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The cost of selling Galaxies, updated

Thanks to @jtk0621 via twitter I was able to obtain a quarterly view into Samsung’s SG&A expenditures by cost category.

The value of this data is in being able to understand why Samsung SG&A as a percent of sales remains fairly constant. To recap, the discrepancy with Samsung’s SG&A is that it has grown in proportion to rapidly rising sales. Normally, when sales grow, SG&A grows but when sales grow very rapidly, SG&A grows a bit more slowly since it’s primarily a function of headcount and hiring is necessarily organic and hence slower as a process.

The contrast is shown in the following comparison between Apple’s SG&A and Samsung’s SG&A as a percent of sales. [For more detail on Samsung revenue composition see: The Cost of Selling Galaxies].

Screen Shot 2013-04-02 at 4-2-3.09.39 PM

Apple’s SG&A has declined as a percent of sales, as one would expect, but Samsung’s hasn’t.

I have hypothesized that the reason for this might be in the practice of “outsourcing” many marketing functions. As Samsung expands promotional efforts, it does so partially by hiring people but even more so by farming out a lot more work. In this way, if and when sales subside, it can pare costs. This practice ensures that it’s not exposed to a huge cost structure that is hard to control. The downside to this approach might be obtaining “quality” marketing as oversight is still depending on inside teams who still have limited resources.

To test this hypothesis, I looked at the types of costs it reports and divided them into two categories:

Category 1 are what might be considered “internal” costs which are in function of employees or operations. These costs are:

  • Salaries
  • Retirement Benefits
  • Commissions
  • Depreciation
  • Amortization
  • Freight

I graphed these costs over time below:

Screen Shot 2013-04-02 at 4-2-3.12.09 PM

Category 2 costs are those which can be “outsourced” and are in function of budget items. These are:

  • Advertising
  • Sales Promotion/Marketing
  • After Service Expense
  • Public Relations
  • Other

I graphed Category 2 costs below:

Screen Shot 2013-04-02 at 4-2-3.12.58 PM

In both cases I created year-sized buckets summarizing these expenditure categories.

It becomes apparent at first glance that through the period shown (2009 through 2012) Category 2 costs grew much more rapidly than Category 1. In 2009 Category 2 were less than 1 but the order was reversed in 2012. On a yearly basis Category 2 nearly doubled while Category 1 grew by about 40%.

When seen in this context, the hypothesis is proven. The growth in Samsung SG&A has been driven by a vast expansion of primarily Advertising and Sales Promotions.

It’s hard to get an appreciation of the scale involved due to the lack of comparable SG&A category reporting from other companies.  What we do have however is that US companies typically report their advertising spending on a yearly basis.

So taking only the Advertising figure from Samsung Electronics, we can get the following comparison with Apple, HP, Dell, Microsoft and Coca Cola.

Screen Shot 2013-04-02 at 4-2-3.20.48 PM

In this context we can see that while both Apple and Samsung grew their  advertising almost at the same rate, doubling their budgets during the last four years, Samsung Electronics has a far higher ad budget. More than four times higher, actually.

Regarding Sales Promotions however, the comparison is far harder to make. I haven’t any way to guess how much Apple spends relative to the $5.3 billion Samsung spent.

 

  • obarthelemy

    Regarding sales promotions, I think it’s simply a choice by Samsung to go for spiffs and money-back coupons rather than lower prices. Though I personally hate spiffs & coupons, something must have convinced Samsung that those work better than everyday low prices.

    Regarding advertising, I think it also has to do with number of products. Apple have a dozen products to advertise, with a strong halo effect since most everything is mobile and target at the same consumers: iPod-iPhone-iPad-MacBook… Samsung have hundreds, most with no halo effect fridges, ovens, TVs, AC, PCs, phones, stereos, cameras… I’m sure they have something mechanical somewhere too :-p

    I was with Dell back when Dell were pulling a Samsung on the PC market; one of the main goals was to eliminate the weaker players; I’m assuming Samsung is doing the same and pouncing while they’re strong. As a side note, Dell’s longer-term goal was to regain pricing power once weaker players were eliminated, but that never happened ^^

    In the end, I’m not quite sure what this fixation on Samsung’s marketing budget is all about. Are we going to talk about their technological, design, industrial, … policies too ?

    • Johnny

      I don’t think Samsung’s other policies are outliers in the industry compared to its marketing. That’s why the focus is on the marketing as maybe one of the main causes for the Galaxy success.

      Is a Galaxy really that much better than a HTC One, or is the Galaxy line a success bc of the marketing and better distribution.

      When all things are close to equal tech wise between competitors, it helps to analyze the few things that aren’t equal, hence the focus marketing budgets to explain success.

      • obarthelemy

        Things are not equal tech-wise nor design-wise.

