung gets so much better press than Apple, Horace’s article tells you why. If you advertise, you don’t just get pretty pictures and videos; editorial content is influenced. The writer is not necessarily bad, just doing their job.
Ittiam

LOL… Bait and switch is Apple’s strategy… Use clever marketing to sell over priced products…

And tech writers are always biased in favor of Apple, since they fear that they might not be called for next Apple event
Quicksingle

Hope you get that sad chip removed, you really are ignorant and blinkered.
Walt French

Looking at your history, a pretty consistent pattern of ad hominem attacks and generalization of personal preferences as the only smart thing for everybody.

Insulting and useless, respectively.

Why not follow Dedieu’s example and supply some facts or original insights to chew on?
http://www.isophist.com/ Emilio Orione

I substantially agree, iphone are of a different class and yet there is some space for other handsets.
Iphone are mainstream devices for every use with top characteristics, specific customer needs could be met by other vendors, like smaller price for less quality or a bigger screen for instance, less ergonomic for holding, better for looking. Niche markets.
And indeed the vast majority of android devices are occupying these different needs.

Then there is the galaxy. Samsung with this iphone clone is not aiming at niche markets, they are aiming at the same iphone market with inferior handsets at the same price.
The incredible thing is the same price, that is the claim of being same class.

This is sustained only by marketing money, the mean price for iPhone and samsung phones are quite different, the lower samsung price is paid by operators not users, it is incredible that marketing can make users pay almost the same for both devices.

The difference can be seen in the power of apple, it is apple that approve lte networks to be used with the iPhone not the other way around common for everyone else.
Operators backed up by samsung money can sell the devices at the same price but know very well who is leading.
I believe that the need of a same class iphone competitor is strongly felt by operators that don’t want to be under the will of apple. There isn’t one on the market, they pushed one phone to be it.

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Ulag

What about the sales promotions of others like Dell, HP, Coca Cola? Why is that not being accounted over and above their marketing expenses. Coca Cola especially indulges in heavy sales promotion. Using these figures we can get a more realistic comparison.

JohnDoey

That is in the chart.

Ulag

No, its just advertising expenses for the rest of the companies. Sales promotions have not been taken into account.

JohnDoey

It is sleazy and illegitimate when applied to counterfeit products.

They are paying off Sales people and others to go along with the scam and promote Galaxy as if it is an iPhone. The money is unusually high because it is a scam.

http://alexandersmith.co/ Benjamin Alexander

Yeah, I just spent a couple hours reading through some carrier agent forums. I need a bath. p>
Didn’t have any idea how bad it was. Yuck.

JDI Interactive

Hello, I am impressed from your report. I wonder how you estimate 2012 costs. It looks fair enough but can you tell me shortly..

http://www.asymco.com Horace Dediu

I start with what is known about the overall marketing spending. We have three of the four quarters already reported. I assumed that Q2 and Q3 were exceptions (growth y/y was 43% and 58%) due to the Olympics sponsorship. I therefore assumed Q4 would only be a total of about 7.3% growth. If we have Q4 we then have the whole year and can measure growth for that (31.3%). I then adjusted yearly ad spending growth to be the same amount. Therefore the estimate depends only on how much will Q4 marketing grow relative to last year’s Q4. I think 7.3% is conservative.

Ittiam

Horace,

Excellent article…. Request you to do more analysis of the Android ecosystem and partners
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http://beautyandthesoftware.blogspot.com/ Adrian Constantin

If high spending on sales is causal to Samsung’s success, then this is good and bad news for Microsoft. It’s good news because they could try to pay their way into the smartphone market. It’s bad because they would need to spend more than Samsung in order to convince customers and sales people to switch. And it is far from certain that the sales would grow fast enough to cover such huge costs.

Walt French

The single worst piece of news for Microsoft is that smartphones are a distinct market from desktops, where they reign supreme.

I heard Bloomberg “interview” Christensen this week (in quotes ‘cuz he could hardly get a word in edgewise), reiterating his belief that markets evolve from proprietary (closed) products that serve innovators best, to open, multi-player collaborations, and that Apple was at risk of running afoul of that natural shift.

