Why Samsung Is Increasing Its Focus On Software And Services
Samsung Electronics‘ (PINK:SSNLF) new smartphone head is reportedly looking to increase the division’s focus on software. The move makes sense, as Samsung looks to differentiate itself and win back share in an increasingly crowded smartphone market. Samsung’s smartphone business accounted for about a third of its overall earnings for Q3 2015 – about half of what it contributed at its peak – and the company’s share of the smartphone market fell by over 3% year-over-year to 21% as of Q2. ((Smartphone Vendor Market Share, 2015 Q2, IDC)) In this note, we take a look at how providing a robust suite of software and services could shore up Samsung’s profitability and valuation.
See our full analysis for Samsung Electronics
Software Differentiation Is Important
Although software has been somewhat of a weak point for Samsung in the past, the company may be gradually rectifying that. Samsung got off to a decent start with the launch of Samsung Pay, and is likely to continue to attempt to leverage software to improve growth in the mobile segment. (see Why Samsung Is Entering The Mobile Payments Fray) Moreover, with new smartphone head Koh Dong Jin – who headed Samsung’s mobile research and development unit and worked on Samsung Pay and the Knox security system – at the helm, there’s a good chance that we will see a shift towards more software-focused innovation from Samsung.
How This Could Impact Samsung
As many smartphones across different price points largely have the same functionality and similar form factors, it’s very valuable for a vendor to offer unique features – be it hardware, software or services – that can help separate it from the pack. Android vendors together hold about 80% of the global smartphone market, and there has been intense price competition, since devices use the same OS and largely similar hardware. On the other hand, Apple – the world’s largest smartphone vendor by revenue – has been relatively isolated from this, owing to its popular design and a robust software ecosystem. The value of this differentiation is immense, with the iPhone’s ASP standing at over 3x that of Samsung devices as of Q3 (ASP of $650+ versus $190).
Apart from improving pricing power, there are other benefits of doubling down on software and services. For example, creating a compelling service ecosystem could increase switching costs around Samsung devices, leading to improved customer loyalty. Additionally, there could be an incremental revenue upside from selling software and services. We forecast Samsung’s average selling price for a mobile phone to decline from over $200 in 2015 to $168 by the end of our forecast period, with its share of the mobile phone market declining to about 15% from around 20% currently. However, if the company is able to create compelling software differentiation, allowing it to improve ASPs to about $230 over our forecast period, while maintaining its current market share, it could result in an upside of over 10% to our current price estimate.
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