Samsung’s predicament

In the past year, Samsung went from being a moderately successful electronics manufacturer to the leading non-iOS mobile device maker. Together, Apple and Samsung earn 98% of the profits in the smartphone market. MG Siegler echoed a common sentiment when he wrote that Samsung is now the “fifth horseman” of tech, alongside Apple, Google, Amazon, and Facebook.

The mobile device industry is still in its infancy. Samsung’s fate depends largely on how the industry evolves. If the computer-in-your-pocket (smartphone/tablet) business ends up being like the computer-on-your-desk (personal computer) business, Samsung is on track to be the modern Dell. Dell had a good run as the low-cost provider in a highly commoditized business, but the vast majority of the industry profits went to Microsoft.

So the big questions for Samsung are:

1. Will the smartphone/tablet industry stratify the way the PC business did?

The dominant view is that technology markets inevitably stratify. Clay Christensen is the most sophisticated proponent of this view. In his theory (more here and here), every tech market eventually “overshoots” the needs of its customers, at which point the benefits of horizontal specialization outweigh the benefits of vertical integration.

A minority view, held mostly by Apple faithful, is that Christensen et al are guilty of over-theorizing. Apple lost the PC business simply because, when Steve Jobs was fired, they stopped innovating. When Jobs returned, Apple started gaining PC market share again. In this view, the future mobile industry structure mostly depends on whether Apple management is innovative enough to keep making superior vertically-integrated products.

2. If the industry stratifies, will the lion’s share of the profits go to the OS and application layers as it did for PCs?

Generally, technology businesses that are defensible have network effects, and network effects usually arise from products with significant software components. Samsung’s competitors like HTC are just one hit product line away from stealing Samsung’s position. Eventually, handset designs will converge and, as happened in the PC market, consumers will stop paying premiums for performance improvements (arguably, this has already started happening). The OS and apps layer, on the other hand, are very hard to replicate. If you invest enough money you can usually build or acquire decent software, but it takes more than just capital to build a vibrant developer ecosystem (just look at Microsoft).

Samsung’s predicament is: their current strategy succeeds only in the scenario where both (a) the industry stratifies, and (b) significant profits flow to hardware. Samsung seems to understand the improbability of (b), which is why they’ve been hinting at throwing serious support behind a new OS. Getting traction with a new OS will be difficult, to put it mildly. Google and Apple have vastly more experience making software and a huge head start with developers. Moreover, Google’s strategic position is even stronger today than Microsoft’s was in their heyday. Google makes so much money from web services (mostly search, for now) that they can afford to lose money on handsets and OSs indefinitely – a very scary fact for Samsung and everyone else in the mobile hardware business.

http://www.participate.com Alan Warms

Great post. And many folks love the new Nexus precisely because it is pure Android without Samsung customizations. I think this also highlights risk of Google’s Motorola acquisition – which really forces Samsung to at a minimum hedge on another OS. Both Goog and Msft are betting on Vertical integration which should further push them there – but at the same time seems to go against a replay of Wintel type mkt evolution. Why I always have thought Google Motorola deal good for Apple.

http://www.cdixon.org/ chris dixon

Thanks. Yeah, it will be really interesting to see what happens with Google + Motorola.
Anonymous

“… many folks love the new Nexus precisely because it is pure Android without Samsung customizations.”

Exactly. Which reinforces the point that Samsung is a hardware company unless they can find a way to reinvent themselves – and I think they are too big and old for that.
Anonymous

Nexus sells in baby numbers. The numbers are shockingly low. It’s like Google employees and that’s it.

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http://veespo.com David Semeria

Yes but Apple as traditionally made more money from hardware than software. This suggests hardware commoditization is not entirely inevitable.

That said, Apple controls both hardware and software – which makes differentiation much easier. It’s hard to see how Samsung could differentiate one without controlling the other.