        HTC One has LCD screen, better sound, aluminum body, fixed battery, no SD slot, low-def high-lumens camera. I’d never get an HTC One because I don’t want a disposable phone, I want to be able to swap batteries and pass it on after 2-3 yrs, and I need a lot of Flash storage. Also I don’t care about looks since the phone will end up in a sleeve, nor about sound since I got headsets and a bluetooth loudspeaker. Most “premium” buyers will probably think the same; Samsung aren’t making those basic mistakes. Also, I do care a lot about AMOLED, but that’s more of a personal preference (I read a lot on my phone).

        Announced prices are equal, which probably means the S4 will end up around 20% cheaper with rebates and an SD-card instead of native Flash.

        And HTC are actually missing their pre-S4 launch window because of manufacturing issues, probably due to the camera and/or casing. That would put design and manufacturing ahead of marketing, in the “important to get right” category.

        Marketing does count, but the actual product, and the logistics behind it, count at least as much. Samsung’s plastic designs and integrated manufacturing are most certainly outliers.

      • JohnDoey

        What is it about AMOLED that makes it attractive to you?

        How is the RGBG pen tile screen good for reading? It makes terrible typography and even worse photographs, which also have inaccurate color.

        The batteries in sealed phones are replaced all the time. There are a dozen shops in my neighborhood that will replace an iPhone battery while you wait for almost no cost, as well as any other part that may be worn out, like the headphone jack.

      • obarthelemy

        1- AMOLED has true blacks: when reading at night, it doesn’t have the “black light” effect of LCDs, nor backlight leaking at the sides. I like that so much that I’ve switched to “night mode permanently, including all apps and widgets I could, and forcing a light-on-black stylesheet on all websites.
        2- AMOLED Pentile. Some AMOLED screens are Pentile, some aren’t. Some LCD screens are Pentile too.
        3- Pentile is no longer an issue at today’s dpi. I already don’t find it an issue on my 2 year old Note (v1, 280 dpi I think), anything after that is irrelevant, at least to my old eyes.
        4- Color calibration issues are independent of the underlying tech, and are a widespread issue on Android anyway.
        4b- Color gamut issues are tech-dependent, and I have no clue how AMOLED fares on that front; I’m guessing not too well, but not unbearable. Again, I don’t care much about color accuracy nor gamut for reading, and when I think a video doesn’t deserve better than my 5″ screen, it probably doesn’t deserve perfect color either.
        5- As I said, I use my smartphone mostly for reading anyway, so color calibration (and gamut) are irrelevant to me.
        6- What’s missing from your question is the most relevant stuff: contrast, minimum luminosity, and maximum luminosity. Contrast is infinite (true blacks), min luminosity is still too high but fixable wholesale via a screen dimmer app (works on almost all screens, not just AMOLED), and max luminosity is, strangely, excellent for AMOLED in night mode: having a mostly black screen allows “lit” pixels to be brighter, for very little battery impact. Switching from low luminosity to high luminosity is just a click on the dimmer widget away (available in the status bar, too ^^)

        I also have a 10″ Galaxy Note tablet; I really wish it were AMOLED too.

      • Walt French

        These are all good points but while contrast is important for good reading, past a certain point it contributes nothing. Note that many people quite like the early Kindles’ e-ink—even preferring them to backlit screens—and that has a relatively low ratio.

        I’m also curious about the “leaking backlight” issue. Never noticed it myself on my, or friends’ phones. How does it manifest as a *real* issue?

        The first I heard of PenTile, it was in the context of it being hard to make AMOLED pixels both efficient and small, leading to Samsung’s decision to eliminate one color per pixel. Wikipedia’s discussion of PenTile RGBG — the format you describe — shows only info about Super AMOLED screens, while the original layout — the one that gives PenTile its name — is described only for prototypes and PenTile RGBW appears to have been used in LCDs only where brightness was important.

        I’d be happy to hear about PenTile RGBG having been used in LCD screens, but since higher resolutions are now easy to obtain I doubt we’ll see the technology being important in the future.

      • obarthelemy

        e-Ink is a different beast: it is reflective, so remains legible in bright sunlight. That’s why contrast on other screens does matter even at seemingly absurd levels: it helps with glare. Specular reflexion would be an important smartphone screen characteristic, but, alas, that’s never discussed nor measured. Also, e-Ink consumes very little battery, because the image is static (no need to keep refreshing it), and it has no backlight, and the tech itself is very low-power. And thin and light. Darn, I’d like an e-Ink phone :-p

        As for light leaks, easy: go to bed, read something. It feels like holding a torch, disturbs the bedmate, and burns your eyes. Also: washed-out blacks if you go for night mode.

        As for LCD pentiles: http://www.anandtech.com/show/4165/the-motorola-atrix-4g-preview/4. Not RGBG which I never mentioned, but Pentile, which I did.

        I think the whole RGBG Pentile thing is due to 2 factors:
        - the human eye is more sensitive to green, so having more green pixels to display that color more accurately improves perceived quality
        - AMOLED has an issue with green pixels (I think they’re less bright), so needs more for a balanced result.

