Samsung’s Race To The Bottom

It’s happened before and it’s happened again – a popular commodity appears and is remade in so many permutations and from so many manufacturers that the differentiation ultimately focuses on price. When this happens, the small players sneak in with cheap hardware, the big players stumble and try to buoy sales with higher-end models (an example of this is the Dell Adamo as the netbook market tanked) and everyone falls down in a heap. See laptops, feature phones, and the aforementioned netbooks for further examples.

Now we’re in a race to the bottom for smartphones. High flyers like LG and HTC are already flat. Now the next big player to stumble under commodity hardware is Samsung. And it won’t be pretty.

I am a huge fan of the Galaxy series, but I haven’t made the switch to the S5 for one reason: the software. Android has been a sub-par experience for me (and I’m probably alone in that sentiment, considering the flaming I’m about to get), but the rise of Android malware and a messy app store have made it uninteresting to me. I’ll use it, but I don’t enjoy it.

That’s what’s about to strangle Samsung. Samsung has made a pact with Google and now it can’t back out. The perception of Android as an open, welcoming platform — at least in its official Google permutation — has been exploded by countless examples of bad behavior by the giant and, like Dell and HP, Samsung is stuck with a software partner that doesn’t particularly need them to maintain success.

Samsung has plenty of solid competitors, from $20 Android burners to $300 Cyanogenmod-based nerd phones to entry-level offerings from Huawei and Lenovo. In China, Samsung’s lunch is being eaten by the upstart challenger Xiaomi, whose slick yet affordable $130 RedMi handset is taking market and mindshare from Samsung’s cheap plastic. Research by Kantar WorldPanel ComTech at the end of May noted that Xiaomi outsold Samsung in China for the second time in April, with almost a quarter of its buyers being Samsung switchers.

In other words, Samsung has to compete with everyone. Apple, with its limited line and low penetration (but stratospheric profits) only has to compete with itself.

Already this sad state of affairs is expressing itself in Samsung’s revenue numbers. Sales are down 9-11 percent and revenue fell by 24 percent. And no one is happy about this. The S5 was supposed to be the crown on the revenue stream, and now it is the base. For a laugh, note this Bloomberg URL vs. the headline to see which side of the finance industry’s Samsung bread is buttered. Everyone wants Samsung to win, but it can’t.

Tech analyst Ben Thompson has some great things to say about this. First, he notes that “the majority of buyers will prioritize price.” Therefore, when faced with two acceptable alternatives, a Moto G and a Samsung phone, the choice will come down to price. Brand loyalty is hard when there is little to differentiate the mass of glass slabs available to all and sundry.

Then he writes:

Ultimately, though, Samsung’s fundamental problem is that they have no software-based differentiation, which means in the long run all they can do is compete on price. Perhaps they should ask HP or Dell how that goes.In fact, it turns out that smartphones really are just like PCs: it’s the hardware maker with its own operating system that is dominating profits, while everyone else eats themselves alive to the benefit of their software master.

That, then, is the bottom line. In a market saturated with essentially undifferentiated players (and again you can argue this point and you will lose that argument), the main differentiator is price. And that’s never the game a smart hardware maker wants to play but, in the end, it is a game they will be forced to play in the coming year. And it won’t be pretty.