Thoughts on AR and Smartphones

Apple’s recent announcement at WWDC 2017 of ARKit has suddenly sparked a new interest in AR, and just a few days ago, Google responded with their ARCore API which does basically the same things. These APIs promise to bring sophisticated AR to all owners of compatible smartphone, dramatically enlarging the addressable market. This has excited pundits and developers alike, and it is now very likely that we will see AR breaking out of the early adopter market and into the early majority.

I would like to jot down my thoughts on this, regarding how innovation tends to happen, and also regarding how this affects the smartphone market as a whole.

The innovation trajectory

Innovation usually starts out as basic research or a new invention somewhere in a lab setting, with specialised and extremely expensive equipment. Then it becomes a specialised instrument that is somewhat cheaper, but still  very hard to use, catering only to the enthusiasts. Finally, it becomes cheap and easy enough to use for the majority of the market, leading to an explosion of usage.

If you look at the PC market for example, it started out when computers like the ENIAC were first invented. Then after revolutions in semiconductors, the computer became cheap enough for enthusiasts to own and tinker with, but still the people who used them were tinkerers. This was the era of the Apple II, Commodore and Amiga. Then as the IBM PC and clones came out, the price came down whilst performance improved dramatically and application software became available, making the PC both useful and affordable thus bringing it into the mainstream.

What we are seeing with ARKit very much mirrors this. We started out with work that was done in the labs, and we recently started to see implementations that require special headsets and powerful PCs connected to them. It was clear at this point that these devices would not go to the mainstream, and the developer community in general did not yet think that it was a market worth pursuing. With ARKit, we are likely to see an IBM PC moment where AR goes mainstream on devices that are affordable and where the developers are also excited to reach large audiences.

One interesting thing to observe is, although the innovation in the lab tends to follow a steady path, the introduction into the mainstream can feel very abrupt, caused by new products being introduced into the market. ARKit is one of these examples. Windows 95 is another. So is the iPhone of course. Sometimes the company introducing the product if far ahead in technology, but this is not necessarily the case. Looking at Windows 95, one could argue that you could be technically behind, but still make a huge and abrupt impact to the market. Judging by how quick Google was to introduce ARCore, it would be fair to say that Apple’s ARKit team was not also necessarily ahead of Google’s, but simply had the right marketing priorities in place.

Implication for smartphone sales

Until very recently, the general narrative was that innovation in smartphones had winded down, and that there was increasingly little to differentiate the new high-end flagships from the models from previous years, or those from mid-tier vendors. However if ARKit and ARCore become mainstream and are adopted by major developers, this changes the whole game. Apple’s ARKit reportedly only works with A9 chips and above, which means that any models prior to the iPhone 6s are not eligible. The iPhone 6 which was introduced in 2014 will not be able to run ARKit apps and neither will the iPad Air 2 (also introduced in 2014). The situation on the Android side is even more dire (as usual) with only the Pixel (introduced in late 2016) and the Samsung Galaxy S8 (introduced in 2017) being eligible to date. Therefore these two platforms may become a strong differentiator for the newest and greatest models, and drive customers who would have otherwise have been content with an old or midrange model to look upmarket.

This has quite a few implications.

  1. Since we know that the high-end smartphone market is generally dominated by Apple and Samsung, this trend will strongly favour these two companies.
  2. Regarding the iOS vs. Android balance, in the high-end (dependent on country) this often is tipped towards iOS. Therefore, we might see a rise of iOS market share.
  3. The interesting thing is that since ARCore currently only supports the Pixel and the Galaxy S8, and since sales of the Pixel are minuscule to date, in reality the vast bulk of ARCore capable smartphones will be Samsung models. As a result, depending on how Samsung plays its cards, it may be possible for Samsung to exert a huge amount of power over Google. Samsung might customise or add proprietary features and APIs to ARCore that would take advantage of the specific hardware on their devices (which might be Samsung silicon), and since the bulk of the market will be Samsung devices anyway, the developers might bite this time. Samsung has been flexing its muscles looking for a chance to break away from Google’s control for quite some time (Tizen, Samsung Pay, security features, etc.), so it would be interesting to see how they plan to take advantage of this situation.

According to Clayton Christensen’s theories on integration and modularity, markets where customers are still looking for innovation should generally favour integration due to the capabilities that this makes possible, and in the smartphone market, the integrated players are Apple and Samsung (Sony is also interesting in that it is integrated around the hardware that matters most – the imaging sensors). It will be interesting to see how this all plays out.

Will High-End Android be a Samsung Exclusive?

I have been very wary of Google’s efforts to build in the tools that Android requires to compete with Apple in the high-end smartphone market. My feeling has been that Google is no longer interested in the high-end smartphone market and is satisfied to let Apple have it. Instead, Google is focusing on the low-end market and on bringing low-cost smartphones to the emerging markets.