So, yes, a Samsung OS would make strategic sense (not that I would bet on its success though).

http://www.cdixon.org/ chris dixon

With Apple it is tough to attribute the breakdown in margins between software and hardware. But given that margins are much higher for software vs hardware in non-vertically integrated companies, most people attribute the margins to Apple’s software.

http://twitter.com/l1rs Lars Kamp

Some color on how Apple is maintaining superior margins compared to Samsung. Software is an important factor, but less from a margin perspective, more as a differentiator.

If I had to summarize what the key reasons are for Apple’s superior margins:

On the top line:

1) Full price control (retail & wholesale)
2) Effective SKU pricing
3) Apple accessories with ginormous margins and attach rates
4) Direct-to-consumer channel

On the bottom line:

5) Limited number of SKUs
6) Common components across their products
7) Tightly managed inventory

Price is the biggest lever for profitability, in simple words a 1% point increase in price brings more to the bottom line than 1% decrease in cost. Apple can control prices through their own retail stores, and avoid undercutting by resellers through contractually agreed wholesale prices, and by denying marketing incentives for resellers that are willing to sell under the wholesale price.

A huge margin driver is the tiered pricing by storage. The pricing steps for x amount of GB on-device storage / memory stand in no relation to the industrial cost of the flash storage. $100 for 16GB in extra storage – that’s $95 of margin for Apple. Then add in a few Apple accessories like the “In-Ear Headphones with Remote and Mic” at obscenely high, four-digit margins, and you have a fat cake with a really thick icing. On that note, Apple probably makes more money from selling iPad covers than Nokia makes from selling Lumia phones. Oh, and did I mention the $200 insurance plan for your iOS device?

And with their Apple Stores, they also capture the full difference between consumer price and COGS – unlike Samsung who rely on retail channels and the carriers.

On the cost side of the equation, Apple has a very limited set of products (I have to guess, would say <40), which allows them to keep complexity low and scale for every single SKU. Samsung has now the Galaxy Family as their flagship device, but they are still in the game of customizing the hardware by market and carrier (e.g. that little AT&T sticker on your Galaxy) – every customization shaves of a few cents if not dollars. Also think Nokia shortly before their demise in 2007, with over 220 (!) different form factors for their phones, not counting the different flavors of each device (color, keyboard, etc.).

And then there are common components across all their devices, the most obvious one the Ax chip series. There's an A6 chip in the iPhone, the iPad, the iPod touch, Apple TV. Flash memory, screens are other examples. Apple then typically buys from one manufacturer, e.g. Foxconn for assembly, screens from Toshiba – allowing for some real hard price bargaining.

The result is a compounding effect – low number of SKUs allows for scale, bringing purchasing volume to the table, and then buying from a single supplier allows to further drive down price. Inventory is tightly managed, Apple probably has only ~3 days of inventory in their supply chain at any given point – Tim Cook is famous for that.

So there's very little software in there. Apple actually doesn't sell that much software on a stand-alone basis to start with, software is mostly integrated into the hardware product, for differentiation purposes. The "iStores" (iTunes, AppStore, iCloud) are not margin makers, they are all run at or slightly or above break-even (though iCloud might be an exception here). CFO Oppenheimer has mentioned that many times on the quarterly earnings calls. But they highly differentiate Apple products, and they do bring ecosystem power, as Apple distributes the revenue back to the ecosystem, and in the process Apple also gets to manage a nice float. I don't know what the current days-to-pay-out are of the AppStore, but let's just say that the iStores generate $6B in revenue total, with 30 days to pay-out, then Apple has $500M in interest-free cash on hand at any given point.

Yes, there are Mountain Lion, Garage Band, Keynote, etc. – but pricing is in the 10s of $ range, compared to the hardware, which is priced in the 100s and 1000s of $ range. Hardware sales dwarf software sales for Apple, probably by two orders of magnitude.

