Samsung's Last Hope

By Trevor Gilbert , written on January 17, 2012

From The News Desk

Samsung is a company with revenues of $220 billion, that makes everything from cars to refrigerators, and yes, the focus of this piece, smartphones. In all of this money, and in all of their work, Samsung neglected to do one key thing: bulk up on software patents, and build a next-generation operating system. That is coming back to hurt, and it's coming back to hurt them in the form of Android.

When Google first debuted Android, one of the first observations people had about the nascent operating system was, "How will Google make money off of an open source operating system?" Over time, it became obvious that a very simple model would divide the profits between Google, the manufacturers (or OEM's), and the carriers.

To begin with, the manufacturers would choose Android as their smartphone OS, and get early access to the Android source code from Google. In exchange, Google would preload all of their proprietary software onto the phones - think Gmail, Google Search, Google Maps, etc. - thereby driving traffic towards their search engine cash cow. In the middle of this, the carriers would get involved and make money by selling the phones and controlling the data. It was a simple formula: OEM's get the hardware profits, Google gets the "halo effect" profits, and carriers get the transmission profits. All is well.

That is to say, all was well. Then the ever present patent problem arose. The patent problem has been talked about by everyone with a platform. Every aspect of it has been analyzed, and there isn’t too much more to add on it. Exception: how will it actually affect our lives, in a tangible way.

So, let's look take a look at how Samsung lost its way amid the patent wars, the smartphone wars and the war between open and closed. To understand each of these, we need to understand the relationships Samsung has with three companies. There is Samsung's relationship with Google, with Apple, and with Microsoft.

Samsung and Google

Samsung and Google’s relationship has had its ups and downs. The ups are worth untold millions, the downs, well, why go there?

Because that’s a key part of this article, that’s why.

The relationship started to stumble with Google's purchase of Motorola. If the merger goes through as planned, it is very reasonable to expect that Google and Motorola will integrate their operations, even though they promise not to right now. Effectively, Google would become a competitor to what are now their partners. This may seem wrong, but it really does make sense from a profitability perspective (see: Apple), and a common sense perspective (see: Business 101).

Once Google announced their decision to purchase Motorola, Samsung (and all of the other OEMs) publicly supported the move as good for the ecosystem. Those weren't their true feelings, however. Ever since the announcement, Samsung, HTC, Acer and every other OEM worth their weight in silicon has been formulating a Plan B. These plans generally are about what to do when Google stops being a benevolent partner and instead begins to be a direct competitor.

Each of these companies has their idea of what to do, and parts of each plan overlaps. Everything from working on webOS, to buying RIM, to working with Microsoft is being thrown around. That's where Google and Samsung's relationship is today.

Samsung and Apple

Apple and Samsung are decidedly less friendly than Samsung and Google. In fact, it would be easy to describe them as enemies. With lawsuits swirling around the world, injunctions being thrown around like email addresses at a meetup, and trade judges handing down rulings that influence billions of dollars of business - it can be hard to keep track of it all.

To simplify it all, just consider their basic positions. Samsung wants to make money on a massive scale, and they want to control the market. If that means infringing, so be it. If that means suing Apple, so be it. If that means spending millions on the next smartphone, so be it. They are there to make money, and who can blame them?

Then there is Apple. They are there to follow one of Steve Jobs' last passions: destroying Android. They are doing it by going after the OEMs instead of Google, and it is a slow battle, but it does seem to be working little by little. Apple is going hard after Samsung, and they won't be satisfied until they've sued over every patent in their arsenal, in every court that's open to them, and on every product Samsung sells. That's what their overarching goal looks like to an objective observer.

Samsung and Microsoft

Samsung and Microsoft's relationship is halfway between Google and Apple. On the one hand, Microsoft has sued Samsung over their use of Android on their phones. At the same time, these lawsuits were resolved and now Samsung licenses Microsofts patents. This means that Microsoft makes an enormous amount of money from Android (some say more than Google makes), while at the same time protecting themselves from any countersuits from Samsung.

In fact, Microsoft makes so much money off of Samsung's smartphones, it has to occur to Samsung that Microsoft's Windows Phone 7 might be cheaper to license than the free, open source Android.

Which brings us to Samsung's big dilemma. On the one hand, they have an existing relationship with Google that is tenuous at best, and at worst, on the verge of collapse. On the other hand, they are in the midst of one of the biggest legal battles of the past few years with Apple. And on the other, other hand, they are giving Microsoft royalties for every single phone and tablet that they sell.

So, put yourself in Samsung's shoes. You have these three problems, all tangentially related, and none of them seems to have a perfect solution. What do you do?

Well, the best solution seems to be switch to Windows Phone. The Google problem is eliminated, and Google might actually be happy about it because they suddenly have one less potential complaint when they fully integrate Motorola. Although Samsung would be taking a loss cutting off Google in the short term, in the long term it would pay off. Microsoft would be thrilled, as they suddenly have another OEM building Microsoft branded phones, and at the same time Android loses its biggest seller. Apple would be less than thrilled, but would likely end litigation (or settle it quickly), due to their cross-licensing agreement with Microsoft.

All-in-all though, it comes down to a few key questions. Does Samsung have the patents to protect itself from Apple? and, does Samsung think it can make money when Googorola integrates, while at the same time giving Microsoft money to fund the competition? The answer to both of these aren't clear yet, but there is one thing that is: it all comes down to those potent patents, and that precious profitability.