The Scariest Company in Tech

The last few days have rocked the mobile world. HP is posturing itself as a major new player with WebOS. Nokia jumped from their burning platform into the sweet embrace of Microsoft (they are no doubt making out as we speak). All the while the spectre of Apple and Google hang over everyone and dominate every discussion in every forum on the web. Yet as this happens, the most fearsome company in tech sits quietly, hardly recognized as the threat that it is.

There is a great tendency when discussing the mobile landscape to compare it to the PC world. Google is Microsoft. The various mobile manufacturers are the various PC manufacturers. Apple is Apple.  So it is common to see people assume that the hardware market will become commoditized and that the vertical empires will crumble. That economies of scale will cause component manufacturers to specialize just like they did in the PC market. This sort of argument ignores the value of vertical integration. By doing more things yourself, you avoid having to pay a middle man and potentially have a faster product rollout. What made the PC industry a commodity industry was that none of the big PC manufacturers at any point controlled the important components or shipped those components en masse. No one controlled their own processor, Intel or Motorola did. No one controlled RAM or graphics. A few vendors had a presence in hard drives. In short, no PC manufacturer controlled enough of their own components to actually leverage the advantages of vertical integration.

In other words, there was no Samsung.

There are many components that go into a smartphone, but of them all the three most important are memory (both RAM and flash), displays, and SoC silicon. Samsung is an industry leader in all three. No other major manufacturer has significant presence in more than one. We haven’t seen this since the mainframe days of IBM, and we have never seen anything close to this in the PC world.

Right now the Android market looks deceptively like the PC market, with many vendors, none with a majority. I expect this to change. Remember that Samsung has only been a major Android player for well under a year, far shorter that either HTC or Motorola. I don’t see anything that either of them can do to stop Samsung from gaining a clean majority of the Android market. This will become clear as Android enters the lower end of the handset market and Samsung’s component advantage becomes even more important and insurmountable.

This is nothing new. Back in the days before smartphones, the single most important phone components were the antennas and radios. Nokia and Motorola were the dominant handset players with collectively about 2/3rds of the market. Guess which manufacturers had the most expertise and patents in antennas and radios. Yup, it was Nokia and Motorola. The thing was that they were roughly even in this regard. No one is even close to Samsung in dominating so many major components. They could very plausibly take 2/3rds of the Android market for themselves.

There is one area in which Samsung is lacking: software. Unlike Apple or RIM, they are entirely dependent on Android. While this is clearly a relevant concern in the smartphone market as a whole, it doesn’t matter too much from within the Android ecosystem since everyone else is in pretty much the same boat. That, however, could change completely if Samsung dominates the Android market like I think it will.

Many people are familiar with the embrace, extend and exterminate (EEE) strategy employed by Microsoft. The idea is that Microsoft adopts a standard in its products. Those products quickly become the majority player within that ecosystem of similar products due to Microsoft’s scale and scope. Then Microsoft would extend that standard in a proprietary fashion. Since Microsoft is the dominant player, that proprietary extension in effect becomes the new standard, essentially giving Microsoft control of the whole market.

It is worth noting that no PC manufacturer was ever able to employ this strategy against Microsoft’s Windows software. This is because 1) Microsoft’s software is proprietary and therefore difficult to extend in any meaningful way, and 2) no PC manufacturer ever had enough marketshare to get away with it. Now contrast this with Android. They are open and very extendable, and if you buy my arguments so far, Samsung could see itself in a majority position before too long. Moreover, while there is great brand awareness and loyalty surrounding Android in general, there is no such mindshare surrounding it’s actual UI and operation. Most Android handsets ship with custom skins and software preinstalled. This makes Android very open to an EEE takeover.

If Samsung decides to go this route (which they very well may not) the first sign will be a major push into development tools. They will want to ensure that developers follow them when they fork Android. The majority installed base plus a strong developer following will make Samsung’s fork the de facto choice that other manufacturers will be forced to license, probably for free. This would steal all control of Android from Google. I don’t know if Samsung is capable of such a coup (their software up ‘til now has been garbage), but the fact that they might be a position to even consider it is scary enough.

The old PC analogies are no longer relevant. We have sailed from those shores and are now in strange new waters. No one truly knows how all this is going to unfold. But what I am sure of is this: we should be afraid of Samsung. Very very afraid.