How Apple, Samsung, and Google Came Out on Top

In my previous post on the Microsoft–Nokia combine, I mentioned that Apple, Samsung, and Google had been leading the way in the operating system market for mobile phones. Here I provide a bit of a background on how this came to be.

Back in 2002, Samsung had a 7 percent share of the market, and Apple was not even on the horizon. Today, as software and device players, Google, Samsung, and Apple are leading the way.

Each of these players has achieved what they have by following slightly different paths. In Apple’s case, beautiful design and ease of use were central to its success. Tight integration of hardware and software—a core strength of Apple’s from the beginning—and readily available applications made for a solid user experience. And the company also benefited—along with software developers—from the indirect network effects created by the apps.

For Google, it was the recognition that a large upfront investment in software would pay off—even if that meant giving the software away to device manufacturers. Google’s core business, search, would only be amplified in the context of a mobile device. But for this to succeed, it still needed the beautiful design and the applications.

The former was achieved by allowing, via the open platform, many competing device manufacturers to provide handsets. These manufacturers chose Android because of its low software costs relative to other platforms such as Windows. Further, the desire to stand out in a crowded market encouraged them to build better devices.

Need a cellphone with a built in projector? There are several now on the market! The fact that many device manufacturers were using the Android platform encouraged more software and app developers to contribute to Google’s Android Market. This took care of the applications issue.

Samsung, meanwhile, had several things going for it. As a broad-spectrum appliance player—from refrigerators to television sets and from vacuum cleaners to washing machines—Samsung has strong brand recognition the world over, and especially in growing markets such as India.

Another factor in Samsung’s favor was that it is backward integrated—it’s a player in several components that go into the smartphone. A consequence of this is that it has been able to leverage its components business to provide a wide range of handset devices appealing to different segments in the market. From more price-sensitive customers in parts of the world where handset subsidies do not exist (see my earlier post on a cheaper iPhone device) to those that want a high-end device, Samsung can cater to a range of consumers. Samsung therefore has devices with large screens, larger screens, and even those with a built-in projector, Samsung Beams.

The company is even enjoying a positive spillover of its smartphone prowess into consumers’ perceptions of its other products, according to a story in the Wall Street Journal.

Of course, in understanding the reasons for the success of Apple, Google, and Samsung, one must also consider the relationships that exist between these companies and cellular-service providers such as AT&T and Verizon.

Service providers play a key role in getting the phones into the hands of customers. How the device companies manage their interactions with service providers is an important factor in the final outcomes—either positive or negative—for Samsung, Apple, and Google. As evidence of this, one only needs to look at the attention that conversations between Apple and China Mobile (the world’s largest service provider) have been getting.

All three companies have arrived at where they are in several different ways. As with Nokia, however, future success is not guaranteed. Apple is already seeing a fall in its smartphone market share. While one can argue that what matters ultimately are Apple’s margins, given that the market itself is growing and that the company’s margins are the healthiest in the industry, it is nevertheless the case that the growth has shifted increasingly to emerging markets, where service providers do not necessarily provide handset subsidies.

In such a world, it is possible that sticking to the high end (even with the new Apple iPhone 5C, which costs $733 in China) can ultimately begin to hurt (especially if one compares its prices with those of other providers, such as Xiaomi’s Mi2, which was launched at a price of roughly $320).

The relationship between Google and Samsung can also get rocky. Since Samsung is the largest player with the Android operating system (the South Korean company sells about 40 percent of the gadgets that use Google’s Android software), a concern at Google could be the increasingly dominant position that Samsung seems to be achieving. This could lead to Samsung demanding a greater share of the advertising revenue that Google generates from search off the handset. For Samsung, Google remains a competitor of sorts with its own Motorola-branded devices. Samsung has also been investing in its own home-grown operating system with Intel and Linux-based Tizen. All these factors make the Google–Samsung relationship a complex and potentially fluid one.

Leonard Shelby, the character played by Guy Pearce in the Christopher Nolan movie Memento says: “I always thought the joy of reading a book is not knowing what happens next.” With all its twists, the mobile-phone industry makes for a fascinating read.

Pradeep K. Chintagunta is the Joseph T. and Bernice S. Lewis Distinguished Professor of Marketing at Chicago Booth.