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Samsung's Polyplatform Paradox

Samsung has, over the years, shipped phones using almost every operating system it could get a hold of. That includes Symbian, Windows Mobile, Windows Phone, LiMo, Android, PalmOS and OPhone.

As far as I know, today its portfolio includes Android, Windows Phone and its own Bada OS. The relaxed attitude to platform exclusivity at Samsung is in stark contrast with almost all other competitors who either for the sake of encouraging their own platforms or minimizing development costs maintained either one or two smartphone platforms.

Samsung justified their polyplatform strategy a few years ago by saying that different platforms are popular in different regions and as they did not want to be excluded from any market, they felt that being agnostic is the best policy.

The idea that platforms are not universal, but the result of provincial preferences is interesting. It’s a concession that “politics” plays a large part in mobile markets. However, for all the volume growth the strategy has produced, the strategy has not paid off in terms of higher margins or pricing power as the following chart shows.


 So perhaps polyplatform thinking is coming to an end.

Exhibit A is Bada itself. The idea that Samsung would build its own OS came as a surprise to anyone following their history. Why did Samsung buy a book when there’s a library in town?

Exhibit B is the repeated statements of Samsung’s Chairman saying that the company should invest in software. Software!

Exhibit C is the statement today that Samsung intends to spend some of its $9.3 billion R&D budget on Software.

The money is expected to be used to strengthen the company technology prowess in such areas as mobile phones, semiconductors, displays and electronics products. Funds will also be allocated to software development.

Samsung investing in software development does indicate that perhaps the company does see value in that component and would prefer not to be dependent on suppliers for it.

In theory, as the market power of inputs (supplier power) increases due to concentration and forward integration it makes sense to backward integrate.

As a supplier itself, however, Samsung has to ask itself if its component customers are thinking the same thing.

  • David W.

    Perhaps you’re looking at the wrong chart. A better one might be from your Marshaling Yard post where you show Samsung to be the second most profitable in revenue. In the above chart, Motorola looks pretty good, rising from $100 to $200, but Motorola constantly lost money and now has been bought by Google.

    We can also look at HTC which is making both W7P phones and Android phones and is doing quite well. Maybe there’s something about keeping your eggs out of one basket — especially if you’re not controlling the baskets.

    • Horace Dediu

      Samsung does well in unit sales, but its margins are not improving even though the mix of smartphones is increasing dramatically.

  • EWPellegrino

    Horace, on the subject of ASPs I think your value for Apple is somewhat too high. As I understand it you're just taking iPhone revenue and dividing by units sold – but as the 10-Q shows …

    Includes revenue recognized from iPhone sales, carrier agreements, services, and Apple-branded and third party iPhone accessories.

    Those accessories represent a considerable amount of revenue, for instance

    iPhone dock : $30
    iPhone earphones: $30
    iPhone Applecare: $70
    etc.

    So what we have for the iPhone ASP is really an upper-bound estimate. I'm not sure how we could go about getting a better estimate for actual handset ASP. For the US we might be able to get accurate ratio of iPhone-3GS sales to iPhone-4.

    • Horace Dediu

      Each competitor's ASP is a combination of ancillary businesses. Nokia is Devices plus Services, Samsung has "Telecommunications" division, RIM requires significant approximations due to its services income. Even HTC has some devices sold as an ODM so revenues/devices sold is not indicative of its own branded products.

      Generally speaking, the device ASP is in consideration of these additional businesses.

      • EWPellegrino

        HTC device revenue is, lets face it, nugatory, Samsung's is not much better, and I seem to recall that you exclude the networking portion of their telecom revenue. Also in Samsung's case any devices are being included in the denominator as well as the numerator, so will have a particularly small impact.

        Apple just seems to have far more ancillary revenue, including of course the retail margin on any iPhones sold directly through their own stores. RIM I will accept has a similar bias.

        Would it not be useful to attempt to generate a lower bound ASP estimate also, when possible, from handset sales figures, RRPs and approximate wholesale discounts?

