Microsoft and Samsung Are Taking Dark Paths to Smartphone Success

By Michael Comeau  OCT 03, 2013 8:39 AM

The tech giants are on alternate routes to growth.

 


Can money buy Microsoft (NASDAQ:MSFT) some smartphone love?

And why is Samsung (OTCMKTS:SSNLF) trying to game benchmark tests?

These, my friends, are the questions that tech investors should be asking themselves this week while waiting for Twitter's highly anticipated IPO filing to drop.

So let's get down and explore the dark side of smartphone growth strategies.

Microsoft's Mobile Pickle

As it stands now, Microsoft has a very weak position in the mobile device market that is completely upending the traditional PC business.

In the second quarter of this year, smartphones running Microsoft's Windows Phone operating system held just 3.3% of the market share, according to Gartner. In tablets, Gartner tells us that Microsoft's Windows platform held 4.5% of the market.

While Microsoft has been making gains in both areas (off very small bases), the competitive situation is only getting worse.

The never-ending stream of new Google (NASDAQ:GOOG) Android devices is still flowing, while Apple (NASDAQ:AAPL) is likely to soon announce a new iPad Mini. And of course, its new iPhone 5S is sucking up mass quantities of media attention while flying off the shelf.

Additionally, while I believe that Microsoft's Surface Pro 2 tablet is in some ways an ideal device, it also has issues. Starting at $899, it is far too expensive -- and meanwhile, Microsoft is unnecessarily creating confusion in the market place with the Surface 2 tablet.

The Surface Pro 2 and Surface 2 have very similar names, but they each run different operating systems with their own app ecosystems... and in any case, the Surface 2's predecessor sold so poorly that it resulted in a $900 million writedown for Microsoft.

The Solution? Cold Hard Cash



In September, Microsoft began offering gift cards of $200 or more for used iPads to get users to convert to the Surface.

And just this week, it expanded the program to include iPhone owners.

Now this is a just plain odd situation, given how common it is for Apple enthusiasts to despise all things Microsoft.

Maybe there are fence-sitters considering dropping out of the Apple ecosystem... but how many could be left?

The iPhone 5S is unequivocally the best smartphone on the market, and in any case, Android has probably already pulled out a lot of users that just weren't that into Apple.

The logical conclusion is that Microsoft is simply desperate to build market share

Samsung's Benchmark Games

ArsTechnica is one of the technology industry's leading publishers of smartphone performance benchmarks, and it found something funny when it reviewed the new Samsung Galaxy Note 3: It was rigged to give great scores on benchmark tests.

The Galaxy Note 3 runs on a Qualcomm (NASDAQ:QCOM) Snapdragon 800 processor, but blew the doors off the LG G2, which uses the same chip.

How?

Well, when the Galaxy Note 3 detected that it was running a benchmark test, it kicked the processor into overdrive. ArsTechnica reports that while Samsung did this with the international version of the Galaxy S4, it's the first time the publisher had seen it happen on a US device.

ArsTechnica also noted the following:

The ironic thing is that even with the benchmark booster disabled, the Note 3 still comes out faster than the G2 in this test. If the intent behind the boosting was simply to ensure that the Galaxy Note 3 came out ahead in the benchmark race, it doesn't appear to have been necessary in the first place.

But Why?

It's simple. Differentiation is becoming very difficult in the Android market, courtesy of how rapidly hot new models keep coming on the market.

Let me circle back to early August, when I discussed the challenges facing leading Android phone makers Samsung, HTC (TPE:2498), and Motorola:

Every company has access to the same mobile phone components -- or at least equivalent ones -- from companies like Qualcomm, Broadcom (NASDAQ:BRCM), and SanDisk (NASDAQ:SNDK).

So where can an Android smartphone maker get an edge?

Customized software? Nah, the customers that notice it usually hate it.

Manufacturing? Nope, contract manufacturers are open to everyone.

Supply chain? Sorry, Dell (NASDAQ:DELL) taught the world the magic of just-in-time inventory a long time ago.

Samsung is still the clear leader in terms of smartphone volumes, with number-one market share and 57% unit growth in Q2, but it has acknowledged that competitive pressures -- the same ones that took down HTC -- are heating up. The Samsung-Apple duopoly is most certainly coming under pressure form the fast-growing LG (NYSE:LPL)/Lenovo (OTCMKTS:LNVGY)/ZTE (SHE:000063) triumvirate, at least in international markets.

Isn't There a Better Way?

Samsung is perhaps fighting the specs war because it may be the last resort.

It certainly can't out-design Apple in hardware or software, and even with Android, I'd argue that Samsung doesn't have anything as visually appealing as the HTC One.

It can't really go down in price without hurting the brand and profitability.

So it's going for the specs war route, which seems bad for one reason: It is at risk of training customers to focus on numbers.

Why Is This Bad?

Simple -- because those same numbers are accessible to everyone.

As I noted above, all the manufacturers have access to the same hardware and software, and they're all constantly cranking out new models. So how does one maintain a sustainable edge in terms of specs?

And even this benchmark gaming nonsense can only go so far, since the competition is doing it as well! A subsequent AnandTech study found that every phone OEM (original equipment manufacturer) besides Apple and Motorola is trying to overstate performance numbers.

I'm sure the hope on Samsung's end is that people will associate Samsung with high performance, but how many people really notice extra processing power in real-world use?

Growing Pains

Samsung is indeed the king of the hill in smartphones. But as a high-profile publicly-traded company, it still has to grow -- and in a hypercompetitive market, that's simply not easy.

What Does This Say About the Smartphone Market?

The smartphone and tablet markets are simply terrifyingly competitive, judging by its low profitability (ex-Apple) even in the face of extraordinary growth.

As time goes on, and as the market inevitably slows, the tactics will only get more fierce -- and in some cases, more pathetic.

Stay tuned. This story is not over.

See also:

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Google Glass Rival Turns Any Flat Surface Into a Tablet, Offers Near-Instant Translation

Why US Firms Won't Dominate the New Data-Privacy Market

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