27 Oct 2014 Samsung and the dangers of the tech hardware business
So recently the feted poster girl for consumer tech hardware, this month Samsung posted a profit warning triggered primarily by a decline in sales of its flagship Galaxy smartphones. Given that only last year its dominance in the smartphone market was such that wild editorials speculated that it was in a position to wrest control of the Android operating system from Google, this is a somewhat precipitous decline. Forecasts of doom were swift. Quoted in the Guardian, a mobile consultant commented that it looked like the “beginnings of the vicious cycle which ended the dominance of Ericsson, HTC, Motorola, BlackBerry and Nokia.”
Strong words, but given the history of the technology hardware market this is all in no way surprising. Though whilst Nokia and Blackberry are the obvious comparison for Samsung’s apparent woes, their problems were quite different. Those two companies, fallen titans of the mobile phone world, foundered because they failed to anticipate and keep up with consumer expectations. Apple’s iPhone was a revolution in how the user experience needs of phones were perceived. By the time Nokia and Blackberry had pivoted to match the new consumer expectations, it was too late and they were too far behind to catch up.
Samsung’s mobile trouble has more to do with operating systems. But rather than Samsung being left behind, the problem is that no one is being left behind. The reasons for Google’s move to create an open source mobile operating system have been discussed and pontificated on at length, and here’s not the time or the place to go into them. The result of their success, though, is it makes it incredibly difficult for any handset makers using Android to maintain a market lead for any significant length of time.
Mobile phones are becoming more and more similar
When you’re selling a mobile phone, you can differentiate yourself from competitors on hardware, software, or price. Differentiating in hardware can involve bigger screens, faster processors, better cameras, or new, innovative features such as an NFC payment mechanisms or a 3d screen, whereas differentiating in software is a matter of the operating system on the phone, and the third party software available. And as third party software is written for specific operating systems, in the end any software differentiation comes down solely to the operating system.
Developing a good operating system is an incredibly, spectacularly difficult thing to do. Most operating systems and user interfaces are at best unwieldy and unintuitive. Apple’s genius has always primarily been in operating systems, focusing heavily on design and user experience. Testing and retesting relentlessly, focusing on the tiniest details, and just putting a lot of time and thought into it, in order to make sure things work so well that anyone can use their products. Their phones are pretty good, but it’s their mobile operating system, iOS, that is the cornerstone of their success.
With Google pouring resources in Android and then releasing it open source, all this trouble and expense and risk could be bypassed by companies wanting to get into the mobile handset business. Whatever the specific flaws or advantages of Android, it’s good enough and it’s free. Happy days. But whilst this is a wonderful boon for a mobile handset maker trying to make their way in the big bad world, it’s also a terrible risk. Because everyone can have Android. Having Android doesn’t make you special, it just makes you another phone. Which means the only way to differentiate yourself is on either hardware or price.
The commoditisation of hardware, and a cautionary televised tale
One of the most salient features of tech hardware as an industry is its tendency towards extreme and rapid commoditisation. Prices for new technology start high then fall massively, and in some cases continue to fall so much that the marginal cost of something approaches zero. Take hard disk space. Costing $950 for a gigabyte 20 years ago, it’s now $0.03. Dropbox give 2 gigabytes of cloud storage away to people for free.
The travails of the television industry are a case in point. Sony was once a giant, a colossus that bestrode the electronics industry, its name synonymous with quality and corporate success, and televisions were central to this. Come 2014, its electronics division bleeds red ink and is kept afloat by Playstations, with the TV unit having made a loss every year for a decade.
For decades, televisions kept improving in ways which matched consumer needs, and market leaders maintain their market and margins by producing better products for the same price. Bigger screens, sharper screens, flatter, thinner screens. However this eventually brings increasingly diminishing returns. Is Ultra HD worth a big price premium over standard HD, for most people? Are curved screens? 3d? Not really. Eventually a product category reaches a stage where a basic offering is ‘good enough’, new features have niche appeal or are gimmicks, and market share passes from companies that make the best products to who make good enough products for the cheapest price.
At the same time manufacturing know-how and expertise that was once the preserve of a few companies becomes dispersed widely, to competitors in lower wage countries without expensive legacy concerns. Anyone can make cheap televisions or hard drives now, and as a result prices are low and margins wafer thin.
Coming to a mobile handset maker near you
Mobile phones are expensive, as televisions used to be. The pricing model in the UK, where the price is amortised over the course of a two year contract, serves to disguise this, but a new handset generally retails outside of a contract at over £300. Up until now there have been enough improvements in the hardware to make upgrading every two years was worth the money for enough people. That won’t last forever. In fact, it probably won’t last very long at all. The rate of new features and hardware improvements has slowed with each passing year. Unable to differentiate on software due to Android, and with hardware increasingly good enough, the resulting race to the bottom on price will be good for consumers and bad for manufacturers one and all; with the exception of Apple, holding their trump card alone in the corner.