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.

A New AAPL Era

Apple reported its most recent quarterly earnings this evening.  Impressive would be an understatement.  

Here are some talking points:

1) Emerging Market Growth.  Skewed perspective is making it hard to understand how fast Apple is growing. Many tech analysts are situated in developed countries and economies where the Apple brand is well established, and accordingly have a harder time conceptualizing how Apple can maintain dramatic growth rates.  The combination of rising standards of living and the increasing availability of lower-priced Apple products is a new trend for emerging markets, and it is reasonable to expect this scenario to drive Apple’s growth in the future. 

2) Product Line Diversification. Similar to the iPod, we are seeing the emergence of the iPhone product line: a series of iPhones with a sliding scale of features and capabilities. By the end of 2011, iPhone 3GS, iPhone 4, and iPhone (4S or 5) will most likely round out Apple’s iPhone line. Importantly, each iPhone utilizes iOS apps and has access to the iTunes store.  I see the same trend happening with the iPad in due time; multiple versions sold simultaneous at different price points.  Apple will rely on this product line diversification to cater to different market segments using price as a key differentiator. Emerging markets will have iPhone 3GS, mainstream will be content with iPhone 4, and early adopters will go crazy over iPhone (4s or 5).  In addition, Apple’s overall margin benefits from the continued sale of “older” products as component pricing generally declines over time.  

3) Big Losers and Winners.  Apple management was very clear on the earnings conference call: iPads are eating away at Windows PC sales and iPhone continues to grow like a wild weed.  Companies focused on selling consumer hardware (Dell, HP, RIMM, Motorola, and Samsung) are in a very difficult position as each is starting to understand that having good software is just as important as selling sexy hardware. Big winners (besides Apple) include companies who luckily aren’t competing in the consumer market, and are instead focusing on selling enterprise services or infrastructure needed to foster commerce and further innovation (IBM and Oracle come to mind).  It is no coincidence that Dell, HP, RIMM, Motorola, and Samsung have indicated (or will indicate) an interest in entering the enterprise services market. 

Random Bytes:

-) Look for Android activation numbers to become less relevant as time goes on. I have this growing feeling that Google is nervous that Android is becoming nothing more than a large void, taking up mobile space, and is relying on activation numbers to impress app developers to dedicate resources to the platform. It’s not working. iOS reached critical mass a few quarters ago and Android will not stop iOS momentum. 

-) While I will keep AAPL stock thoughts to myself (at this time), it is important to remember that the large institutional holders control Apple stock and many of these entities are not interested in quick 5-10% stock moves, but instead the attractiveness of AAPL 5-10 years out.  Potential AAPL dividend payout ratios, cash flows, and cash holdings will begin to matter just as much as iOS market share, iOS user statistics, or other random Apple product data points.  The big boys will continue to support AAPL as long as they feel confident they will receive an annual return that beats other asset classes (fixed income, real estate, etc.) over an extended period of time. 

iPhone Can Still Beat Android in Smartphone Market Share

On smartphone battlefields where iPhone hasn’t yet arrived, Android is winning the battle. 

It is premature to declare Android the eventual winner in the smartphone market share race, even with Google now activating 300,000 Android units/day. Steve Jobs noted on Apple’s recent quarterly earnings call that there is "no solid data" on Android phone shipments. For this argument, let me assume Google is actually selling 300,000 Android units/day (27 million/quarter). Apple sold 14.1 million iPhones in the most recent quarter and is on track to sell 15-16 million iPhones/quarter.  

How can iPhone outsell Android if these sales numbers are correct? Here are the reasons why I think iOS can still beat Android in terms of smartphone unit market share:

1) iPhone (4 and 3GS) is outselling Android (dozens of models) in markets where both iPhone and Android are competing face-to-face on the same carrier.

iPhone dominates European mobile ad market

Mobile OS usage; iOS #1 in North America, Europe, and Australia

When a customer has the choice between iPhone and Android, side by side, they are choosing iPhone. 

(I recognize that these links rely on data that carries a number of disclaimers and is often based on some sort of survey, to which I say, show me clearer evidence. With Google, mobile carriers, and phone manufactures not releasing actual Android unit sales figures, what other type of evidence can be obtained on a regional basis? The only surveys and evidence that even try to depict OS mobile market share continuously point to iOS leading Android in regions where both are sold on the same carriers)

2) Verizon. Android has received a ton of attention and mind share due to its strong hold on Verizon’s 90 million customers. While a few million Verizon subscribers have jumped ship over the past three years to buy iPhone on AT&T, the majority haven’t due to high carrier switching costs, including termination fees, sticky family plans, and differing coverage areas.

Why are Verizon customers buying Android phones?

A) Coming from a feature phone, any Android phone will appear amazing. The ability to use the internet or check email on a touchscreen is truly amazing for someone coming from a basic phone. 

B) Android phones are in front of Verizon customers.  Most Verizon subscribers pick a phone from the selection that they see in a Verizon store or kiosk. If the only thing a customer sees is Android, chances are good that they will buy an Android phone. 

C) Verizon customers have few options: stay with a feature phone, buy Android, or leave Verizon and buy iPhone on a network that doesn’t support phone calls due to their awful coverage and service.  Which option would you choose?

In addition, with Sprint and T-Mobile not selling the iPhone, Android has the perfect incubator to flourish - a market of about 180 million subscribers with no access to iPhone (AT&T has 90 million subscribers).  

3) Interesting Android developments in recent weeks have actually supported my thinking that iOS isn’t in as bad shape as some may say. For example, the Samsung Galaxy Tab has sold 1 million units in its first 28 days - nearly as fast as the iPad - pretty remarkable.

Although the Galaxy Tab is a tablet computer and not a smartphone, I think there is an interesting development to be seen from this data. The Galaxy Tab has done well thanks in part to its sales in South Korea, a country where android has 80% market share, a country where Samsung is a source of national pride. Reports indicate that approximately 50,000 - 70,000 Galaxy Tabs were sold in South Korea in the first 28 days (the Galaxy Tab went on sale in a total of 30 countries). What about iPad? In South Korea, the the iPad just went on sale three weeks ago and initial sales are already on par with Galaxy Tab and I imagine iPad sales will soon exceed the Galaxy Tab. The Galaxy Tab entered a market that was void of iPads, with people eagerly wanting to get their hands on iOS. 

Google VP of Engineering Andy Rubin recently said, “After the US, (Android) saw Asia go crazy” with sales in South Korea going “berserk” in the past four months. Once again, it’s funny how Android is doing so well in South Korea. How about iPhone? Well, South Korea recently decided to allow iPhone sales in South Korea.  So Android was doing great in South Korea, a country where iPhone was banned.  A true battle is one where both sides are present.

China is another interesting story. China Unicom, China’s second largest mobile carrier with approximately 175 million customers, is the exclusive provider of iPhone in China. Last year, the iPhone unveiling was a disaster in China due to restrictions imposed on the device by the Chinese Government. In 2010, iPhone 4 is a complete success with over 200,000 pre-orders being taken for the device and curbs having to be put in place to control the buying frenzy in Apple stores.  Overall though, Apple still has a small presence in China with only four retail stores and the largest mobile carrier, China Mobile and its 570 million customers, still not carrying the iPhone.  A true battle is one where both sides are present. 

My thesis will be validated, or disproven, by Verizon iPhone data in 2011 (and possibly by China Mobile carrying iPhone in 2011). If Verizon sells the same number of iPhones as AT&T (somewhere in the neighborhood of 10-15 million in the first year), my thesis will most likely hold true and iOS will be the top selling smartphone platform in the U.S.