Samsung’s Crisis of Design 2.0

Samsung unveiled its second attempt at wearables, along with its latest flagship phone, earlier this week at MWC. I was not impressed and I am growing more confident that Samsung not only has another “crisis of design”, but will also soon face major headaches from competing Android OEMs.  I think we are on the verge of a new phase in mobile phone hardware: Samsung competitors will finally be able to find a footing and begin to attack the giant.  Meanwhile, I suspect Apple has already placed Samsung in the same drawer as Microsoft; irrelevant. Tim Cook and company is marching to a completely different beat.

1) The Galaxy Fit looks awful. A curved AMOLED touch screen with a huge piece of plastic on its underside attached to a Modern Glam (plastic) watch strap.  I’m having a hard time seeing what is so “beautiful” or “pretty” about Samsung’s new fitness device, to quote a few easily amused tech bloggers. The company’s business model is not dependent on good design and few would suggest otherwise, but I struggle to understand how people can look at the Galaxy Fit and be even mildly impressed by such a horrendous product. One tech blog went so far as to say the Galaxy Fit is a “smartly designed fitness band”.  It’s a piece of curved glass set on top of a bunch of plastic with an extremely awkward user experience and interface.  Smartly designed?

 2) Samsung Galaxy S5.  Samsung’s flagship phone now comes in gold and has a fingerprint scanner. While the joke would typically stop there and many would say “copying a good artist is a pretty good strategy”, Samsung didn’t even copy well.  The gold color is the wrong shade of gold (Modern Glam gold?) and the fingerprint scanner doesn’t work.   I really don’t think I need to say much more about Samsung’s new flagship phone. I suspect Samsung will unveil the real Galaxy S5 this May?  Interestingly, Apple was very quiet this week versus last year’s PR push leading up to the Galaxy S4 launch.  I wonder why…

3) Samsung is a fish out of water without new Apple inspiration.  Samsung is struggling.  The easy smart phone growth achieved by simply shipping an alternative to iPhone (bigger screen) is drying up and with no clear path to additional revenue or earnings growth, the company amusingly jumped into wearables. The Galaxy Gear was downright disgusting, while the Galaxy Fit isn’t far behind. Samsung likes to throw around the “we give consumers what they want” meme and I am left wondering who was asking for something like the Galaxy Gear or Galaxy Fit?   Samsung is throwing a lot of poop against the wall and desperately hoping something sticks. While some may label such a business strategy as acceptable, I have my doubts that consumers are going to stand by a company that is willing to ship products that merely represent different batches of wall poop.

4) Samsung’s credibility is taking a hit. Last year I noticed a few of my acquaintances made the switch from iPhone to Samsung.  The usual reason given for such a move involved wanting a change or simply being bored by iPhone.  Interestingly, on follow-up discussions in recent weeks, these switchers are now regretting their move away from iPhone due to Samsung’s plastic and subpar build quality.  More than a few people on Twitter tell me the same thing about friends or family being disappointed with their Samsung phones. The amount of negative feedback caught me by surprise.  Interestingly, only a few hours after introducing the Galaxy S5, Samsung rumor blogs were talking about a new Samsung phone coming out in May that actually wasn’t made of cheap plastic. Have we reached a point where even Samsung realizes the “not an iPhone”  plastic gold Urban Glam option probably isn’t going to do much in terms of winning converts from competing platforms?  Consumers are starting to notice what Samsung is actually shipping and the grumblings are getting louder.

5) Samsung competitors are foaming at the mouth.  The long-standing joke is that the best Android phones available in the market (never a phone made by Samsung) don’t sell well because no one cares about anything other than Apple and Samsung.  I think that may change. After this week, I am becoming confident that consumers are going to stop being passive and begin seeking out alternatives to Samsung in the form of HTC, Sony, Nokia, Lenovo, or countless of other Asian OEMs, all of which are making significant progress in shipping attractive phones at attractive prices (I would include Nexus, but Tony needs to help Google rework distribution). In terms of hardware specs, most of these phones are already at parity and with several Samsung competitors now focusing on hardware design; consumers will simply have fewer reasons to instantly turn to Samsung. Whereas in the past, Samsung might have been the default choice for Android, I suspect that lead will start to slip. In addition, Samsung recently announced that they will reduce their advertising and marketing budget as mobile phone profits decline (not exactly the best timing for such a move). While smaller mobile hardware companies individually lack the ability to compete against Samsung, and just the thought of going up against Samsung can scare many executives into a cold chill, I think each competitor can take a bite out of the giant which can collectively create serious damage. To succeed against Samsung: 1) Focus on branding 2) Save or raise as much capital as you can and throw it into marketing 3) Narrow your distribution focus 4) Figure out why someone should buy your phone. The challenge is significant and Samsung will not stand still, but 2014 is the year. Wait any longer and limited resources may not allow another fight in the future.  