      • handleym

        "HTC device revenue is, lets face it, nugatory,"

        Do you really think it's different for Apple? How many people buy docks, or a second pair of headphones? The only item in that list I could imagine as representing real money is AppleCare — and if Apple are capable of selling this (bad, IMHO) deal while HTC and Samsung (who COULD offer the same thing) are not, well that's as much victory for the Apple machine as having better operations and better R&D.

      • EWPellegrino

        I think you'd be surprised. Add in the fact that people often want a spare charger for the office, a charger for the car, a dock for the bedside cabinet.

        Consider that Apple's calculated phone ASP is about $670, and yet full retail on the 16GB is only $650. If carriers are getting any kind of margin on that then essentially everybody would have to be buying 32GB iP-4s, but we know that the 3GS is still a big seller

        The gap must be fairly substantial, $50-$100 is my current guess.

      • iosweekly

        I disagree, I know many people with iphones and I dont know of any that purchased accessories, and only 1 who purchased applecare.

        Most people already have spare ipod USB cables/power adaptors from previous ipods/iphones, and so they often serve as the "backup/workplace" accessory.

      • EWPellegrino

        Then how do you explain the ASP? Do you believe that carriers pay full retail?

      • -Rj

        More people than you seem to expect going for the 32Gb model?

      • EWPellegrino

        If there is any significant discount to retailers then everybody would need to be buying the 32GB model, which is clearly incorrect.

      • Narayanan

        These days, the majority of iPhone sales are international and there is a currency exchange effect to consider. In addition, the international prices tend to be higher than US list price.

      • EWPellegrino

        Much of that is due to recent dollar moves and is hedged out. if FX was the key then Apple's ASP would be far more volatile than we've seen.

    • kevin

      Apple has provided iPhone-only ASP a couple of times over the past 3 years. See conference call transcripts. IIRC, the difference has been around $20.

  • davel

    With the data you have analyzed for Samsung what are your thoughts on the company buying Palm from HP?

    • Horace Dediu

      These deals are always hard to call because so much depends on arbitrary conditions. I'm sure Samsung is interested but we don't even know if HP will sell and whether there are a huge number of other bidders.

  • KSunkk

    Aaaarg, that new logo is hurting my eyes. Horace, for the love of humanity, this is a high quality blog so please come up with something better (I will even donate to the cause).

  • MOD

    Samsung and Nokia write software to sell phones. Google sells phones to write software.

    The old Windows (software) and Intel (hardware) paradigm perhaps no longer works. Intel would have to start writing operating systems and Windows to design chips. What were they thinking?

  • timnash

    A real issue for Samsung is that it no longer shares the South Korean market only with LG. When the iPhone was introduced it undercut all Samsung and LG high end offerings and that extra margin disappeared. Samsung had to reduce its smartphone ASPs to remain competitive, after trying a 'be patriotic, buy Samsung' ad campaign and, more successfully, persuading the largest carrier not to stock the iPhone.

    The Apple/Samsung patent/design battles will probably determine whether Samsung stays with Android and in the meantime, it makes sense to see how successful the Windows phone and Bada alternatives are.

  • MOD

    HP moving into software? Oracle into hardware?

    Oracle Corp. asked a California court to rescind an agreement with Hewlett-Packard Co. over Oracle's hiring of Mark Hurd, H-P's former chief executive.

    The action, filed Tuesday as a cross-complaint in Santa Clara County Superior Court against a June lawsuit H-P filed against Oracle, heightens the conflict between the longtime technology partners that have recently become fierce competitors.

    Conflict erupted between the two companies over Oracle's announcement in March that it would no longer provide software support for the Intel Corp. Itanium microprocessor that is used in high-end H-P servers. H-P sued, accusing Oracle of breaking a long-standing development agreement between the two companies. H-P alleges that agreement was spelled out most recently in the settlement over Mr. Hurd's hiring last year.

    Ten days after that agreement was signed, H-P named Leo Apotheker as its new chief executive. Mr. Apotheker was formerly chief executive of SAP AG, which is an Oracle competitor.

    Oracle, based in Redwood Shores, Calif., has fired back against H-P on two fronts. One action answers H-P's original suit, arguing that the Hurd settlement doesn't contain a formal development agreement for the Itanium chip.

