The Downfall of Samsung Mobile

History repeats itself and that's just how it goes. - J. Cole

Samsung has had a very tough 2014. They have faced drastically decreasing revenues, sales and net profit in their mobile division and that's taken a huge chunk out of their bottom line. On the contrary, Apple has been seeing amazing days, especially considering that in their Q4 of 2014, they posted the highest profitability of any company. Ever.

So what makes Apple so successful over Samsung? I'm not going to delve into a specs battle, or say which phone is better because that's simply subjective. What I will discuss, is computer history.

When it came down to desktop and laptop computers, there were two OS giants: Microsoft and Apple, creating Windows and OSX respectively. The differences between were pretty stark at first, mostly because of their ecosystems. Because of the sheer number of Windows computers that were out there, there were simply a lot more programs available. Gaming, for example, was much easier to do on a Windows PC than a Mac. Windows had (and still has) a ton of marketshare, but the underlying issue that eventually crept up was simply that there were many OEMs (Original Equipment Managers) competing against each other in the Windows space with little to no means of differentiation in software.

This is important to note, because if you can't differentiate in software, you are hard pressed to be competitive. You have to differentiate in other ways. This is done either through hardware, or price (one tends to influence the other, as you can see by the Ultrabook category versus the Netbook category).

Hardware differentiation is difficult to achieve, especially when your software only works on certain hardware. For example, Intel and AMD had the entire desktop processor market, so Windows was only built for those two. RAM, motherboards, video cards and other things are also hard to differentiate on because they provide the same basic end product. So now we get to the other way to differentiate: price.

Companies would start competing on price. This is great for the consumer, but terrible for the company. Eventually it gets to a point where, in order to compete, you have to sacrifice profit. Then a whole wealth of problems start popping up. Without profit, you're not able to reinvest and be innovative. Decreasing profits also hit your share price, which hurts the overall value of your company. In other words, a decreasing profit is never, ever a good thing for a company. This is why you can see that Sony exited the desktop market and Dell went from Public to Private.

And where does Apple fit into all of this? Well, from the beginning they stuck with OSX. No other company runs OSX so there were major differentiators already in place. Thus, this makes it easy to pull off hardware innovation. For example, (albeit not a good one) they are able to custom fit their keyboards to the way the operating system works. Things like this increase user experience overall.

Does this sound familiar to you? That's because it is.

Google vs Apple. Same story, different OSes. The minor difference here is that Google open sourced Android, making it possible for OEMs to modify the software. This has its pros and cons. The pros of this are of course, that OEMs can achieve software differentiation. They can customize their hardware to fit Android and create a more cohesive user experience than with Windows. This also has its own problems though.

For one, open sourcing software benefits Google in sheer distribution, but doesn't help them make money. If OEMs are allowed to modify Android as they see fit, then they can simply remove Google Search and other Google Services and try to add their own. Google simply can't make money off of a system like that, so they opted to control open source by any means necessary. Put simply, Google made it really, really difficult for OEMs to make a phone without having Google Services on them. This, once again, has the effect of removing differentiating factors from each Android phone on a software level. Once again, OEMs are forced to compete on another level: hardware or price. Where have we heard that before?

Samsung is trying to compete on hardware with the Galaxy S6. It's made out of glass, metal and all the cool stuff you hear about. It also comes with a fairly hefty price tag, comparable to that of the iPhone 6. But while Samsung is competing on hardware, other OEMs are competing on price. Companies like Xiaomi and Motorola have opted to sell very cheap phones, with comparable performance to that of the S6 and other flagship devices. These phones can all run literally the same apps, and have similar customizability. When you can buy something comparable for a third of the price, why pay 3 times more? That's where the downfall of Samsung has begun.

And where does Apple fall into all of this? Well, from the beginning they stuck with iOS. No other company runs iOS so there were major differentiators already in place. Thus, this makes it easy to pull off hardware innovation. For example, they are able to add a fingerprint sensor to their phones with security on a hardware level. Apple is also rumored to be adding Force Touch to their iPhone 6S. Things like this increase user experience overall, and will be adopted by every single person who buys a new iPhone.

Samsung is being cut off from the high end because of their lack of differentiation. They are being cut off at the low end because there are cheaper Android phones that do more than Samsung's cheaper phones. It's not only Samsung being affected either. Sony lost $1.7 billion in their mobile division in the fiscal year ending March 31, 2015. HTC, after restructing, is only making a slim profit from its handset business.

History repeats itself. As the prices lower, OEMs will continue to make less and less profit, thus affecting their bottom line. Some OEMs will exit the mobile market amidst declining profits, and the ones that stay will accept slim profits in exchange for being part of the market.