      • Ralf_P

        You mentioned “LCD screen” as it were a weakness of the HTC One. As a matter of fact the display is a Super LCD-3, with full HD 1080p and a 468 PPI count that is superior to that of the S4. The display technology is considered better or on par with the S4 by 100% of the reviews that I’ve seen. If you find an objective review saying that the S4 display is significantly better than that of the HTC One please share here.

        The camera technology of the HTC One (Ultrapixels) has been widely recognized as top nocth and the One have earned raving reviews for its performance under low light conditions. This is from Engadget: “…The idea behind the UltraPixels is to take a physically large sensor and combine it with big pixels that are capable of gathering more light than standard-sized ones. Whereas the typical smartphone camera features1.1µm pixels, the One proudly boasts a one-third-inch BSI sensor with 2µm pixels capable of absorbing 330 percent more photons. But that alone isn’t enough to excel at low-light photography, so HTC also uses a 28mm f/2.0 AF lens and optical image stabilization (OIS) — and just in case you still can’t capture enough light, an LED flash is thrown in for good measure…” Also, please see this review from slash gear: .http://www.slashgear.com/i-fell-for-the-htc-one-in-a-tokyo-cat-cafe-31275895/

        I don’t know why you’ll need more than 32 or 64 GB in your phone but if you do, there’s always dropbox (or Facebook for your pictures for example).

        Pricing wise the S4 starts at $250 in the US while the 32 GB HTC One is $199. That’s 25% more expensive than the HTC One. Don’t think the S4 will ever make it to 20% cheaper as you are suggesting…

      • obarthelemy

        I’m mentioning differences, not judging whether they are good or not. The HTC One is LCD, the Samsung S4 isn’t. Both techs have very different personnalities.
        Ditto for camera: i’m not saying one is better than the other, just that the One has fewer pixels but they are better in low-light conditions. I’ve seen reviews critical of HTC’s camera.
        I need lots of Flash in my phone… for when I’m not online, evidently, so Dropbox and Facebook don’t cut it.
        And finally, you’re quoting subsidized prices, I’m talking about off-contract prices.

      • kfir

        You are aware you can replace batteries on the iPhone and HTC phones.

        http://www.apple.com/batteries/replacements.html

        http://www.ifixit.com/Guide/Installing+iPhone+4+Battery/3141/1

        If you don’t want to get your hands dirty you can find someone to do it for you for cheap, e.g Battery Replacement: $40 – http://fixmyiphonenyc.com/?gclid=CKrVutu-rLYCFcyY4AodF1IA2g

      • obarthelemy

        Appke charge $80 for a battery replacement. On a 3 yo phone, that’s probably a good 25% of the resale value.
        A Samsung Original S3 battery is $20,

      • Kizedek

        IF your iPhone has a battery issue, you may be faced with replacing it. It’s rare. You may face it in five years. You may never face it.

        I am glad that you have found one more piece of data to add to your table that favors the S3. Other people may at some point look up from the specs and play with an iPhone in an Apple Store, or listen to family and friends to influence their decision.

        I would say that most iPhone users would consider that the kind of day to day use and satisfaction they get out of their iPhone over those three years more than makes up for the potential 60 bucks difference they may have to pay for a new battery, if ever. Some people simply pick up an iPhone for the first time and the mere feel of it in their hand convinces them that they will be more happy with its engineering than with one that has a replaceable battery. I know you don’t want to hear it, again, but sometimes it’s about more than specs on a page.

      • obarthelemy

        Indeed. My guess would even be that *most* people buy the iPhone because of “the mere feel of it in their hand”. Thanks for making that point :-p
        I’m being a naughty troll now. Your fault !

      • Walt French

        If you use your iPhone intensively, yes, 3 years would be about right for replacing the battery. That’ll be about 7¢ per day, thank you, on a $600 phone.

        It is an infinite percentage of the resale value of a busted phone, which of course is somewhat more irrelevant than the comparison of how much that phone depreciates over its useful life.

        You’d probably agree that the more important issue is the flexibility of subbing out the battery when needed, versus the extra weight and complexity (e.g., carrying the spare protected from its contacts shorting) that is involved.

      • obarthelemy

        Hey, dividing numbers by 750-ish to make them sound irrelevant is a fun trick. let’s do that next time we talk resale value :-p
        Actually, the most important issue is that when I replace my phone, I can get a new battery for the old one I’m passing on so that my friend or relative doesn’t get a sucky phone that won’t last a day. $20 is pocket change, $80, not so much.
        The second most important issue is that I can get an XL battery so that I *don’t* have to carry an extra battery, just a somewhat thicker phone.

      • Ted_T

        “I’d never get an HTC One because I don’t want a disposable phone, I want to be able to swap batteries and pass it on after 2-3 yrs”

        I have nothing to say about the HTC battery in particular, but my anecdotal experience has been that Apple’s built in batteries are superior to others removable batteries — my 2007 original iPhone which to this day is heavily used as the Home Theater remote, cooking timer, etc around the house is still going strong on the original 6 year old battery. Meanwhile I had to throw out our *newer* unlocked (for travel) Sony flip-phone because the removable battery died and it was impossible to find a replacement. Meanwhile should that iPhone battery ever die, there are plenty of replacement sources. And fortunately AT&T finally started unlocking old iPhone last year so now they can be used as travel phones as well…

        So, in theory replaceable batteries should make your phone last longer, but my real world practical experience says otherwise.