But if Apple is at risk, what chance does Microsoft have to introduce a brand new, proprietary platform? (Even more so, RIM?) If they can leverage their masterful understanding of Office/Desktop/Servers onto phones, or if people really want to do the same sorts of things on tablets that they do on desktops/laptops, they’ll do fine. But I think these are utterly distinct markets, and that it is too late, even with their strong base, to introduce a successful phone.

The level of advertising notwithstanding. If they thought that cash would make the critical difference, they have the cash and the ambition not to become irrelevant to modern computing. But methinks they know otherwise. WP8 is still not competitive enough that Samsung-level advertising would make the difference.

PS: I find Apple’s challenge much more interesting because it portends how future battles will turn out—as I say, MS and RIM look lost already. Perhaps iOS, rather than mobile computing, is itself a market with many players (independent software developers, music & TV media, …). Or perhaps Apple can only retain the crown by ever more rapid innovations to create new proprietary markets.

YooHoo

Samsung and Apple are also differentiating themselves from other manufacturers by their deep supply chain integration. In Samsung’s case, it is the traditional model of vertical integration, where they make many of the critical components: microprocessor, DRAM, Flash memory and LCD panel. This guarantees adequate supply, but since the components are also available to others, they still have a reality check that their components are competitive with other vendors.

Apple started off the 21st century as a “modern” American integrator — designing products using standard components assembled by contract manufacturers in China–but then began to modify that formula. First it made huge prepayments to lock in pricing and availability of key components, then expanded their design scope to create custom components: both leading-edge electronic components (first SoCs using standard cells, now full-custom CPUs) and unique mechanical parts (unibody laptop chassis, glass panels). Now it directly invests in the manufacturing equipment used by its manufacturing partners and may even own the Sharp plant that builds the iPhone 5 LCD panels. It seems likely that to guarantee adequate supply of future Ax SoCs they will either prepay or directly invest in new semiconductor fab capacity.

Since Apple owns the key manufacturing equipment, much of Foxconn’s capacity is dedicated to Apple — those plants can’t produce anything but what Apple says.

Both Samsung and Apple have much more control over their entire supply chain than their competitors, particularly critical components like Flash memory.

Will their supply chain mastery allow them to squeeze out the other manufacturers from getting the advanced components needed to build the next leading-edge phone?

And which strategy is better, Samsung’s or Apple’s?

Walt French

@YooHoo wrote, “And which strategy is better, Samsung’s or Apple’s?”

During the 50′s and 60′s, GM perfected its purchasing and manufacturing to be superb for its yearly, mostly cosmetic model changes. High-volume, well-managed, of the sort that a budding Tim Cook would study in school.

Of course, that model became irrelevant with the disruptions brought on in the sixties. Disruption from Japanese nameplates fit the Christensen model to a Tee.

I’m not saying Apple is GM, but I am saying that trying to choose sides in a “business model war”—especially, a choice based on a very shallow understanding of the company’s culture, resources, etc.—is problematic, likely to help us miss the dynamics for how the industry evolves.

http://www.isophist.com/ Emilio Orione

Great article Horace, as always, you are turning on some lights.
The marketing expenses are staggering and suggest some insight on your previous post about android engagement.

Both apple and samsung have advertising, samsung much more than apple but that is understandable since samsung has not the same brand as apple does and they are new to the high end phone market, but samsung does a lot more.

Apple informs users about its products and they choose to buy them, even if they don’t know, at first, other uses than phoning or messaging. The user interface is so simple, a three years baby can use it profitably, that they soon discover new uses and are more engaged in the platform.

Samsung informs users but does more, a lot more, 12 billion dollars literally push their phones in the hands of end users. Operators are so motivated to sell samsung products that they also try to discourage iphone sales.
These users get the phones, push sales, but are not motivated in discovering more features other than the basic ones, they have not choose a smartphone they just have got one.
The interface is less usable and requires more training and cognitive effort to be used so they remain with the basic use and the engagement numbers becomes plausible.