Recent announcements reinforce my thinking.

On Nov 13, 2014, Samsung and BlackBerry announced a partnership to build and market a tightly integrated, end-to-end secure solution aimed for enterprises. It is well known that Apple dominates corporate market share in smartphones and tablets, and security is one of the reasons why Android is struggling. The interesting thing is that Google seems very uninterested in developing a solution of their own for this quite lucrative market.

At the keynote of Samsung Developer Conference 2014, Samsung introduced Samsung Flow, which is basically their version of Apple’s Continuity features. The important thing to note is that Continuity is a feature that is only valuable for customers who can afford multiple devices. Again, why did Samsung and not Google develop this? Is it because Google is relatively uninterested in the customers who are wealthy enough?

Samsung recently announced its answer to Apple’s iBeacon feature, Proximity. This is a technology to enhance customer experience at stores, mall, stadiums, museums, etc. and also push you special offers and stuff. As stores embrace iBeacons, there was the possibility that some of the offers would end up being exclusive for iPhone users. Now it will be exclusive to iPhone and Samsung users. Why wasn’t Google interested?

If this continues, Samsung might create a rather formidable barrier-to-entry for the high-end Android market, blocking HTC, LG, Lenovo and others from competing.

Although I do suspect that the overall market for high-end Android devices might shrink, I do not doubt that Samsung will continue to dominate for the foreseeable future.

Who Is To Blame For Samsung’s Bad Fortune?

As the profits plunged on Samsung’s smartphone business, the web has been awash with reasons.

Ben Bajarin has shown very nicely that the largest problem that Samsung faces is the decline of the high-end business, which is also mentioned by a Samsung executive in the Guardian article.

The high-end of the business has been dominated by Samsung and Apple and still is. This means that there are two possibilities.

  1. Apple took away Samsung’s sales in the high-end. That is to say, users of high-end Android phones (who were mostly using Samsung devices) switched to the iPhone.
  2. The high-end market for Android smartphones saw a sudden shrinking. That is to say, mid-range smartphones were perceived as good enough and hence there was no need for customers to purchase high-end Galaxy devices anymore.

I suspect that both of these happened but I want to analyze them in isolation because it makes the situation easier to understand. Although these two look similar, they are actually very different. The first means that Apple was able to steal market share away from Samsung. The second means that vendors of mid-range smartphones (including Samsung of course) captured the customers who previously bought high-end phones. We will look at each separately.

Apple is stealing away the high-end

This is obviously happening. All reports point to Apple selling huge numbers of iPhones and it has been suggested that a lot of these are switchers who have abandoned Android phones.

The important thing is why. Of course the triggering event is the increased screen size of the iPhone 6. However, what is more important is why couldn’t Samsung match the iPhone 6 before Apple threw down the gauntlet. Why was Samsung left clinging to screen size as the only feature that could keep it competitive in the high-end.

Although design and/or Apple’s brand could well be a factor, it is also as likely that iOS and its app ecosystem could have been perceived to be superior than Android. If this was the case, then the blame would have to be put onto Google. Google failed to create an operating system and ecosystem that was competitive against iOS. The only reason that the high-end Android market existed at all was because Samsung had large screens while Apple did not.

If it was design or branding, then it would be harder to place the blame on either Samsung and Google simply because Apple is so good at these. Either way though, the result is that the high-end Android market cannot exist anymore.

The high-end Android market is shrinking

This is a completely different dynamic. If this were the case, then we should be seeing customers who previously owned the flagship Galaxy devices either downgrade to mid-range Android devices or to extend their replacement cycle. I have not yet seen a statistic that suggests that this is happening, but it is plausible.

This can only happen if Android smartphone hardware is starting to be considered as good enough, even by previous high-end purchasers. This also has to happen while at the same time, on the Apple side of the fence, Apple customers are not considering iOS hardware to be good enough. There must be something very different happening to Android customers and iOS customers.

The good enough of hardware is determined by software. If the software can take advantage of new hardware and create a true benefit for the customer, then old hardware will not be good enough. On the other hand, if the software does not have any compelling features that require new hardware, then old hardware will be good enough. No matter how much the hardware improves, whether customers will demand it depends on software.

In the case of iOS, the OS made full use of the 64-bit hardware to enable much faster processing of photos and movies. The OS made use of the TouchID sensor, which is also now being used by the Apple Pay service. Apple has given each piece of new hardware a significant reason for existing, and that is why customers want new devices.

