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The weakness in Samsung's mobile strategy

BusinessAnalysis
by Tim Bajarin, 09 Apr 2013Analysis
The weakness in Samsung's mobile strategy

Samsung is on a roll these days. It has become a powerhouse in smartphones and tablets, and is even looking to revolutionise web browsing. One of the key reasons for its success is that it is perhaps the most vertically integrated company creating consumer electronics today.

Vertical integration means a company can produce most of the actual components or software it uses in its products. It doesn't have to rely on outside manufacturers for hardware or third-party sources to deliver core components for its products. Samsung makes its own CPUs for smartphones and tablets, as well as screens and many other components. In Apple's case, vertical integration means owning the operating system, user interface, hardware, software environment, and most importantly, the commerce layer. It controls the entire revenue stream tied to its ecosystem of products and services.

While Samsung governs most of its destiny via its vertical integration, there are a couple of areas it has little control over, making it very vulnerable. Firstly, Samsung devices run Android, which is the same OS that most of its competitors except Apple use to power their mobile tablets and handsets. Samsung tries to add value to Android on its devices through its own UI layer and additional security features, but like its competitors, it must rely on Google for any innovations in the core of the OS itself. It has no power over what is done or how fast any new OS features come to market.

A second area that Samsung doesn't have control over is the profit from any Android apps or ads. Apparently 90 per cent of the profit on ads sold on a Samsung Android device goes to Google, while Samsung gets a paltry 10 per cent of that fee. And as far as I can tell, it gets almost no revenue from apps because Google controls that money flow through Google Play. Each vendor has the opportunity to create its own app store to earn revenue from, but this is not normally a major money-maker.

Lacking complete command of its own future and ultimate profitability has to be a real thorn in Samsung management's side. Now that it is the dominant player in Android, you would think that it could get some concessions on revenue sharing from Google. However, Google has its own agenda and it doesn't appear to have any interest in treating Samsung any better than it treats other Android partners.

So how will Samsung take the reins of its fate? Some recent moves may indicate its strategy. First off, there's the fact that at the Galaxy S4 launch event Samsung only mentioned Google and Android once during the hour-long announcement. That was telling in itself. Since then Google and Samsung have gone on record saying their relationship is just fine, but I doubt this is true unless Google relented and gave Samsung more ad or service revenue share and more control over the core OS itself.

Tizen matters

A second clue comes from Samsung's recent decision to blend its own mobile OS, Bada, into a really powerful mobile OS called Tizen. Tizen got its start inside Intel but is now a full open source mobile OS based on a mobile Linux core. Samsung has embraced this OS and I believe it's more than just an experiment. Indeed, I hear Samsung and Intel are working closely to make this an even better mobile OS, and will start getting a lot of software support for it in the very near future.

Even though Samsung has become a mobile force that is challenging the competition, it knows that to become more powerful and gain more market share, it must own its OS and its ecosystem. This is the hallmark of Apple's strategy and Samsung understands that very well.

With this in mind, I have a hunch as to what Samsung will do over the next 24 months. Firstly, Samsung will speed up the work with Intel on Tizen and push the Android community to start writing apps for Tizen. This will take time, but it is important. Secondly, I believe it will (and should) hire a software emulation company to make all Android apps work on top of Tizen as is. I am told that because Android is based on a Linux mobile core, running Android apps on Tizen is more than possible with the right emulator. Of course, a native Tizen app would perform better but emulating this app on top of Tizen would work well too.

I suspect Samsung has also gone to school on Apple's iTunes Store and covets similar success. The smart way to achieve this is to create a service identical to Apple's and start offering software developers a 70/30 revenue share. Given the number of devices Samsung sells, a software developer would be crazy not to support it. This would mean that it could finally generate a serious revenue stream from a software apps ecosystem instead of letting Google keep all of the profits.

Samsung will most likely buy one of the major mobile ad companies and develop its own ad architecture and networks, thereby relying less on outside ad forces. As you know, mobile ads are driving huge numbers for Google but they don’t do much for its partners. In the end, Samsung needs to own this part of the ecosystem as well, and begin reaping at least 90 per cent of the ad profits instead of handing that all over to Google. This would mean that it could finally generate a serious revenue stream from a software apps ecosystem instead of letting Google keep all of the profits.

But Samsung can't just up and leave Android overnight. It could do this perhaps over two years and by the end of that time be completely Android-free. It will probably keep its current UI and security layer that sits on top of Android now, but will begin enhancing it to make it even richer and more integrated into Tizen.

If I were a betting man, I would gamble that this is how Samsung will eventually untangle itself from Google. I can't believe that, given its growth and clout in the mobile market, it will readily continue to hand Google the majority of the ecosystem profits. Samsung could potentially create a major mobile OS competitive with Apple's iOS, Google's Android, and Microsoft's Windows Phone, giving itself exactly what it needs to bring it even closer to owning its market in entirety.

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