The Smartphone Race a Hardware Battle? Samsung's Future

The Financial Times carried an interesting article today entitled "Samsung needs to hit reset button." .
It referred to the company's strength in hardware, notably memory chips, in which it invested  Won11,000bn last year.  Also, its bright and power-efficient Amoled (or active matrix organic light-emitting diode) mobile screens are increasingly the industry standard.
But the long term worry for Samsung is software, which is crucial to its increased focus on high-end consumer electronics such as smartphones and tablets. Falling prices for chips – which constituted about half of second-quarter operating profit – have pushed Samsung to prioritise its Galaxy devices, which are big challengers to Apple’s iPhone and iPad.
The article goes on to quote Chang Sea-jin, professor at Singapore National University who says Samsung was fortunate to produce such devices just as Google’s Android was becoming a standard operating system. He argues this reduced the smartphone race to a “hardware battle, where Samsung is strong”.
However, especially since Google's acquisition of Motorola, Korean government sources have expressed concerns about Samsung's weakness in software. Kim Young-Chan, an analyst at Shinhan Securities is quoted as saying that “Samsung cannot easily build up software in a short time and it is hard to expect major changes from Korean engineers with fixed ways of thinking,” said Mr Kim. “But Samsung will not be marginalised, given its strength in hardware.”

Google sells Motorola Mobility, Agrees with Samsung on Patent Accord

Two developments in recent days offer a powerful commentary on the future of the global ICT sector, with direct implications for South Korea's leading smartphone manufacturers.
First, as reported in the Korea Joongang Daily, Samsung Electronics has signed a 10-year patent cross license agreement with Google that will prevent the two companies from waging a patent war against one another, a move the Korean tech firm believes will help further isolate archrival Apple. As reported in the Joongang Daily, the agreement that covers “a broad range of technologies and business areas” with Google. The “mutually beneficial agreement” covers not only existing patents but also new patents to be filed by 2023, Samsung said. The deal, analysts say, will help the two companies improve on each other’s weak points: software in the case of Samsung and hardware for Google. But Samsung is also expected to benefit from some of the hardware technologies that Google has worked on in recent years, such as robotics and wearable devices.
The second development was the announcement by Google that it is selling its Motorola Mobility division to China's Lenovo for $2.91 billion.  As reported by Forbes, "Motorola Mobility was Google’s largest ever acquisition at $12.5 billion in 2012. Page says the decision was made because of the “super competitive” nature of the smartphone market. “Motorola will be better served by Lenovo—which as a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world,” Page said today. “This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.” The sale doesn’t mean that Google isn’t interested in making hardware to run Android. Earlier this month, Google spent $3.2 billion to acquire smart thermostat maker Nest and bought several robotics companies last year. Page made a point of noting that Google’s vision for smart devices like the Nest and Google Glass, its Internet-connected eyewear, remains a focus for the company."
The most immediately apparent implication of this move for Korea is its impact on the nation's smartphone manufacturers, led by Samsung and LG.

Apple Envy at Samsung Electronics?

An article in Business Week suggests that Apple-envy may have been a major factor in the recent personnel shakeup within the Samsung Group.  The company Choi, Gee Sung, the head of its TV and cellphone business as CEO, replacing Lee Yoon Woo.  It also created a new position, that of chief operating officer, for Lee Jae Yong, the only son of former chairman Lee Kun Hee.
Some Samsung-watchers have a one-word answer for why the company made these changes now:  Apple.    For all of its success in consumer electronics, the company is an also-ran in the battle to win customers away from Apple's iPhone.  Park Kyung Min, chief executive of fund manager Hangaram Investment and a longtime watcher of Samsung noted that "Samsung must have taken a whopping blow from the revolutionary popularity of the iPhone.  To emulate Apple it needs a new start."
Until now, Samsung electronics success has come largely from the development and worldwide sale of electronics hardware, led by semiconductors, flat screen displays and televisions and handsets.  According to Business Week, the new management team will try to refocus the company on total solutions, including creative software.  After all, the Apple iPhone is a beautiful and efficient piece of hardware, but everyone knows that its real worldwide popularity lies in the software applications available through its App store.  The Apple iPhone is really just the first of a whole generation of hand-held computers and internet terminals.  The new Android phones will emulate the best features of the Apple iPhone and eventually these handsets will be come commodities, just as desktop or notebook PCs did.  Perhaps Samsung should envy Apple, but not for its hardware, but rather all of the very useful internet and iPhone based applications that people love to use!