On the Android side, that has not been the case. Google has not moved quickly to 64-bit, it has not worked hard on corporate level security, and it has not introduced software support for biometric sensor technology. Instead, Google has introduced a lot of software technologies that enable low-powered devices to smoothly run the latest operating system. Instead of adding new features that would take advantage of new high-end hardware, they focused on making sure that the mid-range and low-end hardware would be able to run the latest operating system and to take advantage of all of its features. In summary, Google actively designed their new operating system so that Samsung would have a hard time differentiating itself.

Although I’m not sure whether Google did this intentionally, it has made it very difficult for high-end Android smartphones to compete with mid-range ones. This is not only a challenge for Samsung, but it will also be a challenge for any OEM that plans to move upmarket. It will mean that companies like Huawei, Lenovo and Xiaomi will not be able to move up-market unless they gain significant control of the OS.

So what should we blame?

I think that Google was targeting the low-end from the start, but Andy Rubin was not. I genuinely think that Andy Rubin was much more focused on the high-end and he didn’t seriously consider making Android work better on low-end devices. I think he wanted to make Android as good as or even better than iOS. The fact that his reign coincided with when Samsung was strongest is no coincidence.

When Andy Rubin was removed and Sundar Pichai took over, it became rather clear that instead of fighting with iOS, Android would focus on the low-end. In fact, most products that Google creates (many of which were under the supervision of Sundar) aim at the very low-end where prices are normally zero. Google Docs is a prime example of this, as is Chrome OS. Google’s strategy is to commoditize all markets except for search and advertising, by providing a good enough product for free.

Samsung could have tried harder to take control of Android so that they could create software that took advantage of high-end software. In fact, they tried. Considering that Samsung was mainly a hardware company, I don’t think that they ever misunderstood that they needed good software; it was just that they didn’t have the resources or the culture to create great software. It’s hard to blame their strategic thinking for this.

Google could have tried harder to preserve the high-end. However, it’s priorities were clearly in the low-end. It’s hard to focus on both.

I would say that the only strategy that we could actually blame was Samsung’s decision to team up with Android. Samsung should have seen that Google would ultimately aim to commoditize their own OS and all hardware vendors using their platform. Samsung should not have helped Android to gain market share, and instead waited for a contender whose priorities aligned better with Samsung’s goals. Of course, that is what Nokia did.

Luxury versus Premium In Tech

Why aren’t iPhones being disrupted by low-end Androids?

Apple’s iPhones have retained their value (high selling price) and sales despite a large number of low-cost Android devices entering the market. The quality of these low-cost Android devices has also improved significantly, and as a result, many people have claimed that the performance difference between these and the iPhones no longer justify the premium prices. That is to say, low-cost Android phones are “good enough” in the terminology used in “The Innovators Dilemma” by Clayton Christensen.

If the low-cost Android phones are “good enough”, then Christensen’s theory suggests that the high-end iPhones could be disrupted. However, market performance of the iPhones suggest that this is not happening. New iPhones break sales records every year whilst the selling price has not come down appreciably. Interestingly, Samsung, which dominates high-end Android, has had a hard time selling its most recent flagship device this year compared to last year. If anything, what we are seeing is high-end Androids being disrupted by low-end ones, whereas the iPhone is somehow immune.

One big question is, why aren’t iPhones being disrupted by low-end Androids? Why isn’t Apple facing the same problems that Samsung is? Many people give many different explanations for this.

Differentiation alone is not the answer

A common theme is that Apple controls the whole experience while Samsung only controls the hardware. Hence Samsung has more difficulty differentiating itself from the cheap OEMs. While this is no doubt true, differentiation only matters if the unique features that you provide are useful. To illustrate this, imagine if iOS and Android were absolutely equal in utility. Then the differentiation that iOS provides would not provide a competitive advantage for Apple; it would only make them different. And being different alone will not increase your sales.

This becomes clearer if we go back to the mid 1990’s, when Apple was in dire straits. Even at that time, Apple had control of both software and hardware whereas DELL and Compaq did not. However, this did not help Apple at all. Because the classic Mac OS was no longer significantly better than the competition, differentiation was no longer positive; it was actually negative.

Although I do not dispute the importance of differentiation, it is only positive if you have a superior product. If you have an equal or worse product, then differentiation is actually toxic. Differentiation can be positive or it can be negative. Hence the key attribute that we should be looking at is not differentiation, but whether or not the product is significantly superior or not.

iPhones as a luxury

Another common explanation is that the Apple brand has now attained luxury status, and that this has made iPhones immune from feature and price comparisons. This means that iPhones can command high prices despite features being on parity with cheaper Android phones.

It also suggests that iPhones will be immune from low-end disruption as described in “The Innovator’s Dilemma”. Low-end disruption happens when technology improves the functionality of a product up to the point where it overshoots the needs of the majority of the public. Therefore, for low-end disruption to happen at all, the product must improve over time. Since luxury status is often not a function of technical progress, this makes luxury immune to “The Innovator’s Dilemma”.

