Samsung: A Hardware Manufacturer Seeking Its Software Side

On March 14, Samsung’s splashy Radio City Music Hall debut of its Galaxy S4 smartphone — an event complete with tap dancing, musical numbers and comedy sketches — marked a coming out party not only for the company’s latest flagship device, but also for its ambitions to be an innovative leader in software and an integrator of multiple devices in consumers’ lives.

So far, the Galaxy S4 has impressed some analysts with its large five-inch screen, the ability to use both front and rear cameras simultaneously, video viewing controls that respond to a user’s eye movement, and health-monitoring software, among other novelties. Expectations are high for the S4 following the success of its predecessor, the Galaxy S3, sales of which surpassed 40 million units in January.  

Samsung and Apple are the two primary contenders in the global mobile race, and both are vying for smartphone and tablet dominance. According to research firm IDC, Samsung and Apple together control 51% of the worldwide smartphone market, with market shares of 29% and 21.8%, respectively. The No. 3 smartphone maker, Huawei, has 4.9% market share. Samsung also controls 42.5% of the Android market, according to Gartner.

Speaking at the Galaxy S4 launch, J.K. Shin, president of Samsung’s mobile communications division, said the company’s latest device revolves around improving and simplifying consumers’ lives. “We are a company of innovation…. We will imagine the possibilities and listen to you [the consumer] to understand what a smartphone should provide in our lives.”  

Experts at Wharton say that it’s just as notable what Shin didn’t mention at Samsung’s event — Google’s Android operating system, which the S4 utilizes. But the device also has Samsung-branded products like S Translate, a language translation application similar to a feature in Android, and S Navigation, a map application. “Samsung is distancing itself from Google and Android” in an effort to reinforce the idea that its brand is bigger than that of Google’s operating system, says Wharton management professor Saikat Chaudhuri.

Big Ambitions

However, it’s unclear whether Samsung will be able to execute in the software realm, Chaudhuri adds. After all, Samsung is more of a hardware conglomerate than a hardware-software integrator like Apple. Samsung’s power comes from scale and its ability to manufacture screens, processors and mobile devices. In fact, Samsung’s largest customer is Apple, which procures parts from its rival.

It’s also unclear whether Samsung’s own software enhancements will capture the imagination of the broader public. Some analysts called the Galaxy S4 “evolutionary,” not “revolutionary,” and many indicated that Samsung failed to up the ante against Apple because the device lacked a so-called “killer app,” or must-have software. “We believe some of the software features are unique, including the tilt to scroll, video pausing based on facial recognition and hand gesture based interactions, but view these software improvements as minor compared with what Siri was to the iPhone 4S or even Google Now to Android,” wrote Piper Jaffray analyst Gene Munster in a research note. (Google Now is a service that anticipates a consumer’s information needs and delivers them based on location.) “No one is going to look at the S4 and say, ‘This changes everything,’” says Wharton marketing professor Peter S. Fader. “The features are fine, but they may be irrelevant in practice.”

Yet there’s an inherent risk in introducing too many new features at once — reliability. “Samsung’s reputation could become more vulnerable if the apps don’t work well,” notes Andrea Matwyshyn, legal studies and business ethics professor at Wharton.She points to the negative reaction Apple faced when the company tried to replace Google Maps with its own, error-prone mapping software on the most recent iPhone. “You can lose customer loyalty rather than gain it” by extending beyond your expertise, she adds.

For Samsung, “software expertise is the big wild card,” says Chaudhuri. “If the Galaxy S4 is a product where all these features work as advertised, Apple will have a real challenge to come up with interesting things” to compete with it.

Samsung may not have much choice but to push to develop additional innovative software applications. Kendall Whitehouse, technology and media editor at Knowledge@Wharton, says that Android smartphone vendors face the challenge of differentiating their products to avoid competing solely on price. “I don’t think what Samsung is doing [to add value to Android through additional software] is a bad idea in principle, but it may have problems in its execution,” Whitehouse notes.

Distance from Google

Nevertheless, Samsung’s software ambitions may go beyond offering its own unique applications. The firm has been developing another open source operating system called Tizen and plans to launch high-end smartphones based on the new system in August or September, according to Bloomberg. Samsung is one of 12 companies developing Tizen as an Android alternative.

Experts at Wharton say that Samsung may need Tizen as a hedge against Google leveraging its Motorola Mobility acquisition of 2012 to become a stronger rival to the Korean electronics giant. Another concern is that Google could eventually start charging for Android or make it less open. According to David Hsu, a management professor at Wharton, Samsung’s move to play down Android is strategically sound. “Samsung is preparing itself in case Google and Android become a hazard. What Google does is the [question]. It’s a big vulnerability for Samsung.”

