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Bill Bennett


Samsung launches phone, needs new business model

Samsung Galaxy S5

Yesterday Samsung launched the $1150 Galaxy Note 4 smartphone in New Zealand. While the Note 4 is interesting, it is not interesting enough to generate much local media coverage.

This underlines Samsung’s challenge. It isn’t that Samsung smartphones aren’t state-of-the-art devices. They are. But so are the cheaper smartphones coming from Chinese and Indian factories.

More to the point, Samsung’s rivals have lower costs. This puts pressure on margins.

Samsung smartphone profits?

Samsung sells more smartphones than any other company. It has the greatest market share. And yet Samsung’s smartphone business makes little profit.

Last week Samsung warned investors profits have fallen almost 60 percent. The company’s smartphone business may already be in the red.

We’ve been here before. Blackberry, Sony and Nokia each led the cellphone market at one time. Challengers disrupted them all. Samsung was one of the fiercest challengers.

Not different enough

Samsung’s problem is that the phones are no longer different enough to keep the company ahead of its rivals. It relies too much on Google for the most important smartphone components: software and services.

Apple disrupted the cellphone market with the iPhone. Google’s Android gave other phone makers a quick and easy alternative. Android offered Samsung almost all the functionality Apple had, at next to no cost.

Unfortunately for Samsung, every other phone maker has access to the same technology at the same price.

Commodity hardware, commodity software

Without software and services, a smartphone is a commodity. In the long-term that business will always go to the lowest-cost producers.

Just as Samsung’s phone making is being undercut by low-cost rivals, the value of it’s brand is also under attack. Samsung wants consumers to think it is on a par with Apple. It spends a fortune on marketing to create that impression. And yet it has to compete with essentially the same product from no-name brands.

This puts further pressure on margins. All other things being equal, the lowest price competitor will win.

Apple’s premium

Consumers pay Apple a premium for smartphones and tablets because of integrated hardware, software and services. The company has stayed away from fighting for market share.

Samsung’s efforts to add value with lame, hard-to-articulate content deals, OS overlays and bloatware bundles of useless apps only makes matters worse. From an everyday customer experience point of view, a $1000 Galaxy S5 is on a par with a $400 Nexus 5. Sooner or later Samsung’s customers will realise this.



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