The smartphone market is changing and Samsung, as the unquestionable market leader, is feeling the heat. But the problem is not that Samsung is missing a certain product in its portfolio or its products are substandard.
The problem is that the technology-driven 'bigger screen, more features' approach the South Korean firm has successfully used for several years is running out of steam as the technology matures. Putting together a usable smartphone used to be an engineering marvel a few years ago, but today almost any company can put out a decent Android device. Those of us who value premium user experience will still choose the iPhone, while consumers in general become more price conscious and aware of what they really need when they buy their second or third smartphone.
The fact that Samsung is the current market leader does not make its situation any easier with respect to responding to the changing business environment. Quite the contrary, the company has more to lose than anybody else.
In order to retain its market share and regain its former profitability, Samsung would now have to win on two very different fronts. It would have to fend off fierce competition from low-cost manufacturers such as Huawei and Xiaomi that do not spend billions in marketing and, at the same time, outmanoeuvre Apple at the premium end of the market. It is difficult to see how one company could achieve this, yet there is almost certainly a temptation to try. Companies and their investors are usually not happy to sacrifice either profitability or market share. This can makes strategic choices Samsung faces even more difficult than any of its smaller competitors.
Samsung could, at least in theory, sell its smartphone business and focus on products where it faces less difficult choices. This option seems very unlikely at the moment, yet it is what happened to Nokia which lost its strategic direction in a market-leading position. The most likely option lies somewhere in-between the two extremes of pulling out from the smartphone business and keeping going without changing the direction at all.
The company can try a more federal structure in which separate units develop and market smartphones independently for different types of users, but even this does not offer an easy solution. For instance, leveraging Samsung's very strong brand across the market segments will be difficult because it is virtually impossible to be an affordable product and a cool status symbol at the same time. Rebranding different product lines can help alleviate this problem, but it may not be enough if the products still grow from the same culture and business drivers across the company. The different product lines would need to be more than just different product brands, which raises the question of whether they would be better off by being individual companies. Yet, by sticking together Samsung may be better positioned to reap economies of scale and scope, and to fight intellectual property battles that are common to the industry.
Also, no Android manufacturer can ignore Google, which uses its considerable power over the platform to shape the market for its own interests. Google needs mobile manufacturers to stay in business to churn out Android devices, but it also wants to make sure that the majority of the profits are made by showing adverts to smartphone users, rather than from hardware sales. It is unclear how well Samsung and its high-margin business fits into this picture. The relationship between Google and smartphone manufacturers looks very similar to the one between Microsoft and PC manufacturers. The former has been a moneymaking machine while the latter have to survive a cut-throat price competition.
What does this mean for us as consumers? Strong competition means lower prices, which is good as long as we are happy to 'pay' by watching advertisements and handing detailed information about our everyday habits to Google. A smartphone market obsessed with price can also mean less innovation and lower quality products if companies are driven by efficiency considerations, plus it becomes difficult for new competitors to enter the market.
Samsung may well pull off a comeback showing that its current difficulties were just a temporary hiccup, but in the tech industry massive companies can rise and fall in a very short period of time as Nokia and Blackberry have already found out.
- Aleksi Aaltonen is a management scholar and entrepreneur with 20 years experience in digital innovation. He holds a PhD from LSE and is an Assistant Professor at Warwick Business School. Aleksi co-founded smartphone app Moves, and serves as the Chairman of the Demos Helsinki think tank.
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