This (Or that) road can give Samsung the comeback it needs

Friday was a disappointing day for Samsung. Its’ sales for the third quarter not just fell sharply by 20%, but to exacerbate the pain, operating profit was down by a staggering 60% in the same period. This is bad news for the Samsung fans and shareholders alike. To put things in perspective, Samsung still continues to be the leader in mobile phone shipments. The worry? Market share and shipments are beginning to show a decline

To be honest, most of us who follow the mobile world knew this was coming. Samsung,earlier dominating the world of smartphones, is now handcuffed between 2 segments of the market. If the pummeling from Apple wasn’t enough, especially with the launch of larger screen sizes, it was also getting a hit from low cost players like Xiaomi (Xiaomi, according to IDC, is now the 3rd largest in terms of phone shipments), right behind Samsung and Apple). To put it in perspective again, Xiaomi is just one of the many players taking potshots at Samsung. Micromax, Gionee and the likes are beginning tho beat Samsung at its’ own game.

The fault lies in Samsung’s product strategy that leaves consumers around the world confused, and this confusion cannot be settled even after an end number of debates and statistics. The confusion: 1) Is Samsung a niche or a mass market brand?

2) Which segment of the market does it belong to?

3) Where does the focus lie?

The answers to the above can go either way depending on where you would like to tilt. That is exactly the problem. Samsung has failed to walk in one direction, trying to shoot arrows everywhere instead.

It is true that Samsung has been a leader for years now and this could be a finding in hindsight. But things were different then. Most players (Blackberry, Nokia, LG, HTC and so on) were struggling and the fight was squarely between Apple and Samsung. If you didn’t opt for Apple’s camp, Samsung was the obvious option. The charts below a timeline that demonstrate how Samsung’s market share has fared against its’ competitors in the recent years until now.

A further break up of this market share will give us enough information on why it is getting harder for Samsung to retain market share:

Period	Samsung	Apple	Huawei	Lenovo	LG	Others
Q2 2014	24.9%	11.7%	6.7%	5.2%	4.8%	46.7%
Q2 2013	32.2%	13.0%	4.3%	4.7%	5.1%	40.7%
Q2 2012	32.2%	16.6%	4.1%	3.1%	3.7%	40.2%
Q2 2011	17.0%	18.8%	2.5%	0.2%	5.7%	55.7%

Things have further changed in Q3, 2014 as Xiaomi emerged as the 3rd largest player, further denting Samsung’s prospects:

This shows a consistent fall in Samsung’s market share, from around 32% in 2013 to a low of around 24% in the 3rd quarter of 2014

So what has changed in the last few months. The market looks in a different shape now: Sony is turning around, Microsoft Lumia (erstwhile Nokia) is showing signs of revival ; LG is beginning to showcase the best in mobile technology Chinese power brands like Xiaomi are offering cutting edge specs at delightfully low prices, focusing on volumes to offset low margins. Some like Xiaomi are also redefining ways of business by building a cult around their brands and at many occasions, opting for ‘online only’ sales to cut down on the costs incurred as a result of ‘middlemen’.

This has also had an adverse effect on not just sales but operating margins too, which reflect the customer’s tendency to opt for other low cost brands or Apple as an alternative to Samsung’s Galaxy line of flagship phones. Samsung hasn’t done enough to distinguish its brand from competitors and this means consumers are either refusing to pay a premium and for those who are willing to, Apple provides for a viable alternative with its superior brand image and visibility.

Samsung has to make up its mind. It will continue to lead but at this rate, it won’t be very long before it becomes s shadow of its past. It either has to focus on the mass market or take a flight to the upper end. Also, the now notorious strategy of launching phone to attend every price point and customer is also not likely to work. It needs to focus on genuine innovation and clarify on the brand’s ultimate intentions.

Sure, this might make a temporary dent in Samsung’s fortunes in the coming 1-2 years. But with a long term focus, Samsung will have a clear direction. Also with phones like the Samsung Galaxy Note 4 and more wraparound or curved screens like the Samsung Galaxy Note Edge in the near future, there is not an iota of doubt that Samsung has the capability to make class leading phones but all it needs is focus. With enough cash and R&D at hand, Samsung should see through the tough times without hurting itself much, except for the shipments in the segments it chooses to exit for good.

If Samsung wants to retain itself in the lower and mid segments, it could as well launch a separate brand to cater to them. With Samsung’s penchant for a quick roll-out of new products and offerings across a number of price points, low cost players could be in for a ‘rude’ surprise.

Whatever might be the case, I am confident that Samsung’s ‘have it all’ strategy has its’ fair share of fundamental flaws and this strategy needs to be reversed if Samsung intends to stay relevant in the mobile space. I can hardly think of a brand that places itself in all corners of a marketplace and yet gives clear and concise signals about its brand positioning. Samsung has to decide: Whether it wants to be the Hyundai, Cherry, Volkswagen or the Mercedes of tomorrow? It cant have it all, at once.

Follow me @SauravD86 for more news and updates on the tech world!

Critical mass first, profitability comes second. The right approach??

I have been following companies like Uber, Flipkart, Amazon etc with keen interest in the last few months. Each company has a its own values, rule-books and way of going about things but what truly intrigues me is a common denominator that ties them all : The desire to reach a critical mass, putting everything else ‘virtually’ on a backburner. Critical mass refers to these company gaining momentum by way of having a large user base and topline. These companies, hope that in the long run, with a massive user base, that runs in millions and a massive topline in billions, they will be able to extract profits by unlocking the profits from these very customers that have been addicted to rock bottom prices in the past. This future, in many cases, can refer to years or even a decade far into the future. Will that ring true or sounds all too fancy ?