YouTube is Korea's leading Android App: Some implications

As reported by the Korea Joongang Daily, YouTube is by far the most frequently used Android app in South Korea.  A close reading of the article shows how this phenomenon relates to a theme often touched on in this blog, namely this nation's overly heavy dependence on the manufacture and export of hardware versus software and services (YouTube being a video content provision service).  See, for example, these posts.
A major theme of the Korea Joongang Daily article is that Korea's mobile service providers are unhappy with YouTube's popularity, believing that it does not pay enough for use of Korea's fast networks.  This line of reasoning tends to ignore the inherently global scope of the Internet and the fact that three quarters or more of the global ICT market is made up of software and services, NOT hardware.

Android Phones in South Korea: A Breakthrough?

The Economist has a thought-provoking article in its current edition entitled "The battle for the smart-phone's seoul."  It expresses many of the thought's I've had about the mobile phone market in Korea.  I am among the many who can't wait to get their hands on an Android variation of Apple's i-Phone, so that we can carry all of the "killer applications" of the internet around in our pocket or on a belt clip. 

Rather than opening up its mobile market to the I-Phone and other innovations, South Korea chose to maintain a special WIPI software requirement.   As far as I can determine, this software requirement serves no useful purpose other than to make it more difficult for Apple or others to enter the South Korean market.   If you read the Economist's latest analysis, it implies that this nation should completely open up its mobile communications market to encourage innovation and also to help its leading exporters of handsets.  Among the main points are the following.

• According to Informa, a market-research firm, the market for smart-phones will grow from $39 billion in 2007 to $95 billion in 2013, by which time they will make up nearly half of the handset market by value (though only 34% by volume).
• More importantly, as handsets get smarter the nature of the industry will change. It will be less about hardware and more about software, services and content, as illustrated by the accompanying chart. This is why, for the first time, a fierce battle between operating systems for handsets has broken out.
• It has taken two outsiders to shake things up. One is Apple, with its iPhone. As well as being a paragon of hardware and user-interface design, it comes with a flat-rate “all you can eat” data plan.
• The other disrupter is Google, with its Android platform. It also lets users download applications from an online store, called Android Market. But it differs from the iPhone in that Android is just software, which Google makes available to handset-makers and operators.

The Economist goes on to point out that these developments have prompted the incumbents in the mobile phone industry to look for new operating system platforms as well.  The main point of all these developments for South Korea seems abundantly clear.  Both Samsung and LG are members of the Open Handset Alliance, a group of more than 30 technology and mobile companies who came together to accelerate innovation in mobile.  Their first product was Android.  Therefore, the whole world will be watching to see just how innovative the first generation of LG and Samsung Android phones will be.  If I were in charge of long-term strategy at either of these leading mobile handset manufacturers, I'd bet the bank on this one.  Take the best in design from the I-phone and your own prior models, program Android to place the "internet in your hand" and lead the way!

Worldwide Trends in Sales of Mobile Devices

CNET has an interesting report on the trends in sales of smart phones over the past year.  Overall sales of mobile phones increased 17 percent year on year.  However, smart phones showed a 48.7 percent increase as 54.3 million units flew off the shelves.
The most interesting data in the report were in Table 2 (click on the graphic here to see a full size version).  Note that ONLY the iPhone and Android phones increased their market share year on year.  The report notes that the first quarter of this year was Apple's strongest yet, helped in part by overseas sales from mature regions, such as the U.K. but also in new markets such as China and South Korea.
Gartner's forecast for the near term suggests that the most successful companies will be the ones that control an integrated product in terms of operating system, hardware and services.  To stay competitive, manufacturers must integrate hardware, the user interface, the cloud and social networks to continue to attract customers.  Enough said. The challenge for Korean handset makers and mobile service providers should be apparent.