A few quotes from the past to support everything:

Steve Jobs:
"In hardware you can't build a computer that's twice as good as anyone else's anymore. [...] But you can do it in software."

http://www.rollingstone.com/culture/news/steve-jobs-in-1994-the-rolling-stone-interview-20110117

Tim Cook:
"We are the most focused company that I know of. We say 'no' to good ideas every day in order to keep the amount of things we focus on very small."

http://tech.fortune.cnn.com/2010/02/24/audio-tim-cook-talking-about-apple/

Peter Oppenheimer:
"We run the App Store just a little over breakeven”

http://tech.fortune.cnn.com/2009/05/14/how-apple-profits-from-the-app-store/

http://www.cdixon.org/ chris dixon

Great analysis, thanks. My argument is that long term (3 years from now) the developer ecosystem is more likely to be a differentiator than anything else. Like Microsoft Windows from 1990-2005 or so.

http://twitter.com/l1rs Lars Kamp

Agreed with the the importance of the developer ecosystem. Question is if Samsung can ever be good at that, i.e. building both the software layer and the developer ecosystem organically. Might make for some interesting M&A scenarios.
the Ugly Truth

It is already today; hence, the others (MSFT, RIMM, etc…) are PAYING devs to code their apps.

AAPL has always been a software company that understood how to make beautiful tech…

Sammy has always been an efficient manufacturer that wants to know software…

Now that Sammy isn’t on AAPL’s Xmas list; where will they copy? Will they follow a smaller form factor ala the i5 or will they stay the course with the S3/phablet types? My take is that they will use the shotgun approach and make something for everybody…

http://www.elieseidman.com Elie Seidman

Maybe this is implicit in your comment but In the number 1 slot, I’d put something that is much less tangible than the others you listed but, I believe, much more powerful: brand.

All of the impressive things Apple does – advertising, chips, retail, design, OS usability, etc. is powerfully complemented by a unique – and very differentiated – brand that they’ve been building for 30+ years. That won’t be enough to maintain or grow a company with a $400B+ cap but it’s incredibly powerful. My mom does not want to own a smart phone with a faster CPU and a bigger screen – though those things are definitely not irrelevant – she wants to own an Apple phone. Their product level advantages are probably shrinking but their brand has a lot of legs to it.

Anonymous

Software really isn’t part of Samsung’s DNA, in my opinion. If it weren’t for a Google (and now Microsoft) software ecosystem, Samsung wouldn’t be a player. The touchwiz UI and the Kies PC client are the worst parts about the Samsung mobile portfolio, in my opinion. I think they are both liabilities, not assets.

Samsung is a company run with a hardware mindset. It has served them well to this point, but they really do need to evolve beyond that if they want to become all they can be.

I look forward to the day when I look upon a Samsung product and think, “Wow, that’s new!” It hasn’t happened yet. So far, all I’ve seen are (good) refinements of existing designs.

http://www.cdixon.org/ chris dixon

Thanks for the comment. I tend to agree. Very rare for companies to cross over successfully from hardware -> software or vice versa.
http://AndroidAuthority.com/ Bogdan Petrovan

How about the Premium Suite from the Galaxy Note? A lot of new stuff, though I’ll concede that some of it is gimmicky. Multi-window multitasking is amazing, and no one else is doing in the industry.
I’d say that software still is Samsung’s weakness, but they are working to change that.
Really, they are baking stuff into Touchwiz that will differentiate their version of Android, without the need to get a new OS (I think they are just hedging their bets with Tizen and the defunct Bada).

http://kidmercury.posterous.com/ kidmercury

Samsung won’t have the muscle the software players have, simply because software is a better business, but in my opinion Samsung is far more defensible than this post suggests. They’re supply And distribution chains are not easily replicated, and they are astutely building reserves of key minerals they will need to build this stuff cheaply and at scale. This is not something HTC or anyone else will be able to replicate with just one hit product.

I also don’t think the concept of overshooting as advanced by clayton Christensen is necessarily equated with opportunities for horizontal strategies at the expense of vertical ones. Rather, I think the onset overshooting only suggests the market needs to be resegmented — which will likely result in new opportunities for both horizontal and vertical players. For instance, overshooting on tablet hardware specs created greater opportunities for Samsung to employ a very horizontal strategy with success, but it also enables a new class of verticals that bundle low cost hardware with niche media/apps/community aimed at customers that were previously undeserved when the hardware market was not sufficiently commoditized to enable such vertical strategies.