Reassuming two main reason for the engagement numbers:
1) users need a motivation to afford the training required to use more functions on their smartphones and having a smartphone is not enough, the must be attracted, they must choose to have a smartphone not only being pushed to own one
2) the lower the training step the better, usability is everything for this kind of very personal devices, their use must be a no brainer, and ios is ahead in that

Shane77

IOS may be easy enough for a baby, but I know a 74 year old woman who is returning her iPhone 5 because she says it’s too complicated. She could go to an Apple store and take a free course. Meanwhile I just got my 73 year old mom an Apple TV and about to get her an iPhone 4s. She’s now streaming music from her iTunes library to her living room. The only difficult part when she’s used my iPhone seems to be getting familiar with the touch interface and keyboard, but I think that’ll take a week (I remember having a learning curve as well) and she’s going to love the calendar compared to the day timer she’s been carrying for years. Imagine not having to rewrite on another day what you didn’t get done today and being able to call the person you have an appointment with right from the actual calendar, how awesome! Now that Windows new operating system looks like a foreign language to someone used to XP, her next computer is also going to be a Mac. If there’s going to be a learning curve either way, might as well make it the smoothest curve possible.

http://www.isophist.com/ Emilio Orione

Exactly, think about streaming to your mom your latest photos with icloud photo streaming, incredible useful and simple.
Anyway there a lot of personal examples of one thing or another, it is the global engagement data that shows different outcome between android and iOS and I am trying to understand why.

Ittiam

From few comments there is a feeling that Samsung just threw money on marketing and hence success was kind of guaranteed. Thats not the case.

Samsung also mastered its production ramp up and product design which are equally critical.

Example: Samsung has not had the same success in tablets even though they have marketed it equally, since the tablet design has not been upto the mark.

Asus and LG are struggling to ramp up their production capacities of their Nexus devices, which shows its not so easy. Samsung has tripled its production year-on-year, for last three years. That itself is a great achievement

http://www.noisetech-software.com/Home.html Steven Noyes

Samsung has not increased their handset production 300% Y over Y. Samsung has been very successful and transitioning dumb/feature phones to “smartphones”. Their actual production increases, while impressive, are much more modest than the 300% you claim.

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Christopher Robert

Apple does most of their marketing in house. The above graph only represents spreading outside of the company. So in reality this is just what apple spent on buying add space. Apple also has ways less product diversity so for instance they don’t spend money marketing for tvs or micro processors. This number for Samsung show its expenses including the money spent with the ad agency that develops the ads and the money spent on ad buys. If you looked at this on a per product (unit) basis there is far more money spent on advertising money spent per iphone than there is per galaxy phone.

You can’t always believe padded statistics .

http://www.noisetech-software.com/Home.html Steven Noyes

“Apple does most of their marketing in house.”

That is referred to engineering, design and R&D. You are right on that one. But even then, Apple uses outside advertising companies just like a normal company.

“If you looked at this on a per product (unit) basis there is far more money spent on advertising money spent per [iPhone] than there is per galaxy phone.”

Based on what? Given the cost of marketing has risen in accordance to an increase in revenue of Samsung’s cell phone division, are you suggesting Samsung is increasing their marketing geometrically to support divisions with flat revenue growth? This is more about cost of sales that includes costs beyond just advertising. For example, the money Samsung pays sales people to push their product (spiff). At the end of the day, Samsung pays a significantly higher % more on cost of sales when compared to Hp, Dell, Microsoft or Apple.

jameskatt

Samsung has to bribe people to buy their products.

http://alexandersmith.co/ Benjamin Alexander

And to sell them, apparently.
Walt French

Please help me understand how this gibe adds to the analytical dialog that Horace started here.

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poke

I can’t help but think this has something to do with Samsung’s position in Korea and East Asia generally. They’re more of a “lifestyle brand” like Nike or Coca Cola. They sponsor events, sports, TV shows, produce music videos, etc. They’re much more similar to Nike and Coca Cola and Sony than to HP, Dell, Microsoft and Apple.
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http://fundless-sponsor.blogspot.com/ Capitalistic

Nice analysis. I think Samsung has to spend more on marketing vs. Apple not only for sales, but to help their brand name + serve as a notice to investors (i.e., buy and hold our stock).
I wonder if a portion of their marketing costs are actually “trade marketing expenses”
jag

Given Apple’s (intentionally) rather limited portfolio as compared to HP’s massive one, it would be interesting to see that last graph take this into account, for example “average marketing budget per product.”

Coca-Cola’s would be through the roof, and Apple likely would dwarf HP, but it would be interesting to see where Samsung falls.

asymco

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