      • Johnny

        To quote you, “Marketing does count, but the actual product, and the logistics behind it, count at least as much. Samsung’s plastic designs and integrated manufacturing are most certainly outliers.”

        If marketing doesn’t count, why is Samsung spending 4x Apple and how many times HTC or Moto?

        After reading many of your posts, opinions not analsys, I have to ask who pays you? Google or Samsung, because you hate HTC.

        This isn’t Engadget or the Verge. Keep your tech elitist bias opinion out of your analsys of the general market of consumers. That’s what this website focuses on.

        In other words grow up, you are now longer contributing to thoughtful analsys bc you bring your bias to every post.

      • obarthelemy

        You’re funny.

        How do you make the jump form my “Marketing does count, but the actual product, and the logistics behind it, count at least as much. Samsung’s plastic designs and integrated manufacturing are most certainly outliers.”

        to your “If marketing doesn’t count, why is Samsung spending 4x Apple and how many times HTC or Moto?”

        Have someone read my sentence aloud to you, you seem to have reading comprehension issues. Then take the appropriate conclusion on who shouldn’t be posting here.

    • hmm

      Even putting aside what Jake_in_Seoul said, did you really think these other products are growing so fast that Samsung has had to double their advertising spend in the last four years? You’ll find that the growth in advertising can only be reasonably explained by smartphones.

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

      The discussion regarding what the advertising and sales promotion spending is in support of was in the original “cost of selling Galaxies” post http://www.asymco.com/2012/11/29/the-cost-of-selling-galaxies/

      • Chaka10

        Since, as you pointed out, “Samsung is a relatively integrated enterprise”, to what extent do you think the financial presentation, and therefor this analysis, remains subject to Samsung’s internal transfer pricing and expense allocations? What accounting standards govern Samsung’s financials and are there any practical constraints on its practices?

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

        In my line of work I cannot afford to question the honesty of management and hence I don’t. As far as I know Samsung follows IFRS http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards

      • Chaka10

        I didn’t mean to question honesty of management either. Rather, I meant to point out that transfer pricing — obviously very relevant in looking at one part of a highly integrated business — is imprecise at best, and many any factors can go into transfer pricing practices, factors such as taxation, for example (I recall interest in the UK in AMZN not paying any taxes notwithstanding many billions in sales).

        One more quick note, if I may — the 2012 audited financial statements for Samsung Electronics that I found on Samsung’s website seem to show SG&A of USD42,388,520 (not $30 bb, from adding up Category 1 and 2 above)?
        http://www.samsung.com/us/aboutsamsung/ir/financialinformation/auditedfinancialstatements/downloads/consolidated/2012_con_quarter04_all.pdf

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

        In Samsung’s accounting SG&A includes R&D. You can see the R&D separately in their quarterly Earnings Releases slides (PDF documents).

    • Chaka10

      I think the point in the fixation is that effective advertising and marketing can be bought — it’s not generally a very defensible competitive advantage.

      For Apple, though, that line of thinking eventually circles back to competition driving potentially shrinking margins (if not gross margins, then net — after sales and marketing — margins.

    • Walt French

      There are many people who will tell you that phones (or most any consumer product) are SOLD, not bought. I’m not wedded to that starting point but I think you won’t understand the smartphone business circa 2013 without a good feel for what drives the selection of one brand versus another.

      Even attributes such as you ascribe to sensible decision-making — say, screen resolution versus camera-quality — are amenable to advertising shaping customer emphasis on a feature. YOU may be a very independent customer, choosing important attributes without worrying about what companies emphasize, but that’d put you in a very small minority.

      • obarthelemy

        If that were true, marketing would drive sales, and Windows Phone would have dramatically increased after Nokia/MS’s marketing blitz. It did increase, but clearly not as much as marketing spend.

        I think the answer is: a bit of both. And also, on the “bought” part, objective criteria are not the only ones, by far. I still think “will that phone make me look good” and “will I know how to use it” are key criteria, and those are very subjective.

  • Jake_in_Seoul

    @obarthelemy You seem to conflating different subsidiaries within the vast Samsung Group. Samsung Electronics does make and market a wide range of cell phones, computers, TVs, cameras, dram chips and other electronic products, but no home appliances or mechanical devices. Given that the vast bulk of Samsung Electronic profit in consumer goods comes from cell phones, that is where one would expect the marketing costs to be concentrated.

    • obarthelemy

      Does it say Samsung Electronics anywhere ? I read “Samsung” everywhere, and no clarification in the text ?

      Edit: the first chart does say Samsung Electronics, all the text and is other charts say “Samsung”

      • JohnDoey

        The context of this article and even website is the cell phone business.

