Samsung’s Circular Profit on Apple

Samsung’s Circular Profit on Apple

Apple has a clear arch-rival in the smartphone business: that is Samsung. Though Google Pixel is emerging along with Huawei, the company that keeps Apple awake in the night in the smartphone business is Samsung. Samsung delivers the best Android devices, at scale, which challenge Apple products across many indicators.

Between Apple and Samsung, Samsung is a better business in terms of re-positioning, but Apple is a fashionista brand which makes customers great fans. Samsung has better engineering, but Apple builds better customer perceptions on products. But when you look deeper, you will notice that without Samsung, there will not be any Apple iPhone in this world, at least at its quality level. Samsung will make about $110 from each iPhone X sold.

Samsung actually has a vested interest in the iPhone X being a huge success. According to The Wall Street Journal, the company stands to make around $110 from each phone sold, which all told could result in billions more than the company even made on its own most-recent flagship, the Galaxy S8.

To be clear, all that money will go to Samsung Group, the conglomerate, as opposed to specifically the mobile division of the company. Why the windfall? Samsung made the OLED display, NAND flash, and DRAM chips in the iPhone. It’s currently the only company capable of manufacturing these items at the volume that Apple needs, which means Apple has to buy the parts from Samsung.

If the iPhone X sells the way analysts think it will, that means Samsung stands to make billions of dollars off its competition. In fact, the Journal reports that one analyst thinks Samsung will likely earn $4 billion more from selling parts to Apple than it did from sales of its own phone.

Technically, Apple is equipping its main competitor. For Samsung, that iPhone X is selling very well is not really a bad thing, since that means Apple will need more display and memory chips from it. And should Apple struggle, Samsung can easily fill-up the gap since it has its own big smartphone business.

Personally, I do think that Apple will be having quarterly nightmares whenever it sees Samsung break sales records just as Apple is breaking sales records, especially when Samsung has shot itself in the leg. Apple was the primary reason why Samsung recovered easily from its burning phone scandal: the revenue coming from Apple to Samsung’s chip business was enough to make a huge scandal to fizzle.

So, no matter what Apple does, Samsung will win. If it does not do well in its products, Samsung technology will come after its customers. And when it does well in its products, Samsung components will be needed in huge numbers thereby helping Samsung. So, irrespective of the circumstances, Samsung will profit from or on Apple. I call this Circular Profit.

Simply, you have circled your competitor that no matter any action it takes, you will benefit. When the competitor is doing well, you are also doing very well. And when the competitor struggles, your product fills up the space in the market. Under both circumstances, you will profit from or on the competitor.

What Samsung is doing to Apple is also close to what Intuit has done to some partners with the major difference being that the partners built as parasites within the Intuit ecosystem. Apple is not doing so, as it has a clearly differentiated product despite the fact that it uses Samsung components.

One company that has done that very well is Intuit, an American company that is known for selling tax software. A key attribute of Intuit is giving most things free. You can accuse the firm that it hates revenue. You see competitors building products and solutions on its platforms. But there is a catch: after few years, the competitors become invisible. They become folded into Intuit business in the eyes of customers.

So, for decades Intuit continues to swallow competitors without buying them. I have called its model: Fish Bait Acquisition Construct. It is a model where you give things free to competitors. As they come to enjoy the freebies, you trap them, and over time, they become weak. The end game is that over time, they beg you to take over their assets.

All Together

The finest moment for a company or a nation is when you circle around your main competitor. When that happens, all actions the competitor takes will generate money for you. Head, you win; tail, you also win. Samsung has successfully circled Apple. Largely, if not for global regulations, Samsung can decide if Apple will have iPhone X in the market tomorrow. It can simply says “Apple, we cannot supply to you”, but that of course will not happen because Samsung wants to move products out of the factories.

At national level, colonizing states like France and Britain have circled most African countries, profiting from any action they take. If Cameroon grows its economy, France will have more markets to ship consumer products for the citizens since nothing of value is made in Cameroon. And when Cameroon struggles, France also fills up with loans which ensure that the nation is tethered to France. And if crises happen, be sure that France is going to supply the ammunition. Simply, under all permutations, France will profit from the conditions in Cameroon.

The relationship between Apple and Samsung is unprecedented. And I do think that there is an inherent risk element there as we expect the $1 trillion Apple valuation very soon. But of course, Wall Street does not see it that way, and for Apple that is all that matters. But whether it hurts Apple or not, I do suggest you never allow your main competitor to circle you. You must work to accumulate capabilities to mitigate such scenarios from happening.

 

A Commenter on LinkedIn Explained the Manufacturing Processes here

Apple’s business model is what i call *Design, Outsource, Assemble & Market* (DOAM) Model. They design what they want and it is usually sleek, custom made and can be perceived to be better than what is already available for example their System On Chip (SOC) and then outsource the fabrication. Taiwan Semiconductor Manufacturing Company (TSMC) manufactures Apple’s chips while Apple assembles, program and markets.

Samsung on the other hand uses a model i call *Design, Manufacture & Market* (DMM) Model. Apples DOAM Model has been profitable over they years that they stopped using Samsung chips and launched the A-series SOC. Then out of nowhere, Samsung made the first and only breakthrough in OLED Screen Technology. They are the only ones that can Mass produce OLED Screens on Planet Earth at this point in time.

Apple’s Marketing Strategy is to *WOW* their customers but their isn’t much about the iPhone X that would wow anyone up to the point of spending $1,000 to purchase an iPhone X if you take away the OLED Screen which is the latest innovation in Screen Technology and that is exactly where Samsung got them.


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