Google Aims to Help Samsung's Competitors

Samsung's (NASDAQOTH: SSNLF  ) mobile business is under pressure. Earlier this month, the Korean tech giant offered up guidance that was well below analysts' expectations: Samsung believes both its earnings and its revenue are poised to decline significantly in the second quarter.

What's the source of Samsung's problems? The company specifically cited competition from low-end smartphone manufacturers -- budget handsets are increasingly chipping away at Samsung's share of the emerging markets.

This competition should only increase in the coming quarters, boosted -- in part -- by Google (NASDAQ: GOOGL  ) (NASDAQ: GOOG  ) . The search giant's latest initiative, Android One, stands to support many of Samsung's emerging-market competitors.

Samsung's smartphone dominance
According to IDC, Samsung shipped more smartphones than any other company in 2013 -- more than twice as many Apple. In fact, of all the smartphones shipped last year, nearly one in three was made by Samsung.

Some of these were its high-end Galaxy handsets, but most were cheaper devices aimed at emerging market consumers. Although all of them ran some version of Google's Android operating system, the hardware specifications and price tags varied significantly -- from the $600+ Galaxy S4 and Galaxy Note III to the sub-$100 Galaxy Star.

That willingness to offer low-end handsets has allowed Samsung to capture the lion's share of emerging-market consumers, dominating in markets like India and China, as well as most of Africa.

Google's plan for budget handsets
But as Samsung admits, it's starting to feel pressure in those markets, as rival manufacturers offer up cheap, Android-powered smartphones of their own. In China, for example, a market where Samsung has long been the leading vendor, Xiaomi has emerged as a force to be reckoned with. According to Kantar WorldPanel, Xiaomi outsold Samsung in the month of April.

Google doesn't have much of a presence in China, so Android One won't have much of an effect there, but it could cause quite a stir elsewhere. The Indian market, in particular, seems poised for a shakeup.

As part of Android One, Google is partnering with Indian smartphone vendors Karbonn, Spice and Micromax. Google is offering a reference design -- a mid-range, Android-powered smartphone -- that these vendors are free to manufacture. Without the associated engineering costs, these companies will presumably be able to price the handsets aggressively.

Notably, Android One phones will ship with stock Android -- Google's official version of the operating system -- and receive software updates directly from Google. They'll also, allegedly, benefit from Google's advertising: According to The Information (via TechCrunch), Google is planning to spend "several hundred million dollars" advertising Android One phones in India.

Google benefits from Android One by helping to accelerate smartphone adoption. Once locked into Google's mobile ecosystem, first-time smartphone buyers in emerging markets may be unlikely to stray. It also helps fend off challenges from handsets running significantly modified versions of Android.

Xiaomi's smartphones, for example, are powered by a heavily modified version of Android that strips out Google's services in place of its own. Xiaomi has so far been confined to China, but is expanding into India for the first time this month.

Samsung is looking to new growth areas
But Samsung could find itself caught in the crossfire, as Android One phones will go head-to-head with Samsung's budget Galaxies. According to IDC, Samsung currently dominates India, with a smartphone marketshare near 35%. Its closest competitor -- Micromax -- is a distant second, with just 15%.

To compensate for its declining mobile profits, Samsung is looking to other areas for growth, including wearables and the smart home -- new markets where Samsung doesn't have to compete with budget manufacturers.

Investors in the South Korean tech giant must hope those initiatives will work out. As it stands, its days of dominating the smartphone market -- at least in terms of raw numbers -- could be coming to an end.

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  • Report this Comment On July 17, 2014, at 12:25 PM, zippero wrote:

    Sam, there's no such thing as lock-in for $100 Android phones anymore than there's lock-in for feature phones. Budget smartphone buyers don't have the discretionary funds to buy the meaningful, robust data plans that are the gateway to buying the significant number of apps that create the lock-in effect. By the time a budget Android phone buyer is rich enough to buy expensive data plans and significant apps, there's only one choice for them--iPhone. Samsung's premium phones won't even be around anymore as all their buyers will have moved onto big iPhone 6's and will have shifted their big spending ways to Apple's App Store from Google Play, depriving Google Play of its biggest spenders and relegating Google Play to the poorest Third Worlders around the world. App Annie just announced that despite Google Play's huge increase in downloads, which are far higher than Apple's now, Apple's App Store STILL gets almost double the actual revenues. Samsung surely will go down and be the Nokia of Korea, but the entire profitless Android industry, once commoditized, can never recover from commoditization, and it appears Android One will even accelerate commoditization because it prevents skins like TouchWiz, making differentiation even harder for Android OEMs. The future of the smartphone industry is just as Tim Cook predicted: Apple at the top with 100% of all the smartphone profits and all the highest-value app economy customers! and Samsung, Xiaomi, Android One, etc. Fighting with each other at the bottom for scraps with no pricing powers and 0% of smartphone profits.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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