        The title of this article is “the cost of selling Galaxies.” Galaxies are cell phones. Only Samsung Electronics is at issue here.

  • Pingback: Samsung’s Gigantic Ad Budget In Context | Digital Wealth

  • Micromeme

    Horace,

    I am partly involved in medical device distribution from the US to asia. Anytime you use a distributor, or in the case of samsung and apple a telcom as sales channel, there is a division in the contract sort of a who-pays what on marketing and sales promotion and there may be a need to do direct pay to the customer edge salesforce to get them to pay attention or give better efforts. However and its a big one– if you get minimum sales guarantees into your contract with the distributor then its essentially all on them. I am constantly hearing that apple extracts (or gives concessions to get) minimums in their contracts with telcoms. If so that puts spending on getting the final sales channel to push the device (bennies to actual sales people) on the telcom not on apple, because failure to sell the minimum is on the telcom sow they will manage to avoid that.

    this might be a reason similar sales promotions are not present in apples books– because they’ve chosen (or had the clout) to structure their distribution contracts to not need them.

    if this just sounds like an ‘apple is better’ argument I don’t mean it to be– I would expect the requirement to get more stringent contracts would actually be responsible for apple’s slow build out of world wide distribution relative to samsung (so a trade of off terms for volume) But my point would be that tradeoff would not show up in the line items you are looking at.

    • http://twitter.com/WalterMilliken Walter Milliken

      The question then is, *are* the channel people actually spending any money promoting the iPhone, or are they relying entirely on Apple’s advertising and branding. Most of the anecdotal reports I’ve read suggest the US telcos don’t promote iPhones much in-store. Certainly every piece of junk mail I get from AT&T is promoting something *other* than iPhones. Likewise, I think I’ve heard of only one or two ads that were carrier marketing, as opposed to Apple marketing.

      I wouldn’t be surprised if the iPhone’s indirect marketing by carriers was much closer to zero than to Apple’s ad budget.

      • Micromeme

        Walter,

        that is a fair point– I take it as a given that if a telco was seeing apple sales so low that they were going to take a loss on the required minimums then they would take action and promote. but its certainly true that the other side of that bet (in the contract) is that maybe they don’t need to. On the other hand the promotions that samsung uses may be just ineffective also.

        I think one of my points was that in this area contracting strategies that don’t show up on the books are fungible with variants that do show up on the books. This is much to the disadvantage of (horace’s) analysis of course since the fine points of contracts are never disclosed or trackable.

        another way of making your point might be that if the minimums in the distribution contract are too low (ie they were going to make them anyway without extra marketing effort) then apple doesn’t get anything from including minimums in the contract. In that case I would be wrong or rather the distribution system would be operating in a different domain.

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

        Maybe there are considerations made by carriers.
        They are terrified to depend strongly on Apple because in the contracts with Apple they loose their dominant position with handset makers and become pipe managers.
        Also Android’s subsidies make more money since the handset cost less and they are priced like the iPhone.
        So they push alternatives no matter what. Verizon CEO said that they want to have al least three alternative ecosystems and that a strategic decision.
        They can fight to reach the minimum if they see the need of it, but if the iphone sells itself they fight to push competitors and keep the iphone at minimum.

      • http://twitter.com/WalterMilliken Walter Milliken

        I’m not sure Apple’s minimum contract requirement is aimed at motivating carriers to sell iPhones. I can see two other reasons why they’d include those provisions: (1) it allows Apple to predict production quantities and component purchases better, and (2) it keeps the carriers semi-honest, so that they don’t totally ignore/sideline the iPhone. It’s not clear the latter effect is necessary, since at least AT&T and VZ seem to have no problem selling lots of iPhones, even though they’d probably rather not.

      • http://twitter.com/scotartt scot mcphee

        In Australia we get what are obviously Apple-created iPhone ads that have the carrier’s logo at the end. You get the same ads with different carriers. I would expect that although Apple made the advertising *content* (they’re the same basic ad campaign as their own branded campaigns), it’s the particular carrier doing the advertising *buy* (the airtime, which is actually the expensive bit).

        With Samsung, I see Samsung ads with no mention of the carrier. When I see a “carrier” ad that features a Samsung, it’s plainly the *carrier’s* add (using the carrier’s branding and campaign themes), in which they just happen to mention “buy this carrier: get this phone”.

        I think this is the essential difference. Samsung markets the phones. The Carrier markets their network and mentions the phone in connection with their network. Apple, on the other hand, both markets the phones, and gets the carrier to market the phone, with a carrier logo at the end. One sells the network, with an adjunct phone. The other sells the phone, with an adjunct network. But there must be a reason for this power discrepancy, and a reason why Samsung has to keep spending more and more to keep their phones visible, where Apple can make the carrier pay to advertise their phone.