Bonus - iWatch Implications from Galaxy Fit. The iWatch will not look like the Galaxy Fit and the iWatch will certainly not operate like the Galaxy Fit. The best way to think about this would be envisioning a small table in Jony’s design lab with various iWatch prototypes. The Galaxy Fit version (simple rectangular curved piece of glass positioned on a plastic watch strap) would be instantly cast off as a no, if it even would be positioned as a possible prototype in the first place.  I highly doubt the iWatch will include a strap/buckle or a thick piece of bulging glass. The device won’t depend on an awkward user experience where you have to rotate your head and arm just to look at the device. In summary: Look at the Galaxy Fit and you now know what the iWatch won’t be.

My Letter To Apple SVP of Retail Angela Ahrendts

Angela,

I planned on buying a new iMac on Black Friday. In order to make the process smoother, I ordered online at 6am and chose personal pickup.  Approximately one hour after I placed my order I received an email saying that my order was ready. Everything was going well since I would be able to coordinate my Apple store visit with other Black Friday observations at the mall, however my experience with the Apple retail store was very disappointing.  

My first interaction with the Apple store was a greeter assigned to the entrance. After saying that I was picking up an iMac that I ordered online, he told me to go see “the guy with the grey hat”, pointing in the general direction of the rear of the store. Relative to other Apple stores this particular location is small and I would venture a guess that it is one of the smallest out there, a carry-over from the early years of Apple retail.  After a few minutes it became clear that the “guy with the grey hat” wouldn’t be available any time soon, so I was off to find someone else. 

Even though there were plenty of red shirts visible in the store, everyone seemed focused on some task. After finding another worker that actually was not with another customer, I was told to go see another person for personal pickup, who unsurprisingly was with another customer.  A few more minutes go by and I finally get my iMac.  Overall I didn’t find the experience too magical and in fact, compared to other stores during Black Friday including Macy’s, I would classify Apple’s customer service as inferior.

1)   I am not a fan of having to talk with a greeter at the Apple store entrance only to be shuffled to someone who clearly is not free to assist me and repeat why I am in the store. The whole process seems highly inefficient.  Instead, getting my information and then relaying that to another employee who can come forward to help me seems more enjoyable.  This process may actually exist in other Apple stores and I almost remember something like this occurring to me in the past, but it has been a few years.

2)   Apple retail employees have different tasks even though you would never know it because everyone wears the same shirt color. Some workers do not deal with money, others only go around answering questions.  This scenario becomes tricky when trying to buy products or pick up previous orders. Compare this to Macy’s where mostly anyone you find walking around can hop over to the nearby register and take care of your order.

3)   The floor layout is just unnecessarily chaotic as people are standing around for various tasks such as purchasing product or getting tech support.  Generally the front of the store is geared towards selling product with the back dedicated for the Genius Bar, but the middle zone is a very awkward area with people randomly standing around.

In previous years, I recall Apple have a more traditional check-out process for gift cards and other smaller items such as iPods, but such a layout did not exist this time around.  Maybe I’m being a bit unfair and I just timed it wrong?  

Apple retail just isn’t working anymore and you clearly have numerous objectives to accomplish in 2014.

Good Luck, Neil

P.S. I’m enjoying the iMac

Current Tech Musings and 2014 Predictions

Let’s take a step back and see how things look around the world.

Apple is Fine.