I have huge issues with how the word “luxury” is used in these contexts. The way many people use “luxury” is to explain a how a high-priced product sells well despite the absence of any perceivable (at least to them) desirable functionality. They are not saying that the iPhone is luxury because it shares certain attributes with other luxury products; instead they are calling it a luxury because all other explanations have failed.

Regardless of whether the iPhone is truly a luxury or not, this is not how we should be using this word if we are serious about understanding the truth. Instead, we should strive to understand consumer behavior towards luxury products and see how the iPhone fits in.

Luxury vs. Premium

If you look up “luxury vs premium” on Google, you can see that this topic is quite often discussed.

James D. Roumeliotis sums up a long blog post with the following;

Luxury is not premium – and premium is not luxury. They are two dissimilar categories catering to different market segments.

A luxury brand is more about prestige and appearance – it’s about pedigree and social stratification. As objects of desire, they stand out as aspirational to all but a few souls. These crucial elements keep these products exclusive on purpose. Premium, on the other hand, stands for performance, value added, state-of-the-art, craftsmanship, and timeless design.

Mark Whiting conducted a market research study on luxury brands which is summarized in a blog post;

The criteria used to classify Luxury brands

Although putting a brand in the luxury or premium category is the result of a personal opinion, our Luxury Detectives agreed on seven criteria defining luxury brands.

  • Uniqueness: Irreplaceable objects, produced in small quantities, handcrafted. Can only be made in a specific place or country. Exclusive distribution: strategy of rarity, waiting lists, few stores. For one of our Luxury Detectives based in Los Angeles, Villebrequin perfectly captured the spirit of Southern France.
  • Timelessness: Products that will last that will never go out of fashion and will be passed on to the next generation.
    Excellence: They will be made by skilled artisans and the finest fabrics and fabrication will be used. Culture of connoisseurship. The best customer service will apply.
  • Iconic Communication: A very sophisticated and codified visual universe built on dreams, desires and fantasies .
    Sensual Aesthetic: Refined aesthetic that conveys sensuality, indulgence with a hint of extravaganza and it appeals to the 5 senses.
  • Brand Soul: Builds its identity around a creator, the history of the house, and has its roots in history.
  • Innovation: Brands that dare to push boundaries and surprise. They stay faithful to their roots, but modernize and adapt style to present time to express coolness

And finally, Seth Godin says the following;

Luxury goods are needlessly expensive. By needlessly, I mean that the price is not related to performance. The price is related to scarcity, brand and storytelling. Luxury goods are organized waste. They say, “I can afford to spend money without regard for intrinsic value.”

That doesn’t mean they are senseless expenditures. Sending a signal is valuable if that signal is important to you.

Premium goods, on the other hand, are expensive variants of commodity goods. Pay more, get more. Figure skates made from kangaroo hide, for example, are premium. The spectators don’t know what they’re made out of, but some skaters believe they get better performance. They’re happy to pay more because they believe they get more.

The iPhone attributes which are related to premium are;

  1. State-of-the-art performance: Despite having lower specs on paper, iPhones have had much smoother animations and scrolling than even the top Android devices. Benchmarks, particularly on web browsing performance have also consistently shown iPhones to be faster than Android.
  2. Craftsmanship and timeless designs: It has been widely recognized that the craftsmanship and design of iPhones are superior to Androids.

The iPhone attributes which are related to luxury are;

  1. Brand Soul: The history of the Apple brand and the association with innovation and the life of Steve Jobs is very strong and unique.
  2. Innovation: The history of the Apple brand has been around innovation. Many people perceive Apple to be the most innovative smartphone manufacturer.

On the other hand, some attributes that are important for luxury products, but are lacking on the iPhone;

  1. Uniqueness: Even in unsubsidized countries, iPhones have a least double digit sales share. This easily disqualifies iPhones from being unique in developed countries.
  2. Needlessly expensiveness: Although iPhones are more expensive then their Android counterparts, the price is not too different from Android flagships. You cannot say iPhones are needlessly expensive.
  3. Iconic communication: Commercials for iPhones always feature ordinary looking people doing ordinary things. They do not use iconic figures going to an extravagant location in a luxury car. Apple is not sending a luxury marketing message.

We can see that although Apple does have luxury brand appeal, their product, marketing and pricing strategies are very strongly non-luxury. Instead they are squarely aimed at the premium market.

It would be very wrong to classify iPhones as luxury.


