Samsung Schadenfreude And The Fall Of The Church Of Market Share

Schadenfreude |ˈSHädənˌfroidə | noun | pleasure derived by someone from another person’s misfortune. ORIGIN German Schadenfreude, from Schaden ‘harm’ + Freude ‘joy.’

Samsung has reported a 60% fall in quarterly profits. Just three years ago, Samsung rose from seemingly nowhere to dominate the global smartphone market. Today, Samsung is being pressured from above and below as Apple steals away its premium customers and Xiomi and others steal away customers from the low-end.

Keep in mind that these numbers come from BEFORE the introduction of the iPhone 6 and 6 Plus. The blood-letting has just begun.

Cheer up, the worst is yet to come. ~ Philander Johnson

The Church Of Market Share

Truth be told, I take no pleasure in Samsung’s distress. It is the pundits who preached the gospel of the Church Of Market share who grind my gears.

I don’t suffer fools, and I like to see fools suffer.~ Florence King

They jeered Apple’s premium business model, all the while cheering Samsung on and on — encouraging them to grow market share faster and faster…

…until the train that was Samsung went right off the rails.

Why Can’t Apple Be More Like Samsung?

Remember when the analysts were saying that Apple should be more like Samsung? Seems like only yesterday. Oh wait! It WAS only yesterday.

Thinking of all the pundits that wanted Apple to be like Samsung (low-end iPhone etc.). They aren’t saying that this morning. ~ Sammy the Walrus IV 10/7/14

Remember blogger turned @WSJ then @nytimes columnist recommending Apple cut prices and give free products to gain market share? ~ Rags Srinivasan (@rags)

Ah, good times. Good times.

Here’s a couple of additional Samsung/Apple predictions/recommendations from the archives just to remind us all of how long this nonsense has been going on for.

(Apple) once stood the undisputed leader of the smartphone arena, but ceded its crown to Samsung in 2012. ~ Poornima Gupta, Reuters, 13 March 2013

How royally stupid does that statement look, now that Samsung is the one that is getting crowned…if you take my meaning.

After spending the better part of yesterday digging deeply into Samsung’s analyst day materials, it has become clear to me that Apple, over the long haul, stands very little chance against the Samsung behemoth. ~ Ashraf Eassa, Seeking Alpha , 7 November 2013

Hmm. It seems to me that your digging created a hole, and you fell right into it.

If you find yourself in a hole, the first thing to do is stop diggin’. ~ Cowboy wisdom

Why Isn’t Apple Suffering The Same Fate As Samsung?

All this bad news for Samsung begs the question: If all these bad things are happening to Samsung, why aren’t they happening to Apple too? I could be all snarky and simply say it is because Apple doesn’t follow easily disprovable economic principles and business practices — and that would be true — but it would make this article way too short.

So, just for funsies, let’s do something that the High Priests of the Church of Marketshare never seem to do. Let’s stop and think.

Never be afraid to sit awhile and think. ~ Lorraine Hansberry

It is neither an accident, nor a surprise, that Samsung is struggling while Apple continues to thrive. Many astute observers predicted it long ago.

Logical consequences are the scarecrows of fools and the beacons of wise men. ~ Thomas Henry Huxley

Why then was this a shock to so many? And what lessons can we learn both from Samsung’s fall and Apple’s continued ascent?

Samsung, grab your sh*tty stylus and prepare to take f*ck*ng notes. ~ not Jony F*ck*ng Ive

Commoditization, Average Sales Price, And Margins

COMMODITIZATION

(T)he Apple brand has faltered … And it’s all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple. ~ Adam Hartung, Forbes, 4 April 2013

…it’s clear that Samsung will brute-force its way into taking more and more marketshare from Apple at the high end while at the same time will enjoy key structural advantages in the low end that Apple would – at least in its present form – not be able to match. ~ Ashraf Eassa, Seeking Alpha , 7 November 2013

This is the “Samsung-is-so-big-they-don’t-have-to-play-by-the-rules” theory of business. Samsung didn’t change the game. Pundits only thought they did because they didn’t understand the rules of the game.