    The second filing is a cross-complaint that argues even if the court does conclude the Hurd settlement contains a development agreement, the Hurd settlement should be annulled because H-P didn't disclose it was about to hire Mr. Apotheker, which the Oracle filing claims was "deliberate and active concealment" of material facts and for that reason the Oracle asks the court to rescind the Hurd agreement.

    H-P, based in Palo Alto, Calif., didn't immediately respond to request for comment on the Oracle filings.

    An Oracle spokeswoman declined to comment.

    Oracle's core business is software including big databases and a variety of corporate-application software. H-P has been a hardware supplier and its Itanium-powered servers drive operations for about 140,000 big business customers worldwide. Many of those customers also run Oracle software and the two companies' complementary offerings made for a long-running partnership.

    That changed when Oracle acquired computer maker Sun Microsystems in 2010 and H-P began acquiring software. The animosity grew when H-P fired Mr. Hurd as its chief executive and Oracle hired him to run its hardware business. Acrimony grew again when Mr. Apotheker took over as H-P's chief executive.

  • John

    With every passing story about this or that company trying to buy or build a new OS, I increasingly find myself thinking that it's just too late. The positive feedback loop of profits feeding R&D investment and economies of scale which in turn feed more profits is kicking in more every day. Apple may soon reach a point where they can profitably innovate/invest at a pace that the rest of the industry simply cannot match without tolerating very significant losses. Pretty soon everyone else will be what AMD is in the x86 market with Apple playing the role of Intel.

    • Nate

      Great analogy, particularly since Apple's lead will be vulnerable to disruption — just as Intel is looking at ARM saying "Oh S@%#@!"

      • John

        Eventually everyone is vulnerable to disruption. But to continue the analogy, 2011 is for Apple what 1990 or so was for Intel. That's a lot of good years to look forward to. And even now, Intel is not out of the game. They still have the resources necessary to compete, if they could just make better choices.

        Disruption for Apple might come when smartphones and tablets are being replaced by something else. That's likely a long ways off.

      • handleym

        Intel's problems with ARM were not inevitable, they were the result of a particular decision by Intel that it was more important to retain x86 compatibility with Atom (and every damn bit of that compatibility) than it was to design for low power.

        Intel could have decided differently in at least two ways

        - they could have started from scratch, with no attempt at x86 compatibility. If I had to guess, I'd say this option was rejected because of the Itanic disaster, and perception within the company (right or wrong) that it was lack of fitting into the x86 eco-system that doomed it.

        - they could have retained some level of x86 compatibility — enough to make porting compilers and the OS easy, though no trivial, while tossing everything else. In my model they would have retained the x86-64 register set and model and most of the instructions (though not the baroque instruction encodings) but ditched almost everything else. No booting in 8086 mode, no 286 mode, no virtual x86 mode, no PAE, no SMM. And no x87 — do FP using SSE like everybody does now anyway. And no MMX — if there's anything useful in that sad collection of instructions, port it to SSE.
        Doing this would have created a chip that's a little smaller than Atom, a little more power efficient, but most importantly, that can be designed, understood, and debugged vastly faster.

        Instead Intel find themselves trapped in the much the same 7 year design cycle with Atom as they are with their real x86 chips — these monsters are so insanely complicated to get right, while retaining every bell-and-whistle from the last thirty years — while Arm can turn on a dime.

        Relevance to Nate's post is that this type of disruption is NOT inevitable — it's the result of particular foolish choices made by management.
        Of course Apple COULD do the same. IMHO this would most likely come about through Apple choosing the wrong point (too simple, and too much loss of power) on the simplicity/power trade-off curve for future products, in the same way that they (IMHO) held off for too long on multi-button mice, way past when the user base was completely accustomed to mice and their ways.

      • WaltFrench

        handleym said, “ they could have started from scratch, with no attempt at x86 compatibility. If I had to guess, I'd say this option was rejected because of the Itanic disaster…

        This must have contributed, but I'd guess the primary issue was that they thought they could leverage their X86 investment and eventually get power burn down to what was necessary. I suspect they were totally blindsided by the growth of very-low-power devices; didn't see the market opportunity in $10 chips when they were making many times more profit per CPU.