Matwyshyn notes that the hurdles for Samsung to create its own operating system and app ecosystem are too high to be motivated by anything other than fear about Google’s eventual hardware plans. “Part of the company’s strategy has to be motivated by fear of vertical integration between Motorola and Google,” says Matwyshyn.

Could a Samsung operating system take on Android? It’s possible, Matwyshyn states. “Part of the broader appeal of Samsung is that it’s a trusted mark. Samsung represents a [high]standard of technology quality and sophistication.”

According to Fader, however, Samsung is in a delicate position as it tries to distance its brand from Android. “It’s not clear to me whether consumers are buying [a Samsung] phone because it’s Samsung or Android,” he says. “To date, it has been the latter. Samsung has the best Android phone. [But] people aren’t saying, ‘I’m getting a Samsung phone.’ The company doesn’t have that brand [power] yet. Samsung is more beholden to Google than it thinks.”

It’s also unclear how Samsung could detach from Android if it wanted to, due to the critical mass of Android’s app ecosystem, which rivals Apple’s App Store in selection. “Just look at the difficulty Microsoft has had getting developers to create apps,” Fader points out. “Maybe down the road, Samsung’s move will make sense. Today, one of the biggest points of attraction to Samsung is that it runs on Android.”

The ‘Phablet’?

Samsung’s recent moves indicate that the company hopes to be more like Apple, with a seamless integration of hardware and software, say experts at Wharton. However, hardware vendors historically have had trouble developing great software. Whitehouse notes that Apple’s software prowess is unique in many respects. “Samsung has traditionally been focused on hardware. And while Microsoft dabbles in hardware, it is primarily a software company. Apple is fairly uncommon [since it is] a company that is good at both hardware and software,” he says. Meanwhile, BlackBerry and Nokia are struggling in the smartphone market largely due to their inability to develop compelling software, Whitehouse adds.

According to Chaudhuri, Samsung’s style of vertical integration — the concept that one company can control multiple parts of a product — is fundamentally different than Apple’s approach. Samsung operates more like a hardware manufacturing conglomerate, and it is unclear how closely the company’s units work together. Apple’s vertical integration combines hardware, software and product design to create devices that are attractive and intuitive. The actual manufacturing is then outsourced to partners such as Hon Hai’s Foxconn.

Chaudhuri points out that Samsung makes TVs, cameras, phones, PCs, tablets and many of the parts that go into them. If Samsung can add software to its core competencies, it can be a threat to Apple. “Samsung has all the pieces and understands convergence,” he says.

One example of product convergence is the so-called “phablet” — a phone and tablet hybrid with an in-between screen size. Samsung has made a bet that these hybrid devices — such as the five-inch-screen Galaxy Note, seven- and 10-inch tablets, and five-inch smartphones like the Galaxy S4 — will sell well. So far, Samsung’s gamble has paid off. Specific sales figures for various tablets from Samsung are not available, but IDC reports that the firm has the No. 2 spot in tablet market, with 15.1% market share behind Apple’s 43.6%.

Apple has responded to these devices with the iPad mini. However, Samsung is scoring points with an S4 screen that’s an inch larger than that of Apple’s iPhone 5. “Samsung is pushing the limits on screen size…. People are looking for one device that can occupy the middle ground between a tablet and smartphone,” Hsu says. Samsung has said that phablets are especially well suited for emerging economies, since consumers in those markets don’t want to buy both a tablet and smartphone.

“The screen size competition is wide open,” Fader adds. “We don’t know the winning size, and there’s a lot of trial and error. Samsung is leading the way, and the phablet idea will carry some weight.”

Another key battleground for Samsung and Apple revolves around TV. Samsung has apps and an ecosystem for its televisions, and has demonstrated that the Galaxy S4 can be used as a remote control. Chaudhuri says that Apple needs a TV set — or some new category of device — to fend off Samsung in this market. But Fader claims that Apple doesn’t have to rush to deliver its long-rumored TV set because Samsung’s Smart TV interface is a clunker.

Samsung simply “can’t out-Apple Apple,” argues Fader. “Samsung’s biggest selling point [for its S4 is that it's] the phone for people who don’t want to buy an iPhone. Samsung can’t win on software, either. For every feature the S4 has, there are five that the iPhone has.”

As for marketing, Fader adds that Samsung needs to play down its Apple comparisons. One of Samsung’s marketing campaigns mocks Apple fans waiting in line for a new iPhone. According to Fader, it’s a problem that Samsung can’t get lines around the block for its devices. “Samsung should play down that hype and just say that it does everything Apple does more flexibly with a broader product line. Samsung is still playing a me-too game with Apple.”

In any case, Samsung vs. Apple isn’t likely to end with a single victor. “There’s this weird tendency to think that if one company dominates, its competitors are trounced,” says Whitehouse. “The real world is much more nuanced. Both Samsung and Apple are likely to remain key players in the smartphone market for a long time.”

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