Samsung needs more than skin-deep changes

Last updated: November 6, 2013 9:28 pm

Samsung needs more than skin-deep changes

By Richard Waters

It isn’t easy for any company to change its DNA – particularly when the old way of doing things has worked just fine through past market dislocations. So on Tuesday it was no surprise to see Samsung Electronics struggling to convince sceptical investors that it was adapting its methods to a maturing smartphone market. A promise to raise its dividend yield to a skimpy 1 per cent – even Apple manages to pay more than double that – proved that the future will look much like the past. Samsung is going to keep ploughing cash into its technology across the waterfront, from the latest memory chips to flexible LCD screens, as it strives to come up with the latest and greatest hardware.This approach worked well when Sony ruled the consumer electronics world, and has proved very adaptable to the Age of Apple – thanks to a lending hand from Google’s Android mobile software. It has been based partly on control of key components, which has enabled Samsung to hold down costs and move faster than rivals in bringing out new gadgets.

More important, though, has been Samsung’s massive investment in its brand – outgunning Apple in the US – and its overwhelming scale. In the handset business, where its hard to generate meaningful profits out of small-volume products with short product cycles, Samsung has a powerful advantage.

This explains one of the paradoxes of Google’s Android ecosystem: why a common operating system that was designed to commoditise hardware, support a range of manufacturers and drive prices down has given rise instead to a single, dominant player.

And, in hardware at least, it looks like a lasting advantage. As a highly innovative fast follower, Samsung is pushing the boundaries where it can, to bring incremental improvements to maturing categories, while racing to help define the next big things. The Galaxy Gear smartwatch may end up a flop, but it serves notice that Samsung is ready to leap in should Apple, or some other company, hit on a popular formula for wearable technology.

Samsung’s ambition to lead in a new generation of devices with flexible screens sends a similar message. Whatever you’re reading this on in five years, there’s still a good chance it’ll have the Samsung name stamped on it.

The bigger problem, however, is how to use the enviable reach of its mobile hardware to sustain margins. Profit pools in technology don’t last forever, and the smartphone waters in which Apple and Samsung have been splashing around is more like a lake. They have a lot to lose.

Based on the reach of its mobile hardware, Samsung has three choices. One is simply to squeeze money out of Google in return for distributing its services and software. Although that is not what Google had in mind when it came up with Android, it would at least present a strong front against Apple. But, in the fast-changing tech world, the perfect alignment of mutual self-interest seldom lasts long.

A second option is to replace or supplement Google with a new constellation of applications and services – either developed in-house, acquired, or supplied by a range of new partners. Samsung has already started down this road, for instance with ChatOn, a mobile messaging service that it recently said had reached 100m users.

This leads inevitably to the third option: to take full control of the software platform. Thanks to Google, which makes Android available through an open-source arrangement, Samsung would not be starting from scratch. Like Amazon, it could take Android and adapt it to its own purposes, drawing developers into its orbit and increasing its differentiation.

Samsung has certainly been developing the capabilities, claiming on Tuesday that more than half its 80,000 R&D staff are already focused on software.

Yet numbers alone don’t tell the story in software, where the next breakout ideas often come from a handful of developers in a garage.

At the height of its power more than a decade ago, another handset maker, Nokia, also claimed that more than half of its R&D staff worked in software. With an eye on fending off the inevitable shrinking margins on hardware, then-chairman Jorma Ollila declared: “This is not going to be an industry where [mobile companies] lose value to some other players – that is not going to happen.”

That does not mean Samsung is doomed to the same fate as Nokia. But to become a software and internet company will take changes that go more than skin deep.