      • http://twitter.com/WalterMilliken Walter Milliken

        I don’t think that the carriers in the US are running Apple’s iPhone ads with their own money, but I don’t watch TV, so I can’t say for sure. I only recall reading of one iPhone ad in the US that was carrier-specific.

        Another possibility is that the Apple ads with carrier logos at the end are Apple ads with a carrier co-branding agreement of some sort, where the carrier might be paying part of the ad cost, or it may simply be part of the Apple-carrier contract.

        I have read that Apple has to approve any carrier-run iPhone ads, though I have no clue if this is actually true or just blogosphere noise. It wouldn’t surprise me, though.

      • http://twitter.com/scotartt scot mcphee

        Well of course, I have no evidence that the carriers are paying for what is otherwise a standard Apple ad – they are exactly these ads – http://www.apple.com/iphone/videos/#tv-ads-discover just with an additional logo on the last shot. However I don’t think Apple is going to pay for an ad with a carrier logo on it unless the carrier is paying them to do so. All three carriers here get logos.

        But it would not surprise me to learn that the carriers are paying for all the airtime and it’s part of the carrier’s contract. The airtime is the most expensive part of an ad campaign. I only watch about three tv shows a week (recorded) and there’s always an iPhone ad.

      • http://twitter.com/shm224 shm224

        That’s funny. Up until last year, when I upgraded my phones on AT&T, I had to click through at least one full and a half page Apple iPhone promotions to get to Samsung smartphones — where Samsung smartphones were lumped up in the generic “smartphone” category. The iPhone upgrade promotion page was what I got when I clicked “upgrade” after “check your upgrade eligibility.”

        I don’t recall AT&T retail sales folks promoting any specific phone over another.

  • Chaka10

    The data sure validates the general impression that Samsung out spends Apple (and others) by a wide margin on advertising, … and likely the same for sales promotion/marketing (presumably this is rebates, coupons and promotions, and the like). But I’m not sure I follow the outsourcing hypothesis as applied to this driver of Samsung SG&A.

    It seems to me that perhaps the outsourcing hypothesis is more interesting in analyzing Apple’s SG&A trends during this period. While Apple’s net sales grew at a 48% CAGR
    from F2008 to F2012, and its CapEx grew faster at 75% (and Horace has done a lot of great analysis on the relevance of that CapEx), perhaps Apple’s slower SG&A growth (at 29%) benefited from Apple’s outsourcing device production? Of course, manufacturing costs (including labor) are included in COGS (not SG&A), and that is so whether a company does the manufacturing itself or pays someone to do it. But it seems inevitable that there would be some impact on G&A from building out and managing a massive in-house manufacturing capability.

    The downside of this outsourcing has been extensively discussed (and directly benefitted Samsung). But, I’ve wondered if perhaps the benefit/motivation for Apple is not as much cost or cost structure risk management (on COGS for SG&A), but rather the practicalities of ramping up manufacturing massively in a very compressed time period, and the need to effectively leverage the management and other capacities and assets of out-sourced manufacturers (even if you have to, or desire to, buy the actual tools and machines for them to use).

    Could Apple have built up that manufacturing capacity itself within the time needed, even if it had wanted to do so? We can observe how hard is for Apple to build that capacity even now (internally or at another partner, e.g., TSMC…). I’d like to think that Apple management wasn’t blind and suffered the risks of out-sourcing just for a few points of margin….

    • http://twitter.com/WalterMilliken Walter Milliken

      My read is that Apple’s manufacturing outsourcing strategy is mostly about flexibility and risk reduction in the face of technological or social/political changes. Just like they buy components from whichever vendors can offer them the best capabilities at a good price (and usually have multiple sources), having manufacturing outsourced allows Apple to avoid the potential issues with getting stuck with outdated, non-useful assets.

      There are also a lot of moving parts to getting hardware built, and much of the technology (such as circuit board manufacture) is very tricky and takes a lot of expertise to run. It’s much easier to outsource that than to try to build up a unified, in-house capability, which might easily become stranded if the underlying technology shifts to a better solution.

      Apple investing in outsourced partners makes a lot of sense; they don’t take on all the risk, and neither does the partner. And Apple can use best-of-breed manufacturing expertise wherever it can find it, and shift to new vendors when the technology evolves, if it needs to.

      The fact that most of this outsourcing occurs in low-cost countries has more to do with the general manufacturing industry than it does with Apple — since many companies *do* go to the lowest-cost vendor, that’s where the expertise and capital assets can be found, and they’ve disappeared elsewhere.

      This is why you don’t see chips, circuit boards, or assembled boards made in the US; the equipment and expertise is too expensive to maintain at par with current technology with low volume production. Even the US “Cost is No Object” military can’t get cutting edge electronics made in the US any more; it’s a major problem for them.

      The marginal production costs did drive where those factories got built, but the economies of scale and the costs of staying on top of manufacturing technology are what keep those outsourcing vendors at the top of their business.

      • Chaka10

        I generally agree with much of the above, but:

        1. Surely the main manufacturing concern for Apple during the past few years has been to ensure reliable massive volume production on very fast ramp (given product shortages). Considerations of risk management and flexibility surely were more of a secondary concern in that context?