http://www.cdixon.org/ chris dixon

“They’re supply And distribution chains are not easily replicated, and they are astutely building reserves of key minerals they will need to build this stuff cheaply and at scale. ”
The assumption is these are temporary advantages. Supply will catch up in the next few years.

http://www.jroller.com/shareme/ shareme

but the same can be said for Apple’s supply chains as well Chris..

http://www.cdixon.org/ chris dixon

I agree. That’s why I think the only long term advantage is in the software platform.

http://www.victusspiritus.com/ Mark Essel

And now look at Microsoft, even software’s days are numbered. The exception being that the software providers can jump to whatever platforms become dominant.

http://www.victusspiritus.com/ Mark Essel

“I also don’t think the concept of overshooting as advanced by clayton Christensen is necessarily equated with opportunities for horizontal strategies at the expense of vertical ones”
Right on Kid, it just opens up different opportunities. For instance under powered smartphones that have better battery life, or commoditized carriers by dynamically bidding on the cheapest bits in realtime with generic wireless coms.

http://twitter.com/dhammer dhammer

Chris,

A really interesting post.

It seems to me there’s a third layer of value capture here that is meaningfully different between the PC and post-PC/Mobile/Phablet/what-have-you world: Namely, distribution channels.

Distribution was a one-shot gig in the PC era — you acquired your PC from a given store, and then you might occasionally go back fror service etc. Naturally, this meant channels could not capture significant value in the chain. Nowadays, the channel is often merged with the data connection, meaning that it’s an ongoing relationship; I wonder if long-term that will provide a defensible area for value capture.

To date, of course, the carriers have yet to miss an opportunity to miss an opportunity, but I wonder if they’re still ultimately positioned to seize the lion’s share of the value in this generation. Apple, by virtue of being, well, Apple, was able to basically impose its terms on carriers, partially because it owned its own distribution channel — albeit one that’s doesn’t try to own its own network. I wonder if long-term this may hurt apple if somebody can do a vertically-integrated strategy between network and hardware.

Rather than attempt to create its own OS to capture value, I wonder whether it might be more prudent for Samsung to do something crazy like get into the carrier business. It seems absurd, I grant you that, but still perhaps could be a better way for long-term value capture than writing their own OS.

http://www.cdixon.org/ chris dixon

Yeah I left out the carriers but they are very powerful, especially if they keep consolidating. Although for now at least less important with tablets vs phones.
Anonymous

How does Samsung (or Apple) get into the Carrier business? Both are global companies selling into all markets. Unless you can become a global carrier, doesn’t your value prop start to fragment?

http://www.cdixon.org/ chris dixon

I think you are right. That is also the barrier to entering the TV market through acquiring cable operators.
Anonymous

It is possible at the end of the day that both network carriers and hardware become matching bookends of commoditization.

Network commoditization being forced into play by economic infrastructure-efficacy competition between countries.

http://twitter.com/andyidsinga andyidsinga

re this part : “competitors like HTC are just one hit product line away from stealing Samsung’s position”

Assuming you’re only referring to Samsung position with its mobile phones and other devices?

Certainly another arrow in samsung’s quiver is its advanced manufacturing capability ..suppling the silicon into many competitor’s devices.

http://www.cdixon.org/ chris dixon

Yes, just Samsung’s mobile business.

kiran bhanushali

Maybe samsung can build a more defensible locked in position with tight integration across the various home entertainment devices they sell? They are perhaps the only manufacturer in the world who sell everything from phone up to a 60 inch tv, and refrigerators washing machines etc. Thoughts?