Pundits have predicted, correctly, that hardware would inevitably become commoditized. This, they proclaimed with confidence, would cause Apple’s prices to fall while Samsung, with its good-enough and better-than-good-enough hardware and its lower prices, would usurp Apple’s market share, relegating Apple to niche status. Ironically, commoditization DOES apply to Samsung — the favorite of the Priests of Market Share — but it DOES NOT apply to their favorite whipping boy, Apple. Why? Differentiation.

From Ben Thompson:

Almost all industries have two tenable positions: the differentiated high-end, and the low-cost low-end. The iPhone faces little threat in the differentiated high-end of the market. Suggesting this market is limited in size is fair; counting the days until customers flee for cheap phones is silly. ~ Ben Thompson

What differentiates Samsung?

Hardware? Please. Xiaomi and others are taking a page out of the Samsung playbook by copying Samsung’s designs and making hardware that is more than good enough. Software? Please. They’re all running the same Android operating system. TouchWiz? Please. Stop before I die laughing!

Samsung actually DID have some differentiators like scale, time to market, marketing prowess and budget. But none of those is unique to Samsung, and none of them provided Samsung with sustainable differentiation. To put this in military terms, the Samsung army was able to take ground, but they were unable to hold it.

AVERAGE SALES PRICE

There is no doubt, in my mind, that the whole (smartphone) sector is hugely overstretched. The whole sector is priced as if the average player would sustain 25 per cent margin in eternity. It’s bordering on absurdity. This will end in tears. ~ Per Lindberg, MF Global Ltd, Feb 2009

Well, Samsung and the rest of the mobile hardware manufactures may be overstretched and left in tears, but Apple is doing just fine, thank you very much.

And here’s something else to chew upon. The iPhone 6 Plus is 100 dollars MORE than Apple’s previously highest priced phone model. While the rest of the industry is in a race to the bottom of the pricing barrel, Apple is preparing to INCREASE the average selling price of their phones.

ASP will rise significantly this quarter. ~ Horace Dediu (@asymco) 9/9/14

MARGINS

Here are Apple’s actual margins:

And here is how badly Apple’s critics mis-predicted Apple’s margins:

Apple is focused on defending the high end of the market, and that is becoming harder to do each year. Competitors, such as the Galaxy from Samsung, are starting to catch up. I think it is inevitable that the margin pressure increases.”

Mark Newman, Director of Mobile Research, Informa Telecoms and Media, 26 Feb 2012

And even if the industry just continues as it has for the past few years, with companies like Samsung continuing to build phones that are as good as or better than the iPhone, it’s hard to see how Apple’s profit margin will continue to expand the way it has over the last several years. ~ Henry Blodget, Business Insider, 7 Sep 2012

Overall, the iPhone 5 is a good phone and will probably sell well, but in the long run Apple will have a hard time maintaining its extremely high margins because the iPhone is clearly no longer cut above the rest. Since Steve Jobs is gone, Apple should be honest with itself and begin to dramatically increase its R&D budget to stay in the game. Otherwise, the competition will leave it in the dust.” Alvin Gonzales, Motley Fool, 17 Sep 2012

Market Share

Apple’s critics obsess over the relatively high price of Apple’s products and insist that Apple must lower their price in order to gain market share.

Bleier believes Apple will have to dramatically lower iPhone prices or risk losing market share to Android-based phones. ~ Scott Bleier, CreateCapital.com, 24 Oct 2008

I think they should invest more of it in the margin, in the business. Get lower-priced products out there. Stop going after just the premium piece. Get into the real growth engine of the smartphone market, which right now is Android, it’s low-priced phones in China and India, same thing on the tablets. ~ Henry Blodget, CNBC, 3 January 2013

If Apple products remain expensive the company’s penetration rates will hit a brick wall sooner or later. ~ Ishfaque Faruk, Motley Fool , 26 October 2013

I have been left disappointed by Apple’s decision not to release iPhone Lite as I thought this was the most important product for Apple to stop its marketshare decline. ~ Sneha Shah, Seeking Alpha, 25 October 2013

Apple’s already lost. Samsung has taken over the global market share in terms of smartphones and tablets ~ Porter Bibb, venture capitalist, 14 March 2013

These pundits couldn’t have gotten it more wrong.