Similar to 2012, Tim Cook back-loaded Apple’s 2013. Apple went so far as to release the retina iPad mini pretty much as late as it could and still guarantee that supply would be adequate before the key holiday shopping season.  From all indications, the new hardware is selling well - as one would expect - although many Apple bloggers whiffed when judging 5c popularity.  While the sales gap between the 5s and 5c may shrink going forward, I would be quite surprised if the 5c becomes “the real iPhone” as many predicted. The sheer uproar over 5c pricing appears to have quieted down as well.  Apple’s redesigned iOS 7 doesn’t seem to have created any new “–gate” controversies, with the only complaints coming from design snobs (I say that with genuine respect).  Apple accomplished a lot in 2013, and 2014 looks to be just as jam-packed with what I would expect to be iPhone bifurcation (two distinct iPhone form factors with simultaneous development – a really big deal). An iPad pro (think larger iPad Air with possible dedicated accessories for professionals) would also seem to fit very well in Apple’s 2014 resource timeline.

Tech Industry Hardware Becoming a Snooze.

Take a look around and there really isn’t much in the way of exciting and flashy hardware innovations geared for the masses. Yes, the 5s is forward-thinking, and has the internal composition that will rival next year’s iPhone 6, but it’s hardly something to get people talking at the holiday party.  The iPhone 5s fingerprint scanner is nice (continues to work well for me), but I’m not finding it nearly as much of a salesperson as Siri (those initial demos were unbeatable).  On the tablet front, it has become an even bigger bore.  I use an iPad 2 and have absolutely no desire to upgrade to a newer iPad anytime soon.  Outside of Apple, Google is busy publicly beta testing hardware products with the ultimate intent of controlling our data and attention.  Amazon is busy spending money left and right in an attempt to sell Amazon Prime subscriptions, and Samsung is twiddling its thumbs waiting for Apple to release new products. 

Smartwatches Selling Like Cold Cakes.

The smartwatch appears to have finally hit mainstream in 2013 as Best Buy is now carving out more square footage to the concept.  Sales are, and will probably remain, “okay” for early adopters where massive sales are certainly not on the radar, but mass adoption remains out of reach.  The idea of a smartwatch makes perfect sense as the phone form factor contains numerous inefficiencies, but the smartwatch industry lacks the needed design and fashion acumen to really get things moving.  The technology does appear to be available though. Interestingly, one company has been beefing up their design and fashion human capital resume. 

Mobile Messaging App Fever. Yawn.

I’ll be honest, I get bored with the never-ending updates on how many users certain mobile messaging apps have.  In the U.S., this fascination with mobile messaging apps remains subdued as Facebook, Twitter, iMessage, (and I suppose you can include Snapchat), pretty much represent the bulk of how people communicate with each other – oh and the phone feature on the iPhone as well.  Maybe I’m just naïve (and only friends with Apple users), but I really have no desire to follow which mobile messaging app is selling “stickers” or making a play for the Indonesian mobile app market.  I never have used Whatsapp and don’t know anyone who has either. The mobile space is fast moving and people love stories of how start-ups will displace incumbents, but from my vantage point in the U.S. – Facebook and Twitter will remain important communication channels, while iMessage continues to be the sleeper hit. I still think mobile carriers are the big winner as my monthly bills will continue to rise regardless of which start-up does well. Of course critics will say the U.S. doesn’t matter, or is behind the times (and that I am clueless), to which I respond as long as the Valley remains the focal point of technology and entrepreneurship in the world, the U.S. matters.

Changing of the Tech Review Guard.

Yesterday, The Wall Street Journal announced Walt Mossberg’s replacements – relatively new names that probably will get paid a fraction of Mossberg’s current salary. I actually don’t think the WSJ will miss a beat with such a strategy, which may say more about Mossberg’s inflated salary than anything else.  Nevertheless, WSJ tech reviews still matter and companies will continue to treat them accordingly. The overall tech product review industry continues to morph and traditional sources for the “yea or nay” for a new product are now shifting to bloggers turned journalists where personal trust outshines all else.   As seen with Apple’s latest products, tech specs don’t matter as much these days and this trend will only intensify as fashion bleeds into personal technology.

Other Random Musings.  