        It's true that X86 chips burn a lot more power but it's also true they perform a LOT more processing. Some common tests show my laptop's X86 running code 10X as fast as my iPhone does. This is not that Intel is inept; they show great talent in high-power designs optimized to handle complex multi-tasking operations.

        Classic disruption, I'll betcha. Classic, classic, classic.

      • handleym

        Which is why I stressed that the PRIMARY advantage of the strategy I suggest is not lower power or smaller chips, it is substantially improved agility. I'm no naive teenager in this regard — I spent the 90s writing balls to the wall assembly, tweaked to match the micro-architecture of the target device, and had a (very small) part in the design of Altivec. I appreciate the astonishing work that Intel has done in improving high end CPUs — Sandy Bridge is a modern marvel. But none of that changes the fact that they made an incredibly bad engineering decision here, and, IMHO, it was completely avoidable.Intel, even with all their resources, simply can't innovate in this space as fat as they would like to, given that they have to maintain SUCH a large burden of backward compatibility.

      • WaltFrench

        Thanks for the further amplification.

        You're perhaps saying that Intel could not conceive of a world where Windows would forsake backwards compatibility, and since that is 90% (???) of their dollar base, 98% (???) of their unit count, they did not bother to reorganize to compete against the pipsqueak ARM architecture.

        Certainly Apple's entry into mobile, with a higher-efficiency iOS (versus java) must have caught them by surprise. Perhaps the speed with which ARM moved to 32 bits. The aggressive GPU features that nVidia, Apple & others incorporate, and make use of to accelerate operations.

        Back when I was with a computer services firm, we distinguished between efficiency and flexibility; we identified that optimizing for one was at the expense of another. Especially somebody who's done time with the attention to detail you describe knows this, too. Intel must have thought they had a more secure monopoly than has turned out to be the case, because saying that they knew otherwise but ignored the threat that e.g., Apple could move a big share of laptop, and possibly desktop usage to an ARM-based chip is too damning.

      • handleym

        It didn't even require worrying about Windows. There was no REQUIREMENT that unaltered Windows run on Atom — CE was multi-platform, and at the time that was the phone/sorta-tablet OS.But perhaps you are right in that Intel was perhaps as blind as everyone else to the very idea that a whole new style of heavy-duty computing could come along in phone form factor — maybe there assumption with Atom was that it would power NetBooks (and power them badly and unsatisfactorily)? I honetsly have no idea WHAT they were thinking. Can anyone in the know tell us what Intel's target was, internally (not the subsequent PR crap) when they started theAtom project?Of course, even now, it's not too late to change course; just like it was not too late two years ago and four years ago. And yet they refuse to do so.

    • David

      Maybe. Look at HP. They are doing another run and some are holding the Touchpad as success. A device that is giving HP a $100m loss.

      And the same people are clamoring for Amazon to do the same thing. Sell at a loss and hope people why enough content. because that's how razors have been selling for years. Madness. Razors are cheap to make, easy to use and single purpose. Why would people buy content to watch on an admittedly cheap screen? *That's* the plan?

      If the only strategy open to vendors is selling their products at a massive loss, then nothing will ever catch the iPad.

      • iosweekly

        yes, much of the talk of an amazon tablet is missing a crucial point – Amazons main revenue earner for electronic device content is its Kindle ebook sales.

        However a Tablet designed to be sold cheaper than the ipad would not have the features required to make it a good ereader like their kindle devices are:
        - An ipad-level LCD screen is not high resolution enough to be considered a good device for ebooks
        - the screen would not be e-ink, meaning the tablet would require frequent charging & big battery
        - Weight. a device similar to an ipad is not ideal as a book reader due to the weight of the battery.

        To summarize, an amazon tablet would either not be as good an expereince as their cheaper kindles for consuming amazon ebooks, or alternatively be a higher specced device with a retina display that would cost much more than an ipad. Either way, I cant see a succesful sales straergy for Amazon.