First, Apple DID NOT lower their prices and their market share has gone UP in important markets such as the United States And Japan.

It’s looking possible Apple will sell more iPhones than Samsung sells Androids this quarter. ~ Benedict Evans (@BenedictEvans)

Second, Samsung followed the pundits advice, lowered their prices…and lost market share anyway.

It appears that Samsung has been cutting prices in order to maintain market share but has lost market share anyway ~ via Charles Arthur, The Guardian

WINNING

The fetish with Market Share is bizarre. Market share times margins equals profits. Market share and margins are the means. Profit is the end. Market share doesn’t mean a thing if it doesn’t lead to more profits and a better platform.

For example, Sony recently announced that it has been improving its smartphone market share in Western Europe and Japan…and is projecting a £1.3 billion loss.

For what hath a man profited, if he shall gain a whole bunch of market share, and loseth his own shirt? ~ John 09:12

Bill Shamblin explains:

More than a 1-to-1 ratio of profit share to market share demonstrates a company’s ability to differentiate its products, provide more value than its competitors, command higher prices, charge a premium and enjoy pricing power.

—

Less than a 1-to-1 ratio of profit share to market share demonstrates that a company is buying market share; that the company has not been able to differentiate its product in the market and is likely competing primarily on price.

—

Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin

Market share is not the sine qua non of business — profit is. In football terms, market share is the yardage, profits are the points. In baseball terms, market share is the number of hits, profits are the number of runs. In hockey terms, market share is the number of shots on net, profits are the number of goals. Market share, like yardage, hits, and shots, are a necessary means but profits, like points, runs, and goals, are the end. Pretending otherwise for even one second borders on the inane. Continuing to stubbornly believe such rubbish borders on the insane.

To arrive at a contradiction is to confess an error in one’s thinking; to maintain a contradiction is to abdicate one’s mind and to evict oneself from the realm of reality. ~ Ayn Rand

Integration

HARDWARE

If I had to name just one thing that the pundits got wrong about about Samsung and Apple, it would be their myopic focus on hardware (sometimes called “innovation”) comparisons.

Samsung’s hardware was better, they said. Samsung was out innovating Apple, they said. Samsung was on the rise and Apple was all-but-dead, they said.

(T)he Galaxy S II is remarkably easy to summarize. It’s the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. ~ Vlad Savov, Engadget, 28 April 2011

(I)ncreasingly gadget fiends are tossing away their iPhone 4S to drool over the new Samsung Galaxy S3. ~ Patrick Barkham, The Guardian, 9 August 2012

Samsung has not only surpassed Apple in sales, it’s out-innovating Apple. ~ Edward Zabitsky, ACI Research, 21 Dec 2012

(C)ompetitors have caught up with the iPhone. Some reviewers think Samsung’s new phone is superior to Apple’s latest phone. ~ Henry Blodget, Business Insider, 4 January 2013

We are afraid that Apple has lost its ground in the smartphone arms race against Samsung Electronics. ~ Daniel Kim, Macquarie Equities Research, 15 January 2013

What [Samsung] are doing is they’re innovating faster. just the pace that they’re coming out with [products] is so much faster ~ Gene Munster, Piper Jaffray, 12 March 2013

The competition is increasing its lead over Apple. Samsung’s S5 seems to have enjoyed a strong launch, outstripping the iPhone 5S launch for which Apple bulls were prepared to declare a national holiday. ~ Michael Blair, Seeking Alpha, 4 May 2014

Samsung DOES make superb hardware. But how has all that supposed hardware superiority worked out for them?

