Over the past month or so, tech world is abuzz with news, diagnosis, and prescriptions about the decline of Samsung’s dominance in the mobile space. Poor Q2 earnings of Samsung, Micromax becoming the largest mobile vendor in India in Q2 2014 (according to Counterpoint Research), Xiaomi overtaking Samsung as the largest smartphone vendor in China during the same quarter (according to Canalys), high quality offerings from the competitors etc. made everyone get on-board in predicting a bleak future for Samsung. While there is undeniable merit in the argument that Samsung has challenging times ahead, the reasons for that are far more complex than what many customers assume instinctively.

samsung

To begin with, there is no denying that Samsung is conceding more and more space to the new vendors from China and India. In the Southeast Asian markets, where these vendors primarily operate and which are the currently the centres of explosive growth, these vendors are offering compelling and comparable products at irresistible price points (Hey, Xiaomi!), leading to loss of sales for Samsung. However, the story would be entirely misleading if the impact of these vendors is presumed to exist only on Samsung. In reality, the current trends in the smartphone market tell a much bigger story about the fate and future of every major smartphone manufacturer out there.

The changing competitive landscape in the Android ecosystem, where even smaller vendors are able to topple top-tier manufacturers, is primarily due to two reasons – licensing Android OS and common sources of smartphone components supply. In fact, the implications of these two factors extend far beyond the corridors of Android ecosystem, and may very well, in altered forms, explain the prospects and problems in store for all the manufacturers who sell hardware at a premium for profits. Understanding these factors may even explain why is WhatsApp more valuable than Nokia and Motorola? Or why Nokia got acquired while Blackberry still hangs around?

For anyone who observes the smartphone markets closely, it’s evident it’s the software, including apps, which makes a phone ‘Smart’. Need proof? Well, ask Nokia, or shall we say Microsoft Mobile now, why is it finding it extremely hard to generate considerable sales in spite of exciting designs, cutting edge specifications, and the incessant backing of the PC software behemoth, Microsoft. The answer is ‘Software’. This software factor which didn’t go well for Nokia has gone exceptionally well for the new vendors like Micromax, Xiaomi, Karbonn etc. Until a few years back, prior to the advent of Android ecosystem, developing a smartphone mandated huge investment in terms of money, time, and intellectual capital. However, with the evolution of Android OS, the intellectual capital, which was considered the most daunting and significant requisite to manufacture a capable smartphone, is effortlessly knocked out of the equation. The open nature of the Android platform, which allows anyone to use the Android OS (subject to certain rules), has created an almost level playing field in terms of core smartphone software. This has enabled the new companies to effectively counter, without breaking a sweat, the technological differentiation enjoyed hitherto by the well-established global brands in the market.

Likewise, even the smartphone hardware space has seen a similar shift and flattening effect. The past few years have witnessed a tremendous growth in the smartphone components market, resulting in a slew of highly specialized component suppliers covering the entire range of smartphone components. Suppliers like Qualcomm, MediaTek, Intel, Corning Gorilla, SanDisk, NVidia, Sharp etc. (even includes the component business divisions of Sony, LG, and Samsung), with their end-to-end component solutions, have relieved the new smartphone vendors from the complexities and relative impossibilities of manufacturing all or most of the smartphone components by themselves. With this transition and treatment of component supply as standalone businesses, many key smartphone components like processors, memory modules, camera sensors, display panels etc., are from common supply sources for all companies – new and old, big and small – alike. As a result, even the new smartphone vendors are able to offer similar hardware as the global brands. No wonder, OnePlus One (first offering of a new company, OnePlus) uses the same chipset as Galaxy S5, while sourcing their camera sensor from Sony just like Apple iPhone 5S. Again, a case of diminishing technological differentiation among various smartphone offerings in the market.

At the same time, the transition of China into a low-cost manufacturing hub has reduced the capital requirements for new start-ups. The synergistic combination of all these market developments has reduced the complex, intellectual, lengthy, and resource-intensive process of manufacturing smartphones into a mere assembly of readily available components, and slapping a freely available, fully functional, and advanced mobile OS. Unsurprisingly, by sporting similar hardware and adopting the same open Android ecosystem, the smartphones from these new vendors are not too different from the offerings of the global brands either from the hardware specifications or software capabilities perspective.

It’s worth noting that the argument made here is not that there is no differentiation at all, but that it is rapidly diminishing or becoming insignificant, particularly in the mid-to-low end market segments. It’s irrefutably true that a good smartphone is more than the sum of its parts, and producing this synergistic experience can be a key differentiating factor for a top-tier manufacturer to stand out from the rest of the newbies selling merely ‘assembled’ phones. The challenge, however, is that many of these new vendors are offering their products at such compelling prices, that many smartphone buyers are willing to overlook the subtle, hard-to-perceive qualitative aspects like synergy and support, in favour of striking, hard-to-miss quantitative factors like price and specifications. Simply put it, the average Joe is not too convinced that the major manufacturers are offering anything substantially different which is worth the premium they demand.

Pragmatically speaking, with huge investment in R&D, billions of dollars in marketing and brand building, the global brands cannot compete on price with the new smartphone manufactures operating on wafer-thin margins. The only way these major brands can continue to grow in this commoditized market is by developing irresistible features and services that are unique to their products. This is the precise reason why manufacturers install a host of proprietary applications and services, usually called Bloatware, on their entire range of products. If these features and services are compelling enough (like the stylus capabilities of Galaxy Note series) to help them meaningfully differentiate their offerings from the rest of the ‘me too’ smartphones in the market, then they can justify the higher price tag on their products. So far at least, almost all the major manufacturers have failed to create such differentiation, particularly in the mid-to-low range offerings where most of the growth is happening. Therefore, it’s anything but surprising to see all major manufacturers, particularly Samsung given its huge market share, gradually lose their iron grip on the smartphone market. In many ways, this trend of the global smartphone brands struggling to grow in the commoditized market represents restoration of equilibrium, not the deviation from it.

So, coming back to the cardinal question – Is Samsung really losing? Of course, it is. With smartphones becoming commoditized at such breath-taking pace for all the reasons stated above, analysts should be surprised not when Samsung is losing, but when it is not. But, limiting this question to Samsung makes us miss the fundamental shift in the market. It’s not Samsung alone who is losing, but every other major manufacturer is conceding market share. Xiaomi didn’t just knock Samsung of the top spot, but in the process indeed pushed every other established brand like LG, Apple, Nokia, HTC etc. a rank or two below in the sales chart. So, in reality, it’s not so much a case of Samsung losing, but more of a threat to the business model of global brands selling commoditized hardware at a premium. This is not a challenge unique to Samsung, but to every other major manufacturer across ecosystems. No wonder, brands like HTC, Sony, Nokia, Motorola etc. are struggling to make profits while the new brands are having a great time. The only way out is to innovate heavily, or to pivot into new product categories (like smartwatches, VR headsets etc.) and reap profits until they become commoditized.

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Guest Contributor

Naresh Nekkanti is a writer by passion, not profession. He is mad about movies, passionate about politics, and talkative about technology. A firm believer in Science and Technology as solution to our problems. He considers WiFi a basic need and slow broadband speeds inhuman.