Forget Apple v. Google, now it's Apple v. Samsung

By Jonny Evans

What is it with Apple [AAPL] and its friends? It seems everyone touched by Cupertino's magic seems to find a little magic of their own; we've seen what happened when things went sour between Apple and Google, but now the Jobs-led company has a new challenger -- Samsung.


[Above: Engineers had fun designing the Samsung Captivate Galaxy S, leaving this message on the main circuit board in the tiniest possible letters, says Chipworks.]

Fear is the mind-killer

Take a step beyond here. Apple and Samsung have a relationship that goes way, way back. Apple took a $100 million investment in Samsung to secure its display supply way back in 1999. Since then the two have been, if not exactly snuggly, then at least quite close. Four percent of Samsung's $142 billion revenue in 2010 came from sales to Apple.

"We are Samsung's largest customer, and Samsung is a very valued component supplier to us. I expect a strong relationship will continue," Apple COO Tim Cook said during the company's just-gone financial call. Samsung's mobile division "crossed the line," Cook added as he explained Apple's move to launch a patent protection lawsuit against its Korean supplier.

So, two firms are at loggerheads in the courts over mobile, but I think we're looking at more than this. I think Samsung will emerge to become Apple's leading competitor. That's despite key philosophical differences between the two.

Dig out your soul

Think on this. Apple's the world's most valuable brand because as a company it knows its own soul, and remains as committed today as it ever was to solutions which focus on the user, or at least, its perception of a user. It writes software, designs hardware and tries to position its solutions at the leading edge of technology, social evolution and design. Jobs calls this the point where technology meets the liberal arts.

Apple understands that maintaining its soul is key to its success -- look at the philosophical effort being put into protecting that as part of the company's in-operation succession plans..

Samsung isn't primarily a software designer, but a manufacturer. It offers a wide tranche of products across multiple sectors, from microwaves to netbooks, smartphones to PCs. Because it makes this stuff it is less dependent on component suppliers than Apple, and while never so much an innovator (in the PC space) it is capable of good product design.


Take a look at the Next Web account of the Samsung Series Nine laptop (above). This Windows machine is thin, light and clearly focused on the same sector as Apple's MacBook Air -- it even uses SSD in place of a hard drive.

"Over the last week or so, using the laptop has generated the same response roughly two dozen times: I pull it out, and people stop what they are doing, come over and ogle it, pick it up, praise it, and then ask me if it runs OS X. No, I reply, it's a Windows machine. Then they look confused," writes Alex Wilhelm.

Apple's reality creation machine

He's making the point that Apple as a company has now become synonymous with good PC design, meaning people are so much more inclined to believe that any PC that looks good must be made by Apple. In other words, Apple's mythology now impacts people's reality perception. Which is what happens when a company successfully becomes married to people's perceptions, a "reality creation field", if you will.

Now consider the iPod. The iPod became THE MP3 player. Now when people ask for an MP3 player they are quite likely to ask for an iPod. The two words became synonymous. The reality creation engine kicked in again. Now take a look into history and you'll find that while the iPod has dominated this industry since whenever, the biggest competing devices came from Creative Technology and Samsung. Microsoft's Zune was just a 'me-too' aside and available only in the USA.

Apple's leadership of the digital audio player segment led it to make further deals with Samsung. In summer 2005, Apple purchased 40 percent of Samsung's total flash memory production, as it has done since with Hynix, Intel, Micron and Toshiba.

Apple's iPhone and iPad are hugely visible market-leading devices with high market shares and Apple's own iOS running on the device.

Where's the competition?

At present it's with Android, and leading competing devices come from a medley of different firms, though Samsung is well-represented in this, so much so that in Europe, Samsung recently outsold industry incumbent, Nokia, in the mobile phone sector. And continues to battle Apple in the smartphone and tablet zones.

"Samsung and Apple achieved outstanding milestones this quarter in the region. Samsung became the biggest mobile phone vendor in Western Europe and Apple the biggest smartphone vendor," said Francisco Jeronimo, European mobile devices research manager, IDC.