SOFTWARE

By focusing on hardware alone, the pundits totally ignored software and — even more — they totally ignored hardware/software integration. Judging a smartphone by hardware alone is like judging a sailboat by the boat alone. The size, shape and design of the boat is important, but the sails make the boat go. Similarly, the size, shape and design of the phone is important, but it is the software that puts the “smart” in smartphone.

As Ben Thomson put it:

Software Matters – For years analysts treated all computers the same, regardless of operating system, and too many do the same thing for phones. … (Y)ou cannot do any serious sort of analysis about Apple specifically without appreciating how they use software to differentiate their hardware. … (M)any people buy iPhones (and Macs) because of the operating system that they run. … Not grokking this fact is at the root of almost all of the Apple-is-doomed narrative. … (And) for the high end buyer app quality matters as well, and here iOS remains far ahead of Android. ~ Ben Thompson

Here is a video (via Abdel Ibrahim (@abdophoto) of The Tech Block) of Steve Jobs explaining that the iPod is just software in a beautiful box.

AUTHOR’S NOTE: When I see a video link, I generally skip it. But I highly encourage you to follow the link and watch at least the first 90 seconds of the video. I think you’ll find it worth your while.

Some professional reviewers may have voted for the Samsung hardware while declaring Samsung more innovative, but the only reviewers that count — the buyers — voted with their dollars, and when it came to premium phones, they voted 3-to-1 in favor of the iPhone.

Platform

PLATFORM ECONOMICS IN BIZARRO WORLD

The real game changers in the S4 are Samsung’s pace of innovation and the platform it is creating to challenge Apple in this crucial area of innovation – platform economics. ~ Haydn Shaughnessy, Forbes, 18 March 2013

Samsung is innovating on ‘platform economics’? Wow. How wrong could one be? Samsung is currently suffering precisely because it has no platform to help differentiate its products. Samsung’s lack of platform makes it the polar opposite of Apple. Which reminds me of an awful, awful joke:

Samsung’s profits.

No, that THAT awful joke. This awful joke:

Question: Why couldn’t the polar bear get along with the penguin? Answer: They were polar opposites.

THE NUMBERS LIE

There is an illusion that the current lopsided shipment market share is irrelevant. This idea is completely false. Losing market share is almost always never a good sign. Android is roasting Apple and if things keep going the way they are, Apple will be toast. ~ Alvin Gonzales, Motley Fool, 21 Dec 2012

That was written in 2012 and it got it exactly wrong. Android currently runs on two times as many devices as iOS. TWO TIMES. But it is Samsung, not Apple that is getting roasted.

Sooner or later that [market share discrepancy] ought to make a difference. ~ John Gaffney ‏(@jfpgaffney)

And there it is. Your faith based argument:

“Sure, Apple’s App store is doing okay now — BUT JUST YOU WAIT! Once Android has more market share than iOS, the tide will turn. Okay, okay, Android has more market share than iOS and the developers haven’t flocked to the Google Play store…yet. BUT JUST YOU WAIT. Once Android has a super-majority, iOS is doomed. Okay, okay, Android now has twice as many handsets in the wild as does iOS and the Apple App store just keeps growing stronger every day. BUT JUST YOU WAIT! Sooner or later the weight of Android’s market share ought to make a difference. JUST. YOU. WAIT!”

The bedrock theory upon which the Church of Marketshare is founded, is that the platform with the most market share wins. And that theory is demonstrably wrong.

The great tragedy…the slaying of a beautiful hypothesis by an ugly fact. ~ T.H. Huxley

ABSOLUTE NUMBERS

Absolute numbers matter more than share (percentages).

As of June (2014 there were 886,580,000 iOS devices sold. 1 Billion sold will happen well before this year is out. Horace Dediu (@asymco)

One billion units is hardly niche.