Don’t get me wrong. There will be a handful of companies that will eventually be profitable in the long run by building a large user base and using that loyalty to ‘milk’ profits. 1 in 10 companies will eventually hit a home run and be the envy of the corporate world tomorrow. What amazes me is the fact that virtually every entrepreneur who dreams to make it big follows the same principle and strategy: building a ‘critical mass’ and leaving the task of making profits for the next decade.

Uber is something that proves to be an inspiration for many budding ambitions. Business Insider took out a report in June where it claims that Uber has a top-line of around $10 billion dollars. It further goes on to say that with a margin of 20%, the gross revenue turns out to be in the range of $2B. It is safe to say that at an operating level, Uber is or will be profitable (These are only estimates as Uber is not a listed firm yet). Uber has a truly disruptive business model and has revolutionized the way we look at point to point travel. It has made transportation simpler, leaner and more customer friendly. Uber adds real value in the industry it operates. It is simultaneously building scale and profitability.

Booking.com is another example. It simply acts as a middleman between the buyer and the service provider and charges a fee (around 10-15%). Although booking.com will not actual numbers, a leaner model like this ensures profitability as well as a large user base in the long run. Booking.com’s unique selling proposition (‘USP’) lies in the fact that it offers a large selection of hotels, something that is difficult to replicate. It does not charge its’c customers directly, and that is another benefit that customers are offered. Booking.com, again, is offering real value to its customers.

There are instances where a large user base does not necessarily lead to sky-high profits in the long run. In the early 2000s, a number of free e-mail providers opened shop and provided free e-mail accounts, hoping that eventually, they will land with a lot of money in their pockets. Customers could choose between Mail.com, Yahoo, Hotmail, Rediff and a host of other providers. In the next few years, all of these vanished and today, Hotmail is struggling to remain relevant despite re-branding it as outlook.com and Gmail seems to be the ultimate winner.

Customers opted for mail accounts because they were free. Even today, many customers would close an account if they were asked to pay up. Why? Because another mail provider would take it’s place and offer the service for free. Google has depended on its ‘search’ capabilities to capitalize on such a user base, without which, it would have little or no revenue. An access to a large pool of data and Google’s ability to make sense of it is another advantage.

It remains to be seen how players like Whatsapp, now an entity owned by Facebook, end up in profits in the long run. Whatsapp, that earlier charged a $1 fee, is now giving away it’s app for free in the face of intense competition from Line, Kik etc. Whatsapp focuses on messaging with a clean interface while others like Line and WeChat have opted to sell value additions like stickers and games on its app to bring revenues.

In other cases, players are forced to walk the path of ‘critical mass’ to survive. Take the case of Snapdeal.com, an online marketplace in India. If I were to hypothetically assume that the management intends to focus on profits even in the short run, it would be almost impossible to do so with fierce competition from Amazon and Flipkart. Snapdeal could be in a dilemma: charge a higher price and Snapdeal would be out of business; charge a lower price and at least Snapdeal is living to fight for another day.

To avoid, what I call a ‘double edged’ situation like this, one has to build a niche and create strong barriers of entry. Economies of scale itself is a barrier of entry but one cannot use it as a weapon when the other competitor relies on exactly the same thing!

Zappos is a fine example of providing exceptional value to their customers. It is largely knows for its customer service that is groundbreaking even to this day. Now acquired by Amazon, it relies on customer service to drive profits and revenues. Culture and work philosophy that itself is a USP and cannot be easily replicated.

Twitter, although still in the red, has bright chances of making it on the other side. To me personally, Twitter is an equal or even a more powerful tool of communication that Facebook. Tweets are more viral and the focus lies on content in 140 characters and usage of # or hashtags. Facebook, I feel is trying to be everyone at the same time. And that means focus on the user is taking a backseat.

However, Critical mass doesn’t always naturally lead to profits in my opinion. It essentially depends on whether customers are hooked on to your product or service because they are priced cheaply or whether they actually find real value in the offering and will be willing to pay a higher price, if asked for. This should take into account the substitutes whether the brand is truly offering something innovative that cannot be replicated and hence, they could build profits by either hiking prices or further innovating on their business model.

The problem is that most entrepreneurs end up opting this not because it is the most efficient and optimal option available, but because this is the easiest way out. After all, with enough capital and funding, it is far easier to sell at lower prices and build a company than to make profits by showing ‘real value’ to your customers from the very first day.

Venture capital firms, hedge funds and private equity investments into such businesses are reasonable. After all, even if a handful of these investments click, they end up being rewarded with not just high ROIs but also end up being refunded on all failed investments!

So, when one starts a business, I hope one explores all the possibilities, including the option of adding real value to customers in ways where they are readily willing to offer the margin the business deserves. In a technological era that is constantly changing, I am hopeful that there will be more entrepreneurs who will continue this unbridled wave of innovation but not at the cost of profits. Or is a user base more valuable than the money itself? Are we missing out on a link? Time always has the right answer.

Time.com took out this interesting article in 2013. Although it is dated now, the perspective and details are relevant even today : http://business.time.com/2013/10/29/these-8-internet-companies-are-worth-over-1-billion-but-they-havent-made-a-dime/