Samsung – No Song Sheet

Google buying Songza is bad for Samsung not Spotify.

• Google has decided to acquire the music streaming service Songza which effectively means that Samsung will now have to shut down its similar service called Milk Radio. .
• Google is paying somewhere between $15m-$40m for the fledgling service whose specialisation is in the accurate curation of music.
• Songza has taken the position that people are better than machines at curating music and creating playlists and uses humans to program the playlists.
• Songza has 50 such curators to create the playlists that are then offered to users based on their preferences.
• Google could have replicated Songza without too much difficulty but Songza is clearly not doing well meaning that it was cheaper to buy then build.
• Songza, will now become part of Google’s music service and given how important curation has become, give it a much needed boost.
• This is a negative for Pandora and Spotify but given that Google has had very little impact the streaming music business so far, I doubt they will be losing much sleep.
• The real problem created by this acquisition is for Samsung.
• In January 2014, Samsung agreed not to compete with Google in any area of the ecosystem (see here).
• Now that Google has a proper streaming service, Samsung will be obliged to shut down Milk Radio which is its US music streaming service.
• The deal with Google is a 10 year deal and it means that Samsung is precluded from developing a Digital Ecosystem for 10 years.
• RFM research strongly indicates that there are only two places where good profitability in this space will be possible.
  • First: In the ecosystem. This is where the users will be making choices and where user preference will increasingly be found.
  • This gives the preferred ecosystem players the ability to price their products at a premium (e.g. Apple).
  • Second: In supplying value added technology. Good examples of this are Qualcomm, MediaTek, Nuance and Wacom.
  • Having a technology edge gives the ability to charge higher prices and hence earn better returns.
  • I see Samsung as a fantastic manufacturer but not as a developer of technology for devices.
• Samsung had a chance to develop its own ecosystem but now that it has given up that strategy, commoditisation beckons.
• RFM believes that this is a disaster for mobile device profitability and forecasts that IT and Mobile Coms. EBIT margins will fall from 18.4% in 2014E to 11.3% in 2017E.
• This division is so large within Samsung Electronics that this margin decline is enough to cause group EBIT to fall by 24.8% between 2013A and 2017E.
• Samsung is cheap, but I am struggling to think of a single tech company that has outperformed with declining margins and earnings.
• Hence, I think that Samsung will continue to underperform and see no reason to buy the shares.
• Google, Microsoft and Yahoo! are all far better places to look in the Digital Ecosystem.