Premium means being a high-quality product with superior performance and design/craftsmanship. Advances in technology will allow new market entrants to easily attain a premium position in the performance aspect. Also, since manufacturing of Apple products is outsourced to China, design and craftsmanship are not too difficult to copy either (as proven by Xiaomi). Hence being a mainly premium supplier means that you will feel the forces of low-end disruption, and you are in no way immune.

Premium suppliers have to make sure that their products are always state-of-the-art with the best designs and craftsmanship. In the tech world where innovation (driven by Moore’s law) is so fast that any technology risks being overridden by “The Innovator’s Dilemma” in a matter of years (witness the flat-panel TV story), this is extremely difficult. What happens is that you may be state-of-the-art, but your technical expertise overshoots customer needs and becomes irrelevant very rapidly.

It is not constructive and even misleading to categorize iPhone as luxury. As with Samsung, Apple is subject to the forces of low-end disruption and has to ensure that the iPhone is premium by making sure that it is significantly better than cheaper Androids in both performance and design/craftsmanship.

Apple has been better at making their products premium. Samsung has failed. It’s that simple.

Samsung Mobile’s End Game

With Samsung’s disappointing earnings, the Internet is awash with negative thoughts on their future. At the same time, there are some people who say that Samsung will continue to be successful in the high-end, even as the Chinese and Indians eat their market share in the low-end.

I have also chimed in with my idea on how to view Samsung’s situation.

Jan Dawson has done an excellent post which compares Samsung’s mobile business to other consumer electronics markets. What this clearly illustrates is that without significant differentiation, consumer electronics businesses ultimately end up being low-margin (<10%).

Given the strategic importance of smartphones as a potential hub for your digital life, competition in this market will likely be more fierce than other consumer electronic devices. Hence I predict profits will probably end up being much much lower than 10%.

At this point, we do not have any knowledge of how Samsung will counter this predicament. It will nonetheless be quite a steep uphill battle.

Samsung Earnings 2Q14

Samsung’s earnings are in, and they were not very good (Bloomberg: note the original title in the URL slug. The title and tone of this article were revised from the pessimism in the original publication to a much more optimistic tone, which shows how worthless financial reporting has become).

Given these poor results, the blogosphere is awash with analysts telling us that they saw this coming. This is hardly something to brag about because it was so plainly obvious.

It’s also very easy to blame this on what Samsung does not possess; that is software and services. This is equally trivial to do. Giving a sound explanation of why Samsung is now in trouble, does not suggest that you have a clue about what is happening. Anybody can do that. It’s like saying the reason the New York Yankees are pretty weak right now is because their batters aren’t hitting the ball well.

To suggest that you really understand what is going on, you need to provide a coherent explanation of why Samsung was very strong a few years ago, and why it is now starting to fail. This explanation must consider that Samsung itself is mostly doing exactly the same things that there were before. Hence this explanation should not focus on factors that are internal to Samsung, but are external.

Hence the following explanations fail to suggest that the analyst who made them has a clue;

  1. Marketing as a reason for Samsung’s success: Strong marketing is no doubt a reason for Samsung’s ascent to dominance. However Samsung has not relaxed its marketing focus. Unless we have a good explanation of why Samsung’s marketing is no longer effective (external factors), it doesn’t explain the situation.
  2. Software & Services: Samsung is weak in software and services, but it has always been like this. In fact, Samsung knows this and has invested heavily into making itself better in software & services. The lack of strength in software & services does not explain Samsung’s problems because Samsung rose to dominance without them in the first place. Instead, we need an explanation of why software & services matter more than they used to or why Samsung’s efforts have become meaningless.
  3. Cheap Chinese vendors: There have always been cheap Chinese vendors. Hence their presence itself does not explain anything. What has changed is that the Chinese vendors are now capable of creating products that rival Samsung’s in both quality and price at the lower-end of the market. What we need to understand is why the Chinese can now do this whereas they couldn’t do so before.

Clayton Christensen’s theories explain all of these. That’s why I lean on them.

In this context, what is interesting in Samsung’s report is actually the following;

Profit at Samsung’s chip unit, which supplies its own devices and also rivals such as Apple, nearly doubled to 2.1 trillion won on sales of 9.5 trillion won, according to the Bloomberg News analyst survey.

According the “the law of conservation of attractive profits”, as smartphone production becomes more modular allowing new entrants into the market, the attractive profits will shift to somewhere else in the value chain. Although not certain at this point, it is likely that component suppliers will be one of the stages where the attractive profits will accumulate. If so, Samsung’s chip unit may profit (although there is intense competition here as well).

It will be interesting to see how the component industry (Samsung’s chip business, MediaTek, etc.) does in the next few years.

Android OEMs and The Law Of Conservation Of Attractive Profits

A couple of days ago, I wrote a comment on an article on the Tech.pinions website.