1. It is now easier than ever to grab a few of your journalist friends and start a new company focused on delivering news.  Oh, and charge people a lot of money to read what you have to say.  I imagine this trend will only intensify as it is becoming clear that 1-5 person shops are finding a particular niche in online journalism. Some personal bloggers are pulling in more than $500,000 a year, which traditional media companies will have a hard time matching (or even justifying), while start-ups with minimal expenses require only a modest subscription base to break-even. Of course, aggregators will continue to do well in this world as well where expense growth via headcount is one differentiator versus the small shops.  Slideshows put food on the table. One has to start worrying about information overload though, right?  Hopefully?  Yeah, I know, wishful thinking.
2. A wildcard for 2014 includes Apple’s new retail chief, Angela Ahrendts, which some have already labeled as Apple’s next CEO.  My response would be let’s wait to see how she fits within the Apple culture, then we can start talking. Regardless, Apple retail needs some urgent help, so Angela will be busy.
3. The tech IPO window is wide open and many signs point to 2014 being another good year.  Housing continues to stabilize and contrary to the perma-bears, I think the housing industry will be fine from here on out.  The theme of rising interest rates (due to a stronger economy) makes sense to me as well.  While I won’t comment on which companies will see an IPO in the coming quarters, I would focus on the quality of these IPOs as one would assume quality will decline as we move past the economic recovery years of 2010-2013.
4. Angry Birds (and paid iOS app?) fever is over. It was fun while it lasted. I would be interested to see if Rovio can find another “Angry Birds”, although I remain skeptical. In addition, the overall paid app boom appears to be dead (was there ever a boom?). While there will still be winners going forward, companies solely focused on selling apps for money face dwindling prospects of success. App development, as part of a bigger strategy, seems to have a much brighter future. 

Predictions for 2014.

• Pundits will say Apple made numerous mistakes, either in terms of product pricing, marketing, or strategy.  The new iPhone will also be classified as marking the end of Apple’s popularity.
• VCs will continue to pass off personal marketing blogs as independent sources of knowledge and wisdom.
• Pundits will say Facebook is dead.
• Mobile messaging app fever will continue.
• Humans will continue to be inundated with useless information and inconsequential data points. 

AAPL 4Q13 Preview; Expect a Beat

Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)

• I expect Apple’s revenue to increase 4% year-over-year.

Gross Margin: 37.1% (AAPL guidance: high end of 36-37% range/Consensus: 36.9%)

• I expect Apple’s margin to increase sequentially to 37.1% from 36.9% last quarter, reflecting a modest boost from the newest iPhones. Management’s margin guidance is approximately 300-400 basis points less than the 40.0% margin reported in 4Q12.

EPS: $8.20 (Consensus: $7.93)

• I expect Apple to report a 5% yoy EPS decline. I am including a 908 million share count (implying around $8 billion of buyback).

Product Unit Sales and Commentary

Macs: 4.4 million (10% yoy decline)

• Mac sales continue to slow as tablets and smart phones satisfy many consumers’ computing needs. I assume 10% declines in both desktops and portables.

iPad: 12.4 million (12% yoy decline)

• I expect Apple to report weak iPad sales ahead of the iPad refresh in October. With modest channel inventory fill, I expect iPad sell-through to stay somewhat consistent with 3Q13, reflecting some benefit from back to school shopping.

iPod: 3.7 million (30% yoy decline)

iPhone: 34.4 million (28% yoy growth)

• I ordered my gold iPhone 5s online seven minutes after launch and my phone didn’t ship until September 30, two days after quarter end, so it’s clear that a large number of iPhone 5s launch sales will be pushed into 1Q14. Partially offsetting delayed 5s launch sales was solid 5c supply. My 34.4 million iPhone number assumes 13-14 million units of iPhone 5s and 5c and 20 million units of legacy iPhone (5, 4S and 4) selling at roughly the same weekly sales pace seen in 3Q13 (2.6 million).

I expect Apple to beat consensus EPS on Monday. In terms of 1Q14 guidance, I am expecting approximately $55-58 billion of revenue and 37.5-38.5% margins (which would equate to EPS of approximately $14.50, or a 5% increase from 2012, marking the first quarter with earnings growth since 4Q12). The Street is nearly complete with the Great Apple Expectations Reset of 2013. Heading into 2013, most (including myself) were thinking Apple annual EPS was running around $60. The iPad mini’s lower ASP and margin along with high-end smart phone market saturation resulted in EPS closer to $40. Expectations now appear to be closer to reality as consensus EPS for 2014 now stands at $43. I am around $41-$42, which reflects no China Mobile announcement (I will include the additional $3-$4 when the deal is announced), no change in margins (most likely conservative given the new iPhone lineup), 11% unit growth in iPhone, and 15% unit growth in iPad.

Slo-Mo - iPhone 5s