Samsung's challenge is Korea's imperative

As reported today in the Joongang Daily, Samsung Electronics operating profit in the fourth quarter of 2013 fell by 6 percent, largely because of the declining profitability of the company's "cash cow" smartphone business. (click on the accompanying graphic to see a larger version) This marked the first profit decline in nine quarters and was attributed to  "...slowing growth in sales of smartphones and tablets in developed countries, an overly strong local currency and higher marketing costs compared to arch-rival Apple." The article also noted that "Disappointment in the earnings of Samsung Electronics, which accounts for 20 percent of Korea’s stock market capitalization, wasn’t totally unexpected. But the scale of the decline was a surprise, and the company’s shares dropped 0.23 percent from the previous day."
Globally, more than half of all mobile phones being sold these days are smartphones.  However, Samsung is facing increased competition not only from Apple, but also from other manufacturers of Android devices, notably in China.  Also, smartphones like other computing devices are modular and becoming increasingly commoditized.  As noted in an earlier post, companies like Google are looking into "build your own" or "design your own" mobile phones.  Such technological and economic trends suggest that the challenge for Samsung is part and parcel of the next big hurdle for South Korea, to lessen its heavy dependence of manufacturing and exports by large chaebol industry groups while increasing its strength in software, services and content.  This has been the subject of numerous posts, including this short one last October.
Gartner's latest projections underscore the urgency for Korea of making this transition.  As shown in the accompanying table, the three categories of enterprise software, IT services and telecom services together account for 78 percent of projected worldwide IT spending for 2014, while all the hardware devices together, including smartphones, make up only 18 percent of the total.
In light of Samsung's large influence on South Korea's export-led economy, it is probably appropriate to suggest that its challenge to shift from emphasis on hardware to a more balanced approach that includes software innovation is an imperative.   That imperative, in turn is at the heart of the Park Geun-hye administrations emphasis on digital convergence as a basis for realizing the "creative economy."

LG and Samsung Struggle to Crack Smartphone Market

An IHT special report published in The New York Times yesterday was headlined "Korean Giants Struggle to Crack Smartphone Market."  It caught my eye and I read it with some expectation, but it was disappointing.  It failed, as many reports in the mainstream press do, to get to the heart of the reasons why Korea suffered the "iPhone shock" or "smartphone shock" beginning about a year ago.  As readers of this blog will know, I've been caught up with attempting to explain this phenomenon for a long time.  See this post, or another here, or simply search this blog for "smartphone shock" or "iPhone."
The story of why Korea's leading consumer electronics companies are struggling with the rapidly expanding smartphone market is more complex than the IHT special report makes it seem, and it involves the following elements.

• Weakness in software and content versus hardware exports.  Smartphones themselves (the hardware) are not the key element in this wave that is sweeping the globe.  Rather it is the "apps" and the software ecosystem that count.   Not surprisingly, Google and Apple are major players.
• Language -- As I've noted in earlier posts, Korea's heavy reliance on Naver for internet search casts into stark relief the importance of language and culture in any given market.  See my posts on Naver versus Google here or here  or do a search of this blog on the topic.
• Non-tariff barriers -- The WIPI software platform adopted in Korea, while it may have originally had good intentions, eventually became a barrier to entry of the Blackberry or iPhone into South Korea's market.  I've done a number of earlier posts on this topic including this one.
• Worry about loss of Voice Revenue--Korean telecoms executives, along with some of their European counterparts, feared a massive loss of mobile voice telephony revenues if they were to allow the iPhone and other smartphones into South Korea's market.  In fact, these fears were well grounded as Korean youth had flocked to buy Apple's iPod touch, on which many of them installed the free, Skype VOIP service.

The above are just a few of the points I wish that the IHT article, published in the New York Times, would have expanded upon.