The article (by Jan Dawson) was discussing how Samsung came to dominate the Android OEM market, but how it is now struggling with competition on the low-end and is also having difficulty in differentiating itself.

The comment that I wrote;

It’s very interesting that you call Samsung “exceptional”. This is because, at least in my interpretation, the trajectory of Samsung’s accent and decline is precisely what Clayton Christensen’s theories would predict.

I’ve been thinking more about what I wrote, and I think that this is such an important issue that I should put it up as a blog post. Here, I will copy my original comment and add a bit more to it.

The rise and fall of Samsung as a smartphone OEM

Jan Dawson lists the keys to Samsung’s success as the following;

  1. “On the marketing side, Samsung has vastly outspent all other Android smartphone manufacturers and become the default option for people in mature markets looking to buy a mid to high end smartphone.”
  2. “Its vertical integration has allowed it to compete very efficiently and effectively with screen and other component technology.”

Jan Dawson also outlines Samsung’s current problems;

  • Overall smartphone growth is slowing, putting pressure on Samsung’s other device categories to provide stronger growth
  • Samsung’s dominant position in Android is being assailed at the low end and in the mid market by a variety of competitors, many of them from China
  • Google is reining in Android and looking to reassert its own position and services in the smartphone market, putting pressure on Samsung and others to tone down their customizations. New flavors of Android for wearables, the car and TVs will provide even less room for customization
  • People are at any rate apparently tiring of Samsung’s customizations of Android and starting to look more seriously at smartphones which provide a stock Android experience or at least something more like it
  • Samsung’s marketing spend is starting to experience the law of diminishing returns, where each dollar of spending no longer conveys the advantage it once did. It has effectively saturated the market and can no longer derive the advantages it once did from its far superior ad spend.

I completely agree with Jan Dawson’s assessment of why Samsung was successful, and Samsung’s current predicament.

The problem is, how did Samsung transition so quickly from “huge success” to “quite problematic”.

Jan Dawson doesn’t go into explaining the transition in depth. That is what my comment tries to do by applying Christensen’s theories.

How the environment changed from favorable to hostile for Samsung

Christensen’s theories are build on the premise that continued innovation (sustaining innovation) will ultimately open-up the possibility of low-end disruption, and that it can be very difficult for some companies in some markets to counter-attack the disruptor.

Hence to understand what happened to Samsung, we should analyze how technical advances changed the competitive landscape, and allowed low-end disruptors to enter the market. That is what I tried to do in the comment;

  1. When the product is not good enough, the attractive profits flow to the integrator. This was the situation at the beginning. Samsung’s ability to integrate the hardware stack and to also put a UI (that was attractive in the sense that it more closely imitated iPhone) on top was the reason they had the best Android product.
  2. As technology improved, customized integration became less necessary. This caused modularity in the hardware stack. SoC vendors like MediaTek are prime examples of the hardware becoming more modular. Also, as Android got its act together and became less ugly, Samsung’s ability to put their UI on top became less important and even downright annoying. Hence the software vendor (Google) increased its power. In fact, integration within the software stack increased. In total, the Android value chain became modularized and Samsung’s strength as an integrator waned.
  3. Samsung tried to buck this trend by creating products that we much better than those assembled from modular parts (which is the same as Apple’s strategy). Hence they designed their own CPU and added features to their software. Unfortunately, both were unsuccessful. Neither created value that appealed to their customers.

The first item explains why Samsung rose to dominance. Samsung is very vertically integrated in hardware. It has top-level semiconductor technology, display technology, wireless technology, etc. Importantly, because Apple had to rely on Samsung for key components, Samsung learned of Apple’s iPhone plans many months before their competitors. None of their competitors had a similar advantage. This allowed Samsung to rapidly produce the best Android smartphone hardware

One thing I want to add that is rarely mentioned is that Samsung’s TouchWiz UI was well received during these early years. Before Android 4.0, the Android UI was pretty bad (Android 4.0 was a huge overhaul of the UI). Samsung’s TouchWiz imitated the iPhone UI much more closely than stock Android, and this was no doubt one of the reasons why Samsung was so successful. Hence in this context, Samsung’s ability to create a good UI skin was also a key factor in its success. As far as I can tell, yearning for a stock Andorid experience is post Android 4.0. Until then, stock Android was not “good enough”.