TrankWoods

Sounds like a pretty solid plan to me dude, I like it.

http://www.AnoTimes.tk
Kelly

Samsung has had this comin, I’ve been saying it for years. http://www.ficksitall.blogspot.com
http://twitter.com/semil Semil

Would you see any incentive for Samsung and Facebook to work together as each one has what the other wants?

http://www.cdixon.org/ chris dixon

I think you’ll see all sorts of alliances, and that could very well be a big one.

http://twitter.com/semil Semil

Not to add to your list of topics, but if you could even graph out the possible alliances, I’d love to read that and the logic behind it!
Pranav

Hi Chris,
In one of your replies a few months back you had alluded to the fact that most of the innovative thinking is actually done on blogs these days in terms of tech strategy. Can you provide a list of good blogs where this is happening besides Asymco, your blog and a few others? Thanks.

http://sawickipedia.com/ todd sawicki

Surprised you are not thinking of what is the most obvious answer – Samsung creates their own Android fork ala Amazon (and Hauwei).

http://www.cdixon.org/ chris dixon

But what does that get you? The (really) hard part isn’t the software itself (Android is mostly just Linux + JVM), it is the developer ecosystem, which you lose when you fork.

http://sawickipedia.com/ todd sawicki

Amazon shows that forking doesn’t cost you apps as their fork supports android apps just fine. That’s the beauty of Android forks – you control the OS implementation and get a built in app ecosystem. So forking seems like the obvious move for Samsung.

http://www.cdixon.org/ chris dixon

My understanding is once you fork (and form doesn’t pass “compatibility testing suite”), Google won’t let you access google play, so you lose the main benefits of the OS. http://www.forbes.com/sites/adriankingsleyhughes/2012/09/08/something-everyone-should-know-before-pre-ordering-a-kindle-fire-hd/

http://sawickipedia.com/ todd sawicki

Yes you are right that with a fork you lose access to Google’s apps (Play, GMail, GMaps, GVoice) as pre-installed apps. However Amazon has shown that your app store can cover the Google forks of Android (Google’s are as propietary as any of them since the Android base is open source). As a result of Amazon’s success and other side load stores like GetJar – Android developers expect to list their apps at multiple stores at this point based on those I know. Google Play isn’t that critical to me though GMail and GMaps _might_ be for the moment (though long term I’ll disagree).

http://www.cdixon.org/ chris dixon

Good points. Yeah, seems like maps is Google’s biggest asset here.

Anonymous

I agree with Todd here: were I Samsung right now, I would embrace and extend android.

The default apps are very good, but the software (except maybe maps) can be replicated given time and money.
Anonymous

Amazon has its own App Store with many/most of the same apps as Google play. The only thing that Kindle Fire customers lose is Google’s own apps: Maps, Docs, Gmail, etc.

I don’t think it is harming Amazon much — since they actually have a much better media store than Google Play can offer. Also they have far more credit card accounts than Google.

Indeed the obvious partner for Samsung would be Amazon, because they have such a strong ecosystem already and are not a true competitor, as their hardware is a loss leader to sell media — they’re better off if Samsung gets to make and support the hardware.

http://www.cdixon.org/ chris dixon

Yeah Amazon’s media advantage is massive and I would think meaningful to users.

http://technbiz.blogspot.com paramendra

Samsung seeking to go into the direction of a new mobile OS to hasten the onset of HTML5 tells me it truly is the fifth giant.

Anonymous

Nobody can make any money on HTML5. It’s setup that way. Everybody is running the iPhone browser for free. Apple gives it away. You can’t out-HTML5 Apple. Apple has all the HTML5 that anyone else has, plus Apple has 2 massive native C/C++ platforms, one for consumers and one for developers/producers.

If I buy a device today, it has a 2 year working life. What apps can I run during that 2 years? That is all that matters with apps. With Apple, it is just so many more apps and better apps, and apps from many more categories like musical instruments and art tools. Plus all the Web apps.

How is anybody going to compete with that by offering just the Web apps?

http://technbiz.blogspot.com paramendra

You said it. Apple’s app store gives it a huge advantage. But when HTML5 goes mainstream, you no longer need native apps. So the app store advantage is gone. And a new mobile OS could thrive.

Anonymous

You don’t seem to have read JohnDoey’s comment or else you don’t understand what HTML5 is: you can not write sophisticated apps or high performance video games in HTML5 — you need native apps for that. Try to imagine Djay written in HTML5 — you can’t do it.

Look at something as simple as Facebook’s iOS app — it was mostly written in HTML5 and performed badly. Facebook replaced it with a native app and apologized.

http://technbiz.blogspot.com paramendra

HTML5 is not there yet. That is why native apps are still the show. But the HTML5 promise is that it will be a richer experience than anything native.

