Android and the Innovator’s Dilemma

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We have two very different things happening in the smartphone world. We have Apple, who is growing smartphone share in many regions where people said iPhone peaked, raising ASPs, and capturing new customers switching from Android. Then we have Samsung, who has quite a different circumstance. Samsung’s mobile phone unit is suffering from nearly every symptom found in the “You Are Being Disrupted” handbook. Not shockingly, they missed estimates again. A key point here:

Increased marketing spending, including a $120 rebate program, hasn’t sparked sales of the premium devices that generate fatter profit margins. Samsung is investing in computer chip plants as it tries to revive Galaxy smartphone demand through a new mobile payment service and by releasing larger devices at least a month before the new iPhones to recapture market share from Apple Inc.

The article also goes on to say their smartphones in the $150 range sold well but their premium smartphone sales are falling off a cliff. Their blended handset ASP from 105m total units shipped and 84 million of that smartphones was $180. Samsung is suffering from “The Innovator’s Dilemma“. There is absolutely nothing they can do to fix the downturn in their premium handsets. No amount of innovation will save them because the “good enough” mindset has settled into Android land.

If you are not familiar with the Innovator’s Dilemma, it is that, as a market matures, the early innovators get disrupted by competitors who come into their space with lower priced products, similar specs (the specs that matter), and eat into the market share of the early innovator in the category. Once the market embraces good enough products, the innovator can no longer push premium innovations as their value is diminished once a good enough mentality sets in. Android devices in the $200-$400 range are good enough for the masses leaving Samsung’s $600 devices and above stranded on an island.

One of the most interesting observations about all of this is the innovator’s Dilemma was supposed to impact Apple. This was a fundamental tenet of most bear cases. When the market for smartphones became filled with good enough devices at very low prices, why would anyone buy an iPhone? Yet this is impacting Samsung exactly according to the guidebook — but not Apple. The fundamental lesson to learn here is the innovator’s dilemma, in this case, only applies to Android land because all the hardware OEMs run the same operating system. As I’m fond of saying, when you ship the same operating system as your competition you are only as good as their lowest price. This is the curse of the modular business model. This is also why Samsung had hopes for Tizen. They actually knew this was coming. I know this because I discussed it with them in 2013 and was convinced they understood this was their fate if they continued to sell out to Android. Unfortunately, Android was their only option given its momentum. I’ll make a prediction. Samsung will be out of the smartphone business within five years.

Android’s new premium price point is between $300-$400 and the new mainstream Android smartphone price point is under $300. No other Android OEM, Samsung included, will sell in volume anything above those prices. At those prices, cutting edge innovation will be void, meaning the gap between iPhones and Android will grow. This is one element in the bull case analysis for upside potential for Apple which I discussed yesterday.

Android is playing the role of getting everyone onto the internet with a computer in their hand and this is a critical role to play for the benefit of humanity. Many billions of people will be included in the benefits of the online economy and financial inclusion thanks to Android. Android devices will be extremely capable and with very good technology in the premium $300-$400 price range. But the innovator’s dilemma will make it very tough to commercialize true premium innovation in Android at any scale. We are already seeing this in the component landscape where the vast majority of component vendors seeking to commercialize cutting-edge innovation are working their tails off to win Apple, knowing that is the only design win option for them to have any reasonable scale and thus get an ROI on their cutting edge products.

This case of the innovator’s dilemma is one for the study books, since it is a rare occasion where the theory did not hold to the entire category of players but only to those who were modular. Apple is immune to disruption for the primary reason they are not modular. If Apple ran Android OR if Apple licensed iOS to other partners, then all the dynamics mentioned above would apply to them and they would not be able to sell in volume iPhones costing over a certain price.

Let Android and the innovators dilemma be a case where sound business theory is necessary, but the wisdom comes in knowing when it applies and when it does not.