Going on to the second item, we start to see how technical progress changed the environment. Christensen has described how markets eventually favor modularity over integration after the products become “good enough”. As component technologies improve, it becomes less important to fine-tune the components to obtain the necessary performance. Customers are now satisfied by products that are simply assembled from “off-the-shelf” components (from SoC vendors like MediaTek for example). In many cases, even the assembly is outsourced to China. Because fine-tuning is less important, this allows low-end entrants without extensive hardware expertise to enter the market. Because the low-end entrants do not need much hardware expertise, their business models are often very different from Samsung’s. For example, Lenovo is a low-cost assembler of hardware, an operation that doesn’t require much R&D spending. Cherry Mobile, a fast growing smartphone brand in the Philippines is actually a carrier, not a hardware maker. Xiaomi, a fast growing fabless smartphone maker in China that sells mid-range phones with razor-thin margins, earns profit not through hardware sales but through service sales and reduced costs on marketing.

It is also important to note that many of the new entrants mainly have strengths in their local markets. Cherry Mobile (Philippines), Xiaomi (China), Lenovo (China), Micromax (India), Wiko (France), BQ (Spain) are some of the examples. Being local companies, they have some marketing advantages over Samsung and can better tailor their products to local preferences.

To reiterate, technical progress has allowed low-end entrants with a very different low-cost business model, to enter the smartphone market. Samsung’s integration and expertise in hardware is no longer a competitive advantage. In fact, it could even become a liability because it could make it difficult for Samsung to directly address these low-end entrants.

Technical progress has changed the initially favorable environment for Samsung into a hostile one.

Google’s increased power over OEMs

This is explained by “the law of conservation of attractive profits”, which I have described in a separate post.

It also explains why Google now has the power to reign-in Android. The negotiation power of the integrators has declined and has shifted to the OS and service vendor. Google did not have this power until the hardware stack became modular.

The law of conservation of attractive profits allows Google to have stronger influence over Samsung. However, as I described in the previous post, I tend to think that this is temporary and that the attractive profits will transition back to the OEMs who have alternative business models.

Looking into the future

One of the more interesting features of the recently announced Android “L” is the new ART runtime. This looks like it will significantly improve Android performance on low-end hardware. This will accelerate the shift in power away from Samsung and towards the low-end entrants. Combine this with the Android One reference platform, and we will likely see almost all value in low-end Android hardware sucked out. Samsung will have a very hard time competing in this market, and since their competitors are now asymmetric, it’s very hard to see how they can launch a strong counter attack. However, since most of the entrants are local, the spread of low-end entrants might be a gradual process.

On the high end, especially in markets where the cost of the smartphone is subsidized by the carrier, Samsung will continue to be the dominant Android OEM. Other Android OEMs simply cannot match Samsung in marketing and product features. Whether that is enough given the strength of iPhone is yet to be seen.

Importantly, Google’s strategy is providing absolutely zero incentive and zero profits for OEMs to innovate in hardware. With this market structure, it’s difficult to see how the low-end entrants could evolve to the point where they can overtake Samsung in the high-end, even Xiaomi or Lenovo. I don’t see this ever happening in the foreseeable future.

Actually, this could make Apple more dominant in the high-end, and Google probably won’t even care.

Design And The Lack Of Intent

I read a great post today by John Moran about Intent within Apple’s designs.

Overarching intent is easy. The hard part is driving that conscious decision-making throughout every little choice in the creative process. Good designers have a clear sense of the overall purpose of their creation; great designers can say, “This is why we made that decision” about a thousand details.

When Jony Ive, Apple’s newly titled SVP of Design, criticizes a material selection or feature decision, “he’s known to use ‘arbitrary’ as a term of abuse.”

John goes to outline the “Three Design Evasions”; what most companies do instead of employing Intent.

  1. Preserving the past.
  2. Copy first without making the Intent your own.
  3. Delegating design decisions to your customers.

The question is, what is holding good design back? Do we lack good designers or are corporations ruining them?

I don’t know the answer. I’m quite sure that a lot of designers are aware of Intent and consciously try hard. The problem is, I tend to find most of the celebrated designers lacking it the most. Instead, I often find good Intent and good design in kitchen utensils and other everyday tools that are not “appearance” driven.

For example, architecture. Widely acclaimed architecture is more often praised based on its appearance. Of course critics will note Intent and usability benefits. However, as an actual user of these buildings, I have never found myself appreciating the designers’ decisions. In fact, we more often tend to loath the strangely designed rooftops that invariable leak rain, and the unconventional hallway orientations that make you feel lost.

On the other hand, I marvel at the curves of my kitchen cutting knife or scissors which are truly designed to fit your hand. I wonder at the small details on the metal knife embedded in the box of my food wrap which allow me to efficiently cut the film with the minimum of strength and without it tearing in unwanted places.

Even Jony Ive’s designs used to have annoying flaws. I hated the trackpad buttons on the Powerbook G3s which looked nice, but had a very badly designed clicking mechanism. The flimsy hinge on the Titanium Powerbook easily fractured and came off. And it’s really hard to justify the design of the “toilet-seat” iBooks. There was very little Intent in those designs.

