Tuesday, December 9, 2014

Is Samsung the next Sony or next Apple?

Tonight I ended another quarter teaching MBA again at my alma mater, the second time teaching IT innovation strategy this year. There isn’t a great fit of the topic to my current employer, so it’s nice to be able to moonlight (with permission) to revisit the course I created at UCI more than 13 years ago.

The students did a number of final projects, and since I’ve been too swamped to blog here (while rarely blogging at my academic blog) — I thought I’d share a few observations here.

One topic that hit me near the end of the last class is that Apple sort of looks like the next Sony. Sony was the great consumer electronics innovator of the 1960s through the 1980s (Trinitron, Walkman) that failed to keep up its innovation as the rate of technological change and is now losing money badly in a commodity business. So with Steve Jobs gone, I have been wondering if Apple will also slow its rate of innovation and become an undifferentiated premium producer in a commodity business.

But my students suggest that however quickly Apple becomes a commodity producer, Samsung is getting their first. 2014 has brought various headlines about how Samsung’s smartphone market leadership is producing losses not cash cows.

By offering slightly nicer Android phones, Samsung is competing within a standard rather than between standards. So while Americans will pay a premium for minor improvements, developing country Android buyers are quite happy to buy Xiaomi, ZTE, Huawei, or some other generic brand.

Samsung does compete in some capital-intensive markets with high entry barriers, but (as with the DRAM of the 1980s) such businesses are prone to commodity price wars. Samsung’s attempt to create unique technology (notably Tizen) has failed: they are a long way from being the next Apple. It has a high rate of R&D spending but not a high rate of R&D outcomes.

Quoting from Geoff Moore’s book (a required text), the students recommend that Samsung compete on integration abilities. I think it’s a plausible idea (if they can ever learn to do UI and software) — they have an unprecedented scope of products, and so if anyone (beyond Apple) has the opportunity to do this, they do.

One thing that is clear: Apple is not the next Sony — yet. And this gives me a chance to quote from a newspaper clipping that I set aside a month ago. Here is an excerpt of an interview with CEO Tim Cook:

MR. [Gerard] BAKER: I want to ask about some of the broader strategic questions for Apple. This phenomenally successful iPhone, which continues to churn out extraordinary profits. You’ve got a very high margin, relatively low volume in terms of total share of the smartphone market.

Now you’re about 15%, 16% globally of the smartphone market. That model has been compared to the Mac versus PC model of old. You have these beautiful devices, which you were first with, which people adopted very, very quickly, but which were a smaller and smaller share of the market.

In the end, the Windows model blew away the Mac, in terms of market share. Is that a risk here?

MR. COOK: I don’t think all market share is created equal. Our objective has never been to make the most. We’ve always been about making the best.

The analogy to the Mac isn’t a good one. It’s clear when you look back what was happening in terms of the Mac platform was there weren’t enough apps on the Mac platform. Customers began to leave, because there weren’t enough apps. Look at iPhone and iPad. I get more customer notes than any CEO alive, I’m sure. I’ve gotten zero saying, “You don’t have enough apps on your platform.”
So Cook makes two crucial points. First, for decades its identity and positioning have been about being better, not cheaper. Secondly, there is no evidence (even with Android’s superior share) that Apple has any problems with developer loyalty (at least in developed countries).

But the most important point is the one that he hinted at but didn’t finish: “I don’t think all market share is created equal.” Samsung’s smartphone profits are dropping while Apple’s rise. Every year, I have to remind my students that unprofitable growth destroys value for firms — if necessary, reciting the old adage “losing money on every unit, but making it up on volume.”

So while Sony is losing to commoditization, and Samsung is fighting it, Apple (thus far) is keeping at bay. For now, Samsung looks more like it's trailing Sony 10-15 years behind than it is catching up to Apple.

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