Samsung services – Repeating history?

Here we go again.

• The last time Samsung had a go at services the result was expensive and painful and resulted in a civil war inside Samsung that ended in capitulation to Google (see here).
• This time around there are some differences but Samsung’s ability to compete is limited by its deal with Google which I think is certain to remain the pre-eminent provider of services on Samsung smartphones.
• In a site visit, Samsung executives spoke with the FT (see here) where the clear intention seems to be to emulate what Apple is doing in and start generating revenue from services.
• Samsung had a major change of direction in 2014 (see here) and since then it claims to have been making major software investments that it hopes to package into meaningful customer experiences.
• What this means is very unclear, but we can write a few things off right away.
  • First, Digital Life: In January 2014, Samsung signed a 10-year patent cross licence with Google (see here).
  • Included in this deal was an agreement that Samsung would not compete with Google’s core ecosystem services on its own devices.
  • Consequently, this means that for a number of digital life services, Samsung is unable to offer a service until 2024.
  • This deal also ended Samsung’s ambitions to develop its own digital ecosystem and instead it threw its weight behind Google.
  • I continue to think that Samsung’s shareholders would be best served by abandoning its software ambitions and instead focusing on a deeper co-operation with Google (see here)
  • Second, Media streaming: Samsung has ruled itself out from competing with Netflix and Spotify as it views them as partners rather than competitors.
  • This means that in its core markets in the USA and Europe, it will not be offering a streaming media service.
  • Third, Bixby: is Samsung’s digital assistant which has so far proved to be more of a hindrance to its ambitions rather than a help.
  • Accidentally pressing the Bixby button has led to so much frustration from users that Samsung has wisely included the ability to deactivate the button in a recent software update.
  • Based on Bixby’s performance to date, the outlook for Samsung to produce intuitive and intelligent services is highly questionable.
• I think Samsung is not pinning its hopes on the services that are already popular but on new use cases that will emerge as new technologies enable them over time.
• Technologies like 5G, AI and the smart home appear to be where Samsung is pinning its hopes.
• It has a strong presence in the home with both its consumer electronics and the SmartThings platform it acquired in 2014.
• However, Amazon is increasingly dominating this space and given that Samsung’s AI can not hope to compete with even Amazon’s, success in this area looks like it will be a stretch.
• Furthermore, it cannot afford to make its consumer electronics incompatible with either Google Assistant or Amazon Alexa as this is something that buyers are increasingly looking for in their products.
• The net result is that Samsung is very unlikely to develop a thriving services business, like Apple although there is no reason why it should not develop a device insurance business like Apple Care.
• Consequently, I think that these investments are not going to offer a positive return for Samsung shareholders meaning that it might be better for Samsung to focus on what it does best: hardware.
• That being said, this is still a rounding error in its financial statements which are seeing both a bottoming in semiconductors and a benefit from Huawei’s market share losses outside of China.
• Hence, I still like Samsung as an investment in this space and I continue to hold it in my portfolio.