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http://ARMdevices.net/ Charbax

Android feeds over a million engineers, about 100 times more engineers work on Android than on iOS. Stock market profits are not the only game to play. All Android makers are satisfied enough having hardware growth, R&D results growth, rapid shortening of development cycles, intensifying control over hardware and software support all the while getting rapid increase in hardware and software functionality. Growth, revenue growth, increased access to components supply, all Android makers profit from all of that. All the while, they are all well positioned to not just grow but also access massive profits too. They may not yet see the massive profits themselves, basically because Android for them is still so new, they spend all their profits on expansions, on further developing their addiction to utilizing every new Android feature as quickly as possible. That requires massive investments in R&D, in production, etc. The Android makers are all still investing in those. Sony, Huawei, Archos, Asus, ZTE, Panasonic, LG, HTC, Acer, they all are positionned to gain massive stock market profits rapidly. Although for sure, you can also expect smartphone and tablet profits to disapear very rapidly, quite simply because Android allows for massive competition and disruption. The unavailable mass market Nexus 4 at $299 is already here. But look at China, the sub-$100 Android super-phones and super-tablets are existing also, and you can be sure that Samsung and Apple also know that they cannot expect to continue milking that cow for very much longer. Especially Apple is very desperate, because the Apple stock price is based on 90% iOS hardware profits, thus 90% of Apple’s profits is under massive serious direct Android threat.

Anonymous

Apple is not in any way desperate. The idea that they are is ridiculous. They have giant growth. They take the majority of the profits in all their markets. iPad is defining the 21st century consumer PC same as iPhone defined the 21st century phone. Things could not be better for Apple.

Most of the companies you mentioned in your post are not profitable. Sony has not made a profit since the iPhone shipped.

So please, no concern trolling Apple.
http://www.tumblr.com/blog/his-divine-shadow His Shadow

They may not yet see the massive profits themselves

They are seeing no profits. The only profitable Android handset maker is Samsung. Nothing Samsung is doing is actually going back into Android, despite the “open source” fantasies associated with Android and Google.

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Anonymous

I think the mobile market is simply being replaced by the iPod market. The market will continue to work like iPods because it’s iPod parts and iPod services and iPod users. iPhone is just “iPod phone” — everybody who copied it started making iPods. All the phone makers are dead. All the profits go to iPod makers Apple, Samsung, and HTC. Samsung because they copied Apple the most, and HTC was doing Beats headphones and so on. All the profit is in iPods, not phones.

But if the mobile market turns into the PC market, that is great for Apple also, because they dominate that market as well in profits and technologies. Between the time that this “iPhone is Mac, Android is Windows” stuff started and today, this thing called the iPad was introduced and immediately went on to outsell all of HP every quarter in unit sales. The money is literally being given back to Dell shareholders right now.

So whether mobiles is turning into iPods or PC’s, Apple is in the leadership position either way. All the Apple and NeXT stuff that was ahead of its time in the 1980′s is reveling in its time today. Everybody else is reacting to that.
http://about.me/iheke iheke

Interesting post. I think the difficulty with this thesis is that Google has succeeded and is succeeding in reducing the mental price anchor for software (both OS and applications) to zero. In this sort of space – what exactly – will stratification mean? Is (b) really improbable? (It’s pretty hard to make money from free or near free). Surely, this supports the keep innovating and make money on hardware loyalists.
http://www.facebook.com/f.stephen.ackroyd Stephen Ackroyd

A different take on the emergence of Samsung in mobile is all about silicon. Samsung did its learning making chips for Apple. They became good at building core functionality into the silicon. Samsung then drove its volume using both Apple and its own products. Volume is everything in Silicon, and Samsung is the leader. Apple also taught Samsung about putting software functions into Silicon.

Andy Groves describes that the early success at Intel was based upon memory chips driving volume. Intel innovated on the CPU but got its process right based upon high volume manufacturing of memory.