      • EWPellegrino

        Except the Nook Color has supposedly beaten the Kindle to be the top selling dedicated eReader (IDC: http://venturebeat.com/2011/07/08/idc-tablet-sale… ) which would seem to imply that there is a market for a 7inch LCD tablet designed for primarily reading. Perhaps consumers don't like the slow response of eInk, perhaps they like being able to read without an external light source, perhaps they like being able to also watch video and play music on the same device.

        Whatever reason it seems that people are less bothered by the negatives you list.

      • WaltFrench

        Challenge for B&N is that top-selling is just as important as Android manufacturers' margin is to Google: not.

        B&N very likely loses money on each Nook — how could they not? — but has a shot at picking up the profit on book sales. If many of their sales are to people who primarily want a very cheap but capable Android tablet for portable surfing, the profit proposition could evaporate.

        I suspect it's a waste of time for Oracle to sue B&N, too, but I presume the same IP is in the Nook, that Oracle is suing Google over. Google's purchase of MMI must have merely made Oracle drool a bit more over the possible future licensing revenues, as Google shows their commitment to the existing structure. RIM, which apparently already licenses java ME for BB7 and earlier, will continue to have to pay for it in QNX if they continue their green box strategy, and Amazon is likely to face the extra out-the-door cost, too.

      • WaltFrench

        I just did a quick search on Amazon for "Mach 3 razor" (the one I use) and came up with 10 pages of products, maybe 100 different packages, etc. But very roughly, they'll set you back about $7 for the basic razor (not the $199.95 wood handled one with stand, etc) and then about $1+ per blade.

        Somebody's figured out that there's no reason to give away the razor any more. I'm out of the market for drugs, so don't know how many freebies you get in that more captive market, but I suspect Hard Times means dealers are hungry for profit, patient for growth, too. Maybe there's a more suitable example, but I can't think of a market where businesses succeed by setting price expectations below fair value, and then make it up on uncompetitive volume.

    • -Rj

      It was too late for Apple to release a smartphone; WinMo had already beaten Palm and Symbian into submission and the positive feedback loop you mention was clearly on their side.

      • David

        Apple released a radical new design featuring the perfect marriage of HW and SW. Who can do this today?

  • Ggprovida

    I think the observation that Samsungs reservations of partnering with a competitor must fuel enormous irony – whether their component customers have same reservations and how will effect their long term buiness model.

  • rba

    This paradox illustrates – at least for me – that Apple has the single best strategy in this so-called platform war. Mobile PC/smartphone markets are booming, and both platforms iOS and Android are doing well in terms of marketshare (although Android is doing not-so-well in terms of profit, nor Google, neither OEMs).
    But Apple is doing insanely well in terms of improving stickiness to its platform. I mean, never in history of computing gadgets it was so easy to upgrade to new model as in this Apple ecosystem. And with iOS5 and iCloud this is going to be even easier. All you will have to do is insert your Apple ID and password – all your apps (and history of apps, game scores, documents, pictures, SMS, data of all kind ….) on your new iPhone 5 will launch just where you left them on your old iPhone 4 or 3GS. Can Google deliver this kind of consumer experience with Android and its army of different OEMs? Or put it another way. Can Samsung deliver this kind of consumer experience, when crucial part of it (OS) is not in its hands? Where are Samsung cloud services, consistency of app store and zillion other details?
    Computing is going mobile. That means our digital "life" is going mobile. We are buying apps, taking pictures, playing games and archiving stuff in those post-PC devices. Soon all of this will become heavy legacy digital archive. And we will want to keep it on our new devices as harmlessly as possible. That was part of winning formula of Wintel – my stuff from my old PC will (sort of) work on my new PC, although this transfer was far from "it just works". Apple integrated hardware/software ecosystem is far ahead of its rivals in this area and this is going to be real power of iCloud implementation starting with iOS5.

    • David

      +1

      And when you add the ease of upgrades to the extended life cycle of the product, you have have a devastating one-two blow. Think about this. The iPhone 3GS, a phone that came out in June 2009 will be running the same OS as the iPhone 5, a phone coming out in late 2011. And normal people will be able to plug that phone into their computer, press a button and upgrade it.