        2. Apple’s capex has ramped with (actually faster than) its sales. Ie, it hasn’t really saved on buying, and thus internalizing the risk of owning, the manufacturing assets needed to produce its goods (at least beginning F2010 when it began expressly mentioning “product tooling and manufacturing process equipment” in the CapEx discussion in its financials and MD&A. In fact, the outsourcing has really just meant that the equipment has been located in non-Apple factories, which surely is even less ideal from a risk management/manufacturing flexibility point of view?

        I believe the main driver of Apple’s manufacturing strategy during this crucial period of massive growth must have been the practical necessities of accomplishing the manufacturing ramp — do it however they could most reliably, quickly and at the massive ramp/scale required.

        I think the interest in and importance of looking at and understanding Apple’s manufacturing and capex strategy during the past few years is in potentially helping answer the question — what will it need to do, what should it do, as the mobile opportunity plateaus.

      • http://twitter.com/WalterMilliken Walter Milliken

        1. I actually view this as part of the risk management issue — diversity has allowed Apple to shift production from vendors that couldn’t ramp fast enough to those that could handle more. But yes, the ramp-up issue is probably a major driver.

        2. You’re assuming here that Apple is paying all the factory capex because it’s ramping linearly with sales, but I suspect it’s only paying a proportion of the necessary capex, probably only for crucial pieces of cutting edge gear the factories wouldn’t buy on their own. As long as that proportion is relatively constant across products, you’d see the Apple capex spending correlate linearly with sales, without needing to be *all* of the capex for the factory.

        Another issue that Apple probably wants to avoid is managing all the people required — it is often more difficult to hire and fire people as needed than to manage the capital equipment. And there are usually costs of training and termination to consider. With Apple’s bursty production schedule, that would be a major problem.

        When Apple’s production is outsourced, the factories involved can use the excess capacity during Apple’s slack periods to service other customers. And note that many of the Android phones debut during Apple’s slack periods — this is usually attributed to marketing reasons, but availability of spare production capacity may be a driver of their schedules as well.

  • Walt French

    From the chart @Asymco posted on Twitter a bit ago, it looks like Sammy’s “Commission & Service” expenses in 2012 were about $5.7 billion.

    That contrasts to Gartner’s estimate of about 205 million smartphones sold by Samsung in 2012. IF all those spiffs, etc., were only for smartphones, that is somewhere around $28 per phone. That’s a pretty hefty incentive to a salesperson. If these commissions/etc were equal for all Sammy phones, it’s still $15 per phone. If the incentives were targeted or time-limited they could be much larger per device.

    I suspect that if Apple were to take this approach, it’d be wasted money: I will guess that iPhone customers walk into the stores expecting to get the Apple product and only occasionally walk in looking to get a Verizon phone and would be talked into an Apple.

    I also saw partial stats showing the previous manufacturer for Samsung’s sales: some 70%* of switched-to-Samsung customers came from Android competitors. The spiffs could be very helpful in generating those sales.

    * (I couldn’t quite parse what the other 30% was; methinks it’s unlikely for it to have been the obvious one, Apple, as it would’ve been a headline on the story.)

    • obarthelemy

      Dammit, there was interesting stats circulating on the interwebz last week, my google-fu is failing me.

      Oh, well, at least we got http://communities-dominate.blogs.com/brands/2013/02/final-q4-numbers-and-full-year-2012-stats-for-smartphone-market-shares-top-10-manufacturers-top-os-p.html

      That makes the “30%” answer easy: Nokia ! Those guys lost 40 millions sales in a year, someone must have picked them up :-p

      Regarding the “commission and service” figure, does that figure include money-back coupons ? It’s a country-by-country choice, but here in France for example, the S3 seems to be on a perma-coupon, 50 to 100 euros.

    • Mark Jones

      * Blackberry, Symbian, and feature phones?

      • Walt French

        “Of those who changed their phone over the last year to a Samsung smartphone, 19% had previously owned a Samsung featurephone, 15% owned a HTC smartphone, 14% owned an LG featurephone, 10% owned a Samsung smartphone and 9% owned a BlackBerry. It’s apparent that Samsung is successful at capturing users from across the competitor set and not just gaining from their own loyalists, (albeit loyalty towards Samsung has also grown)” [Kantar analyst] Parlato [said].

      • Tatil_S

        Quite inconsistent… “Of those who changed their phone over the last year to a Samsung smartphone [...] 10% owned a Samsung smartphone.” Either the statistic is about all Samsung purchasers, which is quite odd in light of only 10% being a prior Samsung smartphone owner or, or, well, I cannot think of anything else. The first part of the statement just does not fit with the latter part very well.

      • Walt French

        I read the quote as saying that, of people who bought a Samsung smartphone and whose prior phone was NOT a Samsung smartphone, 10% had previously owned a Samsung featurephone. The difficult description is probably why Kantar took the easy way out.