Absolute numbers matter more than percentages – While it’s natural to talk about market size as a percentage, the absolute size is just as important. In the case of Apple, for example, the fact they “only” had 15.5% percent of the market in 2013 is less important for understanding the iPhone’s viability than is the fact they sold 153.4 million iPhones. That is more than enough to support the iOS ecosystem, percentages be damned. ~ Ben Thompson

OPEN

The collective development opportunities made possible by the fact that Android is Open Source will see to that. (What will) matter to the mobile application developer (is that) there are eight or ten Android handsets shipped for every iPhone. Addressable market will again trump elegance. ~ Brian Prentice, Gartner, 21 September 2009

That’s flat out wrong. Always has been. Always will be.

Developers don’t care about people who spend time on the platform. They care about people who spend on the platform. Platforms aren’t a democracy. It’s not one vote per person. It’s one vote per dollar, and each person is free to vote as often as they can afford to do so.

METCALF’S LAW

Perhaps you’re thinking of Metcalf’s law. Metcalf’s law says that the more people you have on a network, the more valuable that network becomes.

Android and iOS are platforms. Nowadays, the internet is the network. Don’t conflate the two. iOS can remain closed and still communicate with the rest of the world via the internet.

There’s something problematic in the idea that platforms with 1.5 billion users and 100 billion+ 3rd party apps installed are ‘closed’. ~ Benedict Evans (@BenedictEvans) April, 2014

PREMIUM DEVELOPERS

There is a striking difference between the two companies though, Apple produces their own hardware and software, they collect all the money whereas Google licenses out the software and occasionally gets in on the manufacturing of a device. iOS is a closed system, Android is open-source and if history proves to be right time and time again then I’m sure that Android will end up winning the battle. ~ Ash Anderson, Motley Fool, 21 Dec 2012

Once Steve Jobs goes away, which is probably not far away, then Apple will have to make a strategic decision on whether to open up the platform. Ultimately a closed system just can’t go that far … If they continue to close it and let Android continue to creep up then it’s pretty difficult as I see it. ~ Patrick Lo, CEO, Netgear, 31 January 2011

That’s the theory of “Open”. These are the facts.

The Apple App Store has now paid out over 20 billion dollars to developers, half of that in the last 12 months.

The Apple App Store has paid out 10 billion dollars to developers in the past year. During that same time, Google has paid out 5 billion.

In other words, Apple has half the users that Android has but pays out twice as much to developers. That means that an Apple user is worth four times more than an Android user to developers or, conversely, that it takes four Android users to equal one Apple user.

A sobering thought: in order for Google to match Apple’s iOS revenue with Android, they would need 3.6 billion Android users. ~ Ari Najarian (@stickbyatlas) 6/27/14

Arguing that the Android market share is going to sink the iOS platform is like arguing that the Titanic is going to sink the iceberg.

PREMIUM CUSTOMERS

The difference in payout between iOS and Android is telling in a whole different way too. We used to think that Android engagement averages were much lower because there were so many more Android users. It was assumed that high-end Android users were worth as much to Android as high-end iOS users were worth to Apple. The numbers tell us that this is not so.

There are roughly the same number of high-end Android and iOS users. Yet the total payout over the past 12 months was 5 billion for Android and 10 billion for iOS. This means that Android engagement numbers are not lower because of all the low-end users. It means, instead, that high-end Android users act very differently than high-end iOS users.

Either the Apple App Store motivates the high-end user to spend more or the high-end user chooses the Android platform because they want to spend less. Neither bodes well for Android developers.

THE NEW PLATFORM PARADIGM

The Prophets of the Church Of Market Share have had it wrong all along. Market share does not draw developers to a platform. Dollars draw developers to a platform.

And the strength of a platform is not dependant upon the number of users. It is dependant upon the amount those users spend.

Premium

NICHE

Android now commands 80% of the smartphone O/S market and over 50% of the tablet O/S market. Apple, which pioneered the touch screen smartphones and tablets, finds itself increasingly becoming a niche premium player. ~ Sneha Shah, Seeking Alpha, 16 January 2014

Shah treats the role of the premium provider as though it were that of a vulgar street walker.