      Who else is doing this? With Android it is the opposite. You buy a new phone and the new OS isn't available. All the other vendors, *ALL* of them have zero motivation to make the this process easier and hence the nightmare we are witnessing.

      And iCloud, I think is going to be big. Bigger than big. IMO, only Google with the Motorola purchase can come close to matching this and they can't match the rest of the iTunes ecosystem.

      Again, look at the players: RIM, Samsung, HTC, LG, Sony-Ericcson, the various low end Android vendors…a few are trying to create various services copying Apple and they simply don't have the infrastructure in place and I would say they don't have the money. If the arguably #1 Android vendor Samsung can't do it, who in the Android world can?

      SJ mention a 5 yr lead and at the 5yr mark, Apple moved the goal posts.

  • PatrickG

    Horace one other data point to consider perhaps. Convention has it that the "faster the rise, the quicker the fall". This has been a mixed convention in terms of accuracy, but looking at the products as well as the companies – is there any symmetry to the rise/fall convention and in the case of the players here, is it possible to be reasonably predictive using it.

  • http://newcanuckworkshop.tumblr.com jandrewyang

    Using the latest comScore data, one can estimate that of the 42% smartphone share attributed to Android can roughly be broken out as SAM 16%, LG 10%, MOT 12%, Other 4%
    Given the two following:
    1. SAM's move to further diversify their product portfolio away from a heavy dependence on Android
    2. Increasing probability of LG mobility ceasing to be a going concern

    I think the real possibility of a rather drastic decline in Android share exists. If AAPL continues its aggressive carrier expansion, and can release a handset for the pre-paid market, the decline has the potential to be even more drastic. The introduction of an entry level model would pose an additional problem for the other makers by potentially forcing a further reduction in their ASP's. Given the relative margins, LG may not be the last casualty of the smartphone "revolution".

  • http://twitter.com/kleptco @kleptco

    Apple people, seriously, you got Verizon and iPhone share continued to fall further behind Android, Sprint and T-Mobile are not the answer. Well, thankfully, there's the saving grace of knowing that Apple makes a more money from you per unit than the other guys.

    • David

      You may need to re-check your numbers. Android Verizon growth has stalled and iPhones are outselling any Android model at Verizon.

      Android tablets have no traction and are collecting dust on shelves. A few people not quite as smart as you are are buying Android phones at full price only to see the price drop by 50% 45 days later and Android still can't make any money for vendors.

      WebOS, a dead OS, is matching Android tablet numbers in the add space and soon Amazon is going to come along and eat the Android communities lunch. You think Apple's tough? Go look at how Amazon runs their market. Amazon gets the set the price.

      Buy hey, you get to root your phone. Checking out the job boards out there, I'm sure, plenty of people willing to pay for that skill. So you have to ask yourself. You rather have skills that people pay real money for(look at Apple's customer educational and salary demographics) or would you rather use an 'open' system that you must root to do anything useful, but not know anything useful or profitable?

  • http://www.neoinfosolutions.com/ lakshendra

    Samsung has nice product with its android products.

  • Anonymous

    Hmmm…new comment system.

  • Geoff Powell

    I’m loving the new Galaxy S2

  • Anonymous

    As well as poly-platform, Samsung is also going poly-formfactor. We’re now seeing a tablets in 10.1, 8.9, and 7.7inches as well as the original Froyo 7inch device. Samsung’s phones now go up to the wopping 5.3inch Galaxy Note.

    Oh, and they’re releasing a $1300 windows 7 tablet.

    Focused they are not.

  • A Question about your stats

    Is the Samsung number divided across all their mobile phones, as in not just smartphones. If so it’s a very misleading number. The fact that Apple, HTC and RIM (all smartphone only) happen to be much higher could be a coincidence, and certainly your commentery seems to suggest you’re talking about revenue from Android, Bada and WinMo phones. Could you clarify please?

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

      Samsung’s R&D number is divided across all its operations, not just mobile phones. What number are you referring to?

  • Electronic Bazaar

    Awesome! Everything I desired summarised in a very short way.

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

      Delete.

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