Smartphone shipments, that's multitasking, OS-powered devices, increased 76 per cent year-on-year to 21.2 million units –- representing 47 per cent of total mobile shipments. Apple's iOS took 20.8 percent European marketshare.

Samsung's Galaxy range of smartphones and tablets are hotly-touted as the biggest competitors Apple's iPhone and iPad have, at least this week. The Samsung Galaxy S II has already achieved 3 million global pre-orders.

The future is the developing markets

In a way this didn't used to matter. It was alright for Samsung to clean up in the developing markets while Apple consolidated its position in the leading markets, such as Europe and the US. But things have changed. Economic rebalancing and a need to penetrate new markets in developing countries are imperatives to any player in any business today, as world markets undergo painful change. Developing markets are the seed grounds for tomorrow's business success.

Apple knows this.

This is why company management is making such a noise over China -- it reflects the firm's focus on making equal inroads into other developing markets.

  • Apple's products are so popular, people even riot to get hold of them.Apple's business in China has multiplied nearly four-fold since last year.
  • iPhone sales grew 250 percent year-on-year
  • Apple pulled in $5 billion in sales in Greater China in the first half of the current financial year
  • China has over 850 million mobile phone users
  • Samsung, Motorola and Nokia lead in this market.

Samsung has its competitors rattled. The South Korean conglomerate has clearly played a blindingly intelligent game, which is probably why it has chosen to hire UK football ace, David Beckham, as its global brand ambassador for the London 2012 Olympics.

In developing markets, Samsung continues its sponsorship of key local events, including hosting the second Samsung Africa exhibition in Nairobi next week. Samsung Electronics East Africa Business Leader Robert Ngeru said the company will "Showcase innovations in Internet-connected TVs, consumer-inspired digital cameras and the latest mobile technology," during this event. Presumably, these won't include the Apple TV, iPhone or iPad...

Apple's options

There's real issues here. Samsung makes a lot of products of its own, true, but also controls over 40 percent of the global demand for memory, has a huge slice of display and flash memory production and more. Over 60 percent of its revenue comes from component supply deals. The thing is, now it is becoming successful in its own right, will competitors, including Apple, want the company to make components for their products?

This has led one analyst to suggest Intel may make a bid to manufacture ARM-based processors for Apple. These chips are currently manufactured by Samsung.

Piper Jaffray chip analyst Gus Richard this morning called on Intel to make these ARM chips for Apple. He also rejected last week's reports claiming Apple might make a move to abandon Intel x86 processors in favor of an all-ARM-based line-up.

"T]he solution is for Intel to become Apple's foundry and for Apple to integrate an Intel Atom core in its designs. In our view, Intel would pick up Apple's volume, driving revenue growth at good (not great) gross margin. Intel would also benefit from becoming a key supplier in smartphones and tablets and drive growth. Intel would maintain dominance at the high-end of the PC market," he writes, as reported by Barron's.

Will Apple move into manufacturing of its own components?

Manufacturing: Apple's weak spot

I'm not convinced. Apple is well-versed in the various challenges of employment in the countries it already has product manufactured in. Equally, it knows that in order to eradicate some of the more appalling side-effects of the existing employment status quo it would likely have to raise prices.

At present, most tech customers might pay lip service to worker rights, but don't necessarily see that delivering these will require higher priced consumer goods. If Apple owned the iPad factories outright, even paying industry standard wages would be criticized, there would be pressure to improve conditions beyond profitability -- an unpalatable truth it will require a marriage of consumer and industry attitudes to address.

This means Apple's whole widget approach has an Achilles' Heel -- it doesn't manufacture its products and requires partners to achieve this. This advantage is one that Samsung -- despite that it doesn't innovate in software -- is well-placed to capitalize upon. And Apple's apparent CEO-in-waiting, logistics wizard, Tim Cook, is in good position to play that game right back.

And this is why Samsung and Apple will be vying for future bragging rights to the title of being the "new Sony". And why Google loves Samsung so much... We'll see how this game rolls.

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Copyright © 2011 IDG Communications, Inc.

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