Much of tech media’s focus in recent weeks has been on two epic grudge matches: Apple (AAPL) vs. Samsung (005930) and Apple vs. Amazon (AMZN). Both narratives are full of melodramatic twists, jury decisions and glitzy product launches. But I find the third side of this triangle perhaps more intriguing than these two headline-grabbing rivalries. That’s because in Samsung vs. Amazon we can see a crystallized form of two pivotal struggles: content vs. hardware manufacturing and the smartphone market vs. the tablet market. These are the two fundamental issues of our time, rivaling the monarchy vs. democracy and religion vs. science debates that defined the Age of Enlightenment.
Apple and Samsung are the only two smartphone vendors that matter. Apple and Amazon are the two most likely content-distribution giants of the next decade.
Samsung and Amazon have very little in common. It’s their opposite natures that makes their rivalry compelling. This is like Michael Phelps vs. Gabby Douglas. Samsung is exceptionally accomplished in vertical integration, leveraging its memory and display expertise to drive its relentless smartphone expansion. Amazon is a shopping champion expanding aggressively into content distribution, using hardware merely as a tool.
The fact that the expensive Galaxy S III sold 20 million units in just 100 days demonstrates how Samsung is now utterly crushing the old smartphone champs. Research In Motion (RIMM) is now selling fewer than 8 million units of all of its smartphone models over a similar time period — Nokia fewer than 4 million units.
Yet despite Samsung’s soaring smartphone volumes, it has faced a series of devastating setbacks in the tablet market and of course never even launched an eBook entry. On Thursday, Amazon revealed that Kindle Fire had 22% of the U.S. tablet market this year. Amazon’s thoughtful, ingenious new tablet range clearly has the potential to grab at least a quarter of the American tablet market this winter. How important is being a strong No.1 in the smartphone market compared to being a strong No.2 in the tablet market?
They key question here is about the value of content consumed on smartphone and tablet platforms, and how that relates to the value of the hardware. The London Olympics provided a fascinating snapshot of where we are right now.
During working hours, smartphones were slightly ahead of tablets when it came to usage per hour, but from 7:00 p.m. to midnight, tablet usage soared above smartphone usage. Those are the hours most valued by advertisers and television networks. And tablets are grabbing the role of the second device alongside the television set, becoming a key tool when it comes to reacting to television ads and shopping on the sofa. Smartphones are used while walking to the subway or sitting in a boring meeting.
It’s worth noting that smartphone market is still more than four times bigger than the tablet market in 2012. Tablet sales will hit 110 million units this year — smartphone sales beat that volume every quarter. Yet even with a far narrower device base, tablets already stole a march on smartphones during the evening of the London Olympics.
Tablet volume growth is likely to top 65% in 2012. Smartphone volume growth is cooling off at below 40%. Several app vendors I have interviewed in recent months state that iPad apps already generate roughly 35-50% as much revenue as iPhone apps. The iPad may have a far smaller device base, but vendors can charge more for iPad apps and/or consumers are more motivated to pay for in-app purchases on a bigger screen.
Samsung’s triumph in the smartphone market is amazing; the company may sell more than 250 million smartphones in 2013. But its inability to make any real dent in the tablet market may well take the shine off this achievement.
The price competition in the smartphone market is brutal and getting worse. Samsung will have to push the price of its low-end devices below $100 very soon to fend off spirited challenges from Micromax, Spice and Nokia (NOK) in emerging markets. Its margins will come under real pressure if Apple decides to take the plunge in Asia and drop the price of its cheapest iPhones in 2013.
But the tablet content, advertising and e-tailing markets are only starting to blossom. If Amazon can grab 25% or even 35% of the U.S. tablet market, it can create an entire content and shopping industry for people surfing from their sofas, watching television and fondling their tablets. This is the heart of American life: 8:00 p.m to 11:00 p.m. on the sofa. This is where Detroit, Hollywood and consumer behemoths from Coca-Cola to P&G aim their marketing spend. And whatever happens in the American consumer market will reverberate across Europe and emerging markets.
