The Galaxy S5 is indicative of a broader trend in the smartphone: evolution over revolution. We have been spoiled with revolutionary new features and game-changing performance increases. However, the hardware innovation appears to be slowing down.
The Galaxy 5 is an evolutionary product. It improves on a few areas, but ultimately there is not enough to make people upgrade from the Galaxy 4. We are going to see sustaining improvements as the smartphone market reaches maturity.
That is not to say that smartphone innovation is finished, but much of the innovation is going to come from the introduction of sensors into the phone, software, and service improvements, and how the phone will interact with the range of wearable devices. The innovation will move away from hardware towards the kinds of services and platforms that the smartphone enables. Services such as ordering taxis, mobile payments, and location-based services will add value on top of the smartphone platform.
Samsung's main challenge is that the bulk of its profits come from the premium segment, where its core scale and supply-chain strength is less of an advantage. The key to success in this segment is differentiation, and as the market has matured, it is less about features and more about design and brand.
As Apple continues to dominate in this segment and competitors such as HTC, Huawei, and ZTE catch up quickly on design, brand differentiation is critical. Samsung's success with the premium line comes down to a huge marketing budget. According to Benedict Evans, this could reach $13 billion in 2014. It is unclear how long the company can maintain this level of spending.
Samsung is now completely unable to differentiate on the software side with Google driving Android consistency. A quarter of all Android handsets sold in China last year did not include Google services and therefore were not as valuable to Google. The company is therefore preventing fragmentation of Android, making it even harder for Samsung to truly differentiate itself.
At the low end of the market, margins are coming under continuing pressure, and price leadership has been difficult to maintain in emerging markets with OPPO, Wiko, and Micromax all producing handsets in the $100-$200 segment. The bulk of Samsung's business, despite the high-profile nature of its Galaxy line, is in the middle and low end. This is where Samsung is losing share as cheaper manufacturers build capacity and experience and can use lower labor costs.
The bulk of growth in the market will come at price points of $200 and less, and these segments are simply less profitable than the high end. For Samsung, this means increasing pressure on margins.
In the long term, profit will be captured at the data and app layer, rather than the hardware layer, which is where Samsung's competitive advantage lies. The proliferation of Internet-enabled devices will offer vast hardware opportunities for Samsung, especially with its expertise manufacturing hardware such as refrigerators, washing machines, and TVs.
Samsung already has the largest portfolio of hardware, and it has a huge opportunity to connect these and really add value for the customer. However, Samsung does not have the internal software and machine-learning capabilities to provide best-in-class solutions in the post-mobile world.
This article was originally published on EBN's sister publication EE Times.