We will see that more and more of what makes up a Smartphone will be in a single chip. Apple and Samsung are two of the players, and they both get this. Apple is moving its silicon work away from Samsung – aware that Apple made Samsung into the competitor it is today.

We should look back at not just Microsoft, but at Wintel – and again – the role of Silicon, again looks like it is pretty pivotal.

I think you will see Google, Amazon, Microsoft look at mergers with the likes of NVidia, Intel and Qualcomm as Silicon is recognized as the primary driver of value.

kiran bhanushali

great points. Further elaborated on asymco in the posts below.

http://www.asymco.com/2012/12/28/in-search-of-apples-microprocessor/

http://www.asymco.com/2012/12/07/the-real-threat-that-samsung-poses-to-apple/

http://www.stanleywong.org Stanley Wong

Apple simply wins because they align hardware, software, and services together. Everyone else treats these things as separate entities. Samsung is good at hardware, Google is good at software, etc.

http://www.cdixon.org/ chris dixon

The Christensen argument is vertical integration strategy wins for a while, but eventually product “overshoots” and the excess performance is optimally “spent” on the horizontal specialization.

kiran bhanushali

Yeah. When there is a new “category: of product vertical integration helps to get the most performance out of the product which is what happened in the first 3 years of the iphone. But in the next phase of the product compontentization works best as individual component makers can optimize pricing and performance.

http://www.engag.io/Abdallah Abdallah Al-Hakim

This is a terrific post and the discussion below is very interesting! While I am not sure this could be the smartest idea but what do you think of Samsung buying RIM (if the new BB10) gets traction. RIM still has a niche market among enterprise and are still doing well in emerging markets.
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poke

I think people overstate the degree to which Apple is vertically integrated. They do essentially two things: they make software and they design hardware. They buy components. They outsource manufacturing. This is not a heavily vertically integrated company. The integration is very specific: hardware design and software. In fact, it’s only integration at all from a particular perspective.

I don’t think it’s a coincidence that the shift from Microsoft-style modular to Apple-style “integrated” came after Dell, HP, et al started outsourcing. These hardware companies have essentially been hollowed out. They continue to exist for political reasons: Microsoft can’t move into own-branded hardware (although it has, tellingly, being doing this in new product categories for awhile now) without alienating its partners. (Note that this hasn’t stopped Google though.) But none of these companies was really doing much in the hardware space besides putting their logo on Taiwanese ODM hardware.

The PC market had “overshot” consumer needs in a variety of different ways. Apple entered this market with a slight reshuffling of modularity. Instead of the dividing line being software/hardware, it’s now at software-hardware-design/manufacturing-and-components. It did not enter as a highly vertically integrated company. By shifting the dividing line it managed to produce products that more relevantly meet customers needs. They score on important dimensions like size, weight, display quality, etc. They took advantage of a market that was over-serving. Apple is the Microsoft of the mobile space.

Apple also takes advantage of open source software. Its OS is based on BSD. This is also an extremely important point because Apple isn’t even especially vertically integrated in software. It focuses on software DESIGN just like it focuses on hardware DESIGN. One might say Apple is a “horizontal specialist” of design. Design happens to be important in the mobile world. (We might say that the separating point is now form/implementation rather than software/hardware and Apple is a form specialist.)

It’s the components space that Google has entered. It supplies an OS. Android is to Samsung as BSD is to Apple. Samsung customises the UI, loads its own apps, etc (as do HTC, Motorola, etc). Google is not in the “Microsoft position.” It started an open source project in the hope of increasing the availability of its services. People tend to ignore the lack of revenue and go a bit crazy in looking at what Google has achieved, but it fits the “open source project” view more than anything else. Microsoft made a lot of money from its OS. Google doesn’t. Who has the margins in mobile? Apple does.