      • obarthelemy

        I understand it as “19% of the people who bought a Samsung smartphone to replace their previous one (i.e., changed their phone), previously owned a S featurephone, ” etc, etc: You can change a Samsung smartphone (say, a Galaxy Y) for another Samsung smartphone (say, a Note 2)… that would be a huge upgrade. Literally :-p I’m assuming that’s what the 10% are.

        If you assume everyone who bought a Samsung smartphone, previously had a mobile phone (a safe assumption in developed countries), you can simplify it as: “Of all Samsung smartphones buyers, 19%…” etc. etc.

      • Walt French

        I’m open to a better interpretation. You can find the quote with as much context as I had at, http://www.kantarworldpanel.com/Global/News/Android-Sprint-and-Samsung-Increased-Share-In-Early-2013

        Re-reading it, I see that I misread it on first go and these are just people who bought a Sammy smartphone, no qualification of not having (immediately) previously owned one such.

        But the point is that Samsung’s recent sales explosion is largely at the expense of Android competitors that are very similar in OS version and app availability, all the issues that partisans for an OS cite. Very device- and/or manufacturer-specific, it’d seem. And that latter *could* be heavily driven by massive advertising and other marketing.

      • obarthelemy

        1- The %ages add up to only 67, so 33% of the info is missing. The missing 33% cover Apple, Nokia, other featurephones, and other Androids, and other smartphones (Palm, Winphone….).

        2- Those 67% say: 15% of Samsung sales came from a competing Android smartphone supplier. That’s actually *not* a lot. , Adding in the missing 33%, that 15% rises to 20% maybe, 25% tops. That’s not a lot of Android cannibalization, especially with Android market share at around 70%, and installed base probably way above 25% (couldn’t find figures).

        3- And in any case, again: Maybe intra-Android switchers switch due to device characteristics, not marketing. I’d argue that “Android upgraders” are more likely to know what features they want and not be swayed by marketing, as opposed to first-time Android buyers ?

        4- A special Note on HTC, since the 15% intra-Android switchers that we’re sure of are all from HTC: HTC messed up their product lineup ! They had a devoted high-end nerd following, and dumped them (no more SD, fixed battery, no more huge phones…) to go after the mainstream (very hyped sound partner, ever more flashy UI…). They lost the nerds, and didn’t gain the mainstream.

      • Tatil_S

        But it also says 19% owned a Samsung featurephone, so that angle looks to be covered already. Maybe, it means 10% who used to own a Samsung smartphone, switched to a non-Samsung at some point and then back to Samsung???

      • obarthelemy

        As a side note, with RIM and Nokia having fallen about as much as they could and being on a rebound, easy poaching of their users is over, things are going to get interesting.

    • oases

      Horace said commissions are internal. I assumed spiffs would come under sales promotion/marketing. Am I wrong?

  • obarthelemy

    this article on BGR (http://bgr.com/2013/03/25/apple-cheap-iphone-smartphone-market-395183/?utm_source=b-yahoo-orig_pub&utm_medium=feed) states that 80% of smartphones are unsubsidized. Is there a source for that ?

  • obarthelemy

    Also, I’m guessing the ephemeral Samsung shops for the GS4 launch will show up as SG&A, while Apple shops don’t… let’s keep that in mind when we look back on 2013.

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

      Operating expenses for Apple retail are part of SG&A. That includes leases and staff, the primary costs. The non-operational costs are capital expenses related to interior improvements. The figure is easy to come by and it’s not a large portion of overall CapEx. http://www.asymco.com/2011/10/14/how-much-does-an-apple-store-cost/ $100 million/quarter on Apple’s leasehold improvements is not much compared to $5000 million/quarter for Samsung’s SG&A.

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  • http://twitter.com/Yakezie Yakezie

    So that is why the media is so kind to Samsung!

  • Guest

    To Samsung I mean!

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  • Questions1st

    It’s easy to “influence” traditional media if you invest enough money, but i wonder if Samsung or Apple can also influence social media. If you post very frequently on Facebook, Twitter and other platforms, will it make negative feedback and stories almost irrelevant? Apple’s sales have not been impacted by their issues with their Chinese partners, nor by their schemes to avoid paying taxes.

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

      Consumers hire products to do jobs. Trying to affect the sentiment around a product (both positively and negatively) has little effect if the job is important and the product does it well and alternatives don’t. Consider the extreme case of alcohol and tobacco. Neither has a positive image and the attempts at creating negative sentiment around the products are enormous. These efforts are justified in the interest of public health, but sales of alcohol and tobacco are largely unaffected mainly because they solve important jobs for the buyer and there are few alternatives. Put in marketing terms, purchasing behavior is most closely correlated to the job and not to the positioning.

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  • Reckolm

    This very interesting, I didn’t know Samsung spent so much more than Apple, even though they sell their phones much more cheaper. I guess they cut costs as they don’t need to innovate, made clear there – tinyurl(.)com/kd96aka