As the mobile phone market increasingly offers more quality phones at a range of price points, Apple now faces a difficult choice. Does it try to remain a premium product-premium price company, or does it dive into the commoditized lower priced arena? Neither choice is very appealing. ~ Bob Chandler, Motley Fool, 2 May 2013

Why does Chandler think that choosing between being a premium provider and a low-cost provider is difficult? If you can make the choice, premium is the obvious choice to make.

In the fourth quarter of 2013, Apple sold 64% of all the premium smartphones in the U.S. That number will grow in the the fourth quarter of 2014. Yet pundits seem to treat the premium sector as a ghetto that must be avoided at all costs.

Presuming all decisions are based on price is the easiest way to mispredict the future. ~ Ben Thompson (@monkbent)

The pundits seem wholly incapable of understanding two simple facts. First, Apple WANTS to be the premium provider. They are targeting that market. Second, Apple will not pursue additional market share if it endangers their position as the sector’s premium provider.

This is such heresy to the priests of the Church of Market Share that they simply cannot grok it.

The hardest thing to explain is the glaringly evident which everybody had decided not to see. ~ Ayn Rand

Yet it is the norm everywhere in every market! There isn’t a good or service that doesn’t have a premium and a low-end sector and, as a general rule, the premium sector is the place to be.

Brand

Samsung makes some truly lovely high-end phones, but by selling a million, bazillion, gazillion mid-tier and low-end phones too, their brand has become diluted.

If I’ve told you once, I’ve told you a thousand times: Resist hyperbole. ~ William Safire

No one mentions of “Samsung” and “premium” in the same breath.

Middle

High end buys iPhones. Low end cares only about price. No middle. There.~ Ben Thompson (@monkbent)

Samsung sells high, mid, and low-end phones — which is exactly what the pundits have been urging Apple to do — and Samsung is paying dearly for it. Samsung is losing the high-end to Apple. They are losing the low-end to Xiaomi and others. They’re trapped in the wholly undifferentiated and wholly indefensible middle.

Two Ways To Grow

There were two ways for Apple to broaden its ecosystem – take a chunk of the mid-range or take another chunk of the high-end. ~ Benedict Evans (@BenedictEvans) 9/11/14

Clearly, Apple has chosen the latter. Unlike Samsung, Apple doesn’t WANT to corner the phone market. They want to corner the PREMIUM phone market.

If you want to catch trout, don’t fish in a herring barrel. ~ Ann Landers

And they’re doing it, too. The new iPhone is a direct assault on that part of the premium market still being controlled by Samsung.

(W)ith the iPhone 6 and iOS 8, Apple has done its best to close off all the reasons to buy high-end Android beyond simple personal preference. You can get a bigger screen, you can change the keyboard, you can put widgets on the notification panel (if you insist) and so on. Pretty much all the external reasons to choose Android are addressed – what remains is personal taste. ~ Benedict Evans

Apple Is Doomed Anyway

“Apple is screwed” – 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014. ~ Sammy the Walrus IV (@SammyWalrusIV)

None of what I’ve said will deter the High Priests of The Church Of Market Share from continuing to predict Apple’s doom. If the facts disprove their theory in the here-and-now, they simply fall back upon irrefutable prophesies that will only occur in the here-in-after.

Faith is an oasis in the heart which will never be reached by the caravan of thinking. ~ Kahlil Gibran

Apple’s lack of market share will be their doom, they say. It is going to happen, they say. All we have to do is patiently wait for the day that is sure to come, they say.



CAPTION: Waiting and waiting and waiting and waiting and…

And what the hey, while we’re waiting, we can always have some fun by twisting every story into anti-Apple FUD:

“Is Samsung Sales Disaster Bad for Apple?” ~ an actual headline

Well, of course Samsung’s problems are bad news for Apple. All news is bad news for Apple…in accordance with the prophecy!

My only hope is that the pundits who told Apple to be more like Samsung, shorted Apple and invested heavily in Samsung. That would be some schadenfreude that I could really get behind.