So we’re in an Apple vs. Samsung world. Apple is essentially a horizontal specialist and Samsung is heavily vertically integrated on the hardware side but light on the software side. If this is the right way of looking at things, then I don’t think Samsung needs its own OS, what Samsung most needs is its own services to push out the remaining remnants of Google branding so it can completely control the “form” side of the equation. It’s interesting that this was precisely Amazon’s approach and is the approach of the Chinese manufacturers. Samsung has started making steps in this direction with the various “S-” branded apps.

http://www.cdixon.org/ chris dixon

I think you might understate how vertically integrated Apple is. They make chips and do retail etc. ?

poke

They do other stuff besides software and hardware design, it’s true, but what I’m questioning is whether they’re especially vertically integrated compared to the model they’re displacing. You can look at different things. I’d guess their datacenters don’t run a lot of Apple software and hardware, for example. Moreover, there seems to be a logic to the acquisitions they make and the areas they branch out into it, and that logic leads back to their core competency of design.

Let me put it another way. The PC is typically used as an example of a non-integrated product. The PC itself is essentially generic. It doesn’t matter if you get it from Dell, HP, Asus, Lenovo, etc. But Windows has always been the software platform. It has been difficult to move to anything else. But why couldn’t “Windows” include the shape of the device and the logo on it? Why couldn’t customers identify Windows with the device rather than merely what they see on the display?

I think it’s because Windows grew up in a world where you needed to own your own factories and where form and function were separate because computers were big things that sat on your desk. Microsoft really would have had to be deeply vertically integrated to pull that off (in the same way Apple was at the time). But iOS grew up in a world where manufacturing outsourcing is the norm and form and function are intimately connected. So Apple only had to shift things around a little bit in a way that made a lot of sense.

People typically ask, “Has the hardware become commoditised? Is Apple still doing anything special on the hardware front?” I think they’re looking at it the wrong way. In the Microsoft era, anyone could have made their own OS. Lots of people had that capability. We can imagine a world where Microsoft created a set of middle-ware for application developers that could sit on top of a variety of operating systems and this meant that every computer could have a different kernel, a different file system, etc, as well as different hardware. The dividing line has a degree of arbitrariness to it. Microsoft chose to supply those components and they got locked in with the platform. So it goes with the iPhone’s hardware design.

The ONLY question is whether there’s some benefit from doing these things separately. But look at the current market. First of all, everyone is vying for time at the same factories. They all use the same displays, the same fabs, the same memory, etc. What we’re actually seeing in the market is that the big guys (Apple and Samsung) have the purchasing power. They can lock up the components and the factory time and push the little guys out. The benefits that come from having lots of companies doing hardware design (with manufacturing typically outsourced) do not appear to be all that great anymore. Every “open” platform seems to end in a one-platform-per-manufacturer situation. The conditions have changed completely from the Microsoft era. So I’m skeptical that wanting to include hardware design in its platform is inherently a bad thing for Apple anymore.

Anonymous

I don’t agree with that “BSD with design” stuff. First, there is much more in Mac OS X than just BSD with a pretty UI. Second, Apple has developed a lot of great, widely adopted, software projects, such as Webkit and LLVM. They sure know how to develop software

Anonymous

Mobile may be in its infancy, but it’s growth is Topsylike. Right now, both Apple and Samsung would benefit by dissociating their hardware from the WALL-E sized wasteland that the over 4,000 mostly cheap models of Android devices will fill worldwide. How? By “lifecycling” their mobile devices, offering to take used and broken units on trade in.

Presently Gazelle will purchase my used or broken iPhone, ‘cus the components have material value. Apple, for sure, should be doing this good work itself, and driving a competitive wedge between itself and garbage phones. Even if Apple makes a smaller, less expensive China phone, it must be recyclable for all our sakes. As a buyer value sustainability is underserved, not overshot. Where Apple leads, others follow. See my petition: http://cl.ly/0A302L3Y0c0r.
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Ruby on Rails consulting

Every household has one samsung device at home. Apple has been trying to get into connected homes world where one devise can control many. That’s where it becomes easier for samsung to rule over apple. Apple however has a tribe which samsung does not. So it will be fun to see how they strategize themselves to take over the lions share.

A perspective from a – Ruby on Rails development company.
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Totally agree, and Jeff Bezos said it before “In The Modern Era Of Consumer Electronics Devices, If You Are Just Building A Device You Are Unlikely To Succeed.”
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Chris Dixon