In my opinion, it was only after the aluminum Powerbooks which had very minimal ornamentation that Jony’s designs started to blend form and function.

Designing with Intent is probably really really hard. Even for Apple and Jony Ive.

Thoughts on Premium

A lot of people use the work “Premium” to explain Apples iPhone strategy, and/or their strategy in general. Apple’s products tend to be priced at the high-end of the market. On the other hand, Apple tends not to sell products priced at the lowest-end of the market. This tendency is strongest for the iPhone lineup, which constitutes only of phones in the high-end; Apple does not introduce new models targeted at the lower-end, although they do sell previous-year’s models at lower prices.

Some people have suggested that Apple has a broader product range for their iPods and their Macs, and hence they are not idealistically opposed to selling products at a range of price points, going from maybe the mid-range to the high-range. My opinion is that this is not the case. My understanding is that Apple produces the absolute best product they can for a specific customer, and only provides some minor configuration options (like RAM, HDD).

Take the iMac and the PowerMac for example. It is tempting to say that the PowerMac is the high-end model whereas the iMac is the mid-range model. However, this is not the case. For the vast majority of people who buy iMacs, the PowerMac is not only an overkill. It is actually less suited for the required jobs-to-be-done. The PowerMac is designed for creative professionals who require the very best in computing power, and who will also add extra hardware to the core PowerMac. The iMac is for normal people who do not need so much power, but instead value convenience of setup and ease-of-use. The iMac and the PowerMac are not high-end and mid-range models; they are two different products targeted towards two different markets with very different needs. Hence this is not an example of Apple selling a premium product.

The same goes for the MacBook product line up. The current retina display MacBook Pro is great for creative professionals but sacrifices portability. For people who want to carry their laptops with them, the MacBook Pro is actually a worse fit than a MacBook Air. Hence the MacBook Air is not a lower-end model of the MacBook Pro, but a different product for a different segment of the market.

The exact same goes for the iPod lineup. There was never two products in the iPod line-up that targeted the same use-case with one being the premium product and the other being an entry level one. The only “premium”-ness of a product in the lineup were products with maxed-out storage.

Now let’s apply this to the iPhone. Smartphones tend to have the same jobs-to-be-done for almost every person (except those who use smartphones as a feature phone replacement). Smartphones are used for communication, taking photos, playing some games, viewing maps and sometimes watching movies or listening to music. There is no segment like the creative professionals using PCs, who use their smartphones for very different purposes that require much higher processing power and/or expandability. On the other hand, there are no smartphone users who would be content with a device without a display, like the iPod shuffle. It’s even very difficult to make the argument that the variation between the MacBook Pro and MacBook Air is necessary for smartphones, because everybody highly values portability and because retina displays are necessity even for mid-range phones.

Regarding the iPhone, the only segmentation that would make any sense is a small variation in screen size. This would be similar to the 11-inch and 13-inch MacBook Airs. The current 11-inch an 13-inch model only have $100 price difference and choosing either is more about personal preference than premium/mid-range targeting.

Looking at what Apple actually sells and the markets that it’s targeting, selling a mid-range iPhone and a premium iPhone in parallel appears to be very uncharacteristic of Apple, and I doubt that it will ever happen. I sense that Apple doesn’t ever segment markets by “low-end”, “mid-range” or “premium”. More likely, they simply segment by “junk” and “best”. Any product variation in their lineup is a result of simply targeting different jobs-to-be-done.

If you believe that this is how Apple thinks, then the evolution of the iPhone lineup is pretty obvious. They may introduce a slightly larger (or maybe slightly smaller) iPhone in the same way that they have 11-inch and 13-inch MacBook Air models. That is, specs other than the screen size will remain mostly the same. The price difference would be small and choosing either would be totally a matter of personal preference.

For the lower-end, selling previous-year’s models at discounted prices seems to be a working in developing countries.

In fact, it’s a shame that there are very few companies that take the same approach as Apple. That is, market segmentation by “junk” and “best”.

Why Distribution Channels Matter

Distribution channels matter a lot in selling most kind of products.

This is why Google Nexus products fail to sell well, Samsung is so strong in Android smartphones, and why the Moto G is doomed to failure.

Micheal Fisher wrote a great article a while ago about this.

“Should I Trust My Phone Salesman?”

in the United States, manufacturer brands succeed or fail on the backs of the salespeople. And a salesperson who knows nothing about a platform isn’t going to recommend it.

In the US, at least, a phone lives or dies by the retail staff in the carrier stores. Nothing else matters. Not price. Not features. Not apps. If the retail staff doesn’t like you… you die.

I think people are worried that the iPhone is getting ‘sold against’ in stores – that we’re talking people out of the iPhone. And that is true.