samsung

2013: The Year Of…

 

As Samsung dominates the Android market, one has to wonder, who controls whom? Is Google really in charge, or is Samsung so strong it can now rule the Android game?

This morning’s thoughts are harder to focus than usual: I’m sitting across the street from Sciences Po — the Paris Institute of Political Studies — one of France’s elite graduate schools. As hundreds of students gather at the door, smoking (and littering the pavement with very Parisian hauteur), I’m dismayed by the thought that many of these smart, eagerly alive young people will die from lung cancer. Somber thoughts made more acute by the loss of a dear friend two days ago to that very illness — the third smoking-induced death of a close relation in a matter of months. This from a legal drug that’s much more dangerous than some that can land you in jail….

Back to less morbid topics: Like so many other high tech observers, the impending CES (Consumer Electronics Show) in Las Vegas has prompted me to take a guess at what — or who — will turn out to be 2103′s most important development. One name that isn’t on the list: Microsoft.

CES isn’t just an endless series of booths manned by barkers and BS artists where companies peddle their latest vacuum tube audio gear and touch-screen laptops, it’s also the venue for a conference with a series of keynote speeches. During the Golden Age of the PC, Bill Gates was the obligatory headliner on the eve of the trade show. Gates’ keynote was an opportunity for the head of the world’s most important software company to describe (and prescribe) the future according to Microsoft.

When he ceded the CEO title, Gates also passed the keynote baton to Steve Ballmer who continued the propaganda, although with progressively diminishing success. Last year’s keynote was widely trashed by the press (see here, here or here)

Microsoft CEO crashes and burns in final CES keynote.
At CES, Microsoft’s Steve Ballmer Strains For Relevance

There will be no keynote address from Ballmer or any other Microsoft representative at this year’s CES.
The baton has indeed been passed, but to whom?
The ascendancy will be decided in a fight between Google and Samsung — and that could turn out to be the most important 2013 development.

Samsung is, by far, the biggest promoter and the best advertisement for the Android platform. Not only does the Korean giant dominate the Android market in unit volume — about half if we believe the company’s necessarily imprecise numbers — it also sets the standard for quality with handsets such as the Galaxy S III. And when you consider the huge amount of money Samsung has spent promoting their devices (about $13B — see Horace Dediu’s chart, below, from yet another of illuminating posts, The Cost of Selling Galaxies), you would think that the two companies would be close allies.

But as Samsung dominates ever more of the Android market, one has to wonder: Who controls whom? Is Google really in charge, or is Samsung so strong it can now set the rules in the Android game?

I don’t think Samsung’s competitors fully appreciate the implications of the company’s spare-no-expense investment in securing a dominant market share. In particular, I wonder what Apple execs think of the disproportion between their own relatively tiny marketing expenses and Samsung’s gargantuan budget. Apple has shown, time and again, that they can do more with less, but have they let Samsung secure an inexpugnable market position? Perhaps the Cupertino team was simply unwilling to waste money stimulating a demand they knew they couldn’t satisfy due to iPhone supply chain bottlenecks.

Is Google truly happy with all this free advertisement? Samsung is firing on all cylinders: great Android handsets, apparently limitless manufacturing capacity, imaginative and prolific marketing campaigns. There may be a feeling in Mountain View that the tail is starting to wag the dog, the handset vassal could end up dictating terms to the platform creator. Samsung could parlay its dominant share of Android handsets in a number of ways.

For example: The Android economy doesn’t rely on licensing revenues but on user data that flows back to the Google mothership through the use of Google applications running on platform-compliant handsets. (Such data then flows through Google’s advertising money pump, but we’ll leave that aside for now.) What if Samsung could renegotiate its Android license and demand “role-appropriate” levies for running Google apps on its market-leading handsets? We’ve heard rumors of just such a levy before: Apple is said to receive significant payments for favoring Google’s search engine in iOS devices.

Another possibility is that Samsung could emulate Amazon’s practice of picking the Android lock. By modifying the Open Source Android source code — a completely legal maneuver — Samsung could create its own set of revenue-generating apps and services and thus cut Google out of the income stream. A number of other handset makers, particularly in China, are headed down this path, proposing devices based on Android-derived platforms such as Tapas and OPhone.

Lastly, although less seriously, Samsung has announced handsets based on Tizen, an OS that has joined the chorus line of Open Source platforms: Gram (née WebOS), Jolla (Nokia émigrés), Ubuntu (née Debian), Firefox OS. My apologies for possible oversights…

Samsung can’t possibly believe it can build a viable business on Tizen. It must know that the platform itself no longer matters, that this has become an ecosystem war. Even with Samsung’s resources and determination, betting on Tizen as an alternative to the Android ecosystem isn’t realistic — and can’t possibly impress Google execs. Complicating matters, Samsung also builds handsets on Windows Phone and Bada (developed in house). Such complexity isn’t sustainable.

Over in its corner, Google has Motorola. Ostensibly acquired for its patents, Motorola could    be the piece of the puzzle that Google needs to create a fully-integrated device, a “proper” Android handset that Google execs feel their ecosystem deserves and that independent handset makers have failed to deliver. Rumors of an xPhone are in the air, but they don’t say much about what the product will do, exactly, or when it will come out.(Google protests that it won’t give its Motorola team any unfair advantage…a promise that comes from a company that gives special access to partners-of-the-moment such as HTC, Samsung, and LG.)

Of course, creating a device in the numbers that can effectively compete with leading Samsung (and Apple) devices is easier said than done. Google/Motorola will need to convince component suppliers and device manufacturers — who are “controlled” by Samsung and Apple — to free up some space on their assembly lines.

So on one side, we have Samsung, an extremely capable and determined Korean giant with huge technical and financial resources — and little regard for niceties.

On the other, we have Google with its unparalleled infrastructure, full control of the Android ecosystem through its Google apps (think Maps) and services, very strong finances, and real long-term vision. As for niceties, Google’s style may be more “polished” than Samsung’s, but it isn’t a pushover. Google can stand toe-to-toe with anyone.

In the end, ownership of the ecosystem should tip the scales: Google will win the undeclared war with Samsung. The Mountain View company will help itself to the higher value of vertically integrated products and, at best, degrade the Korean giant’s margins or, worse, drive them into a PC-like race-to-the-bottom with other handset makers.

This isn’t an outcome Samsung will take lightly.

JLG@mondaynote.com

PS: Bill Clinton will attend Samsung’s CES keynote

The Apple Tax, Part II

Once upon a time, Steve Ballmer blasted Apple for asking its customers to pay $500 for an Apple logo. This was the “Apple Tax“, the price difference between the solid, professional workmanship of a laptop running on Windows, and Apple’s needlessly elegant MacBooks.

Following last week’s verdict against Samsung, the kommentariat have raised the specter of an egregious new Apple Tax, one that Apple will levy on other smartphone makers who will have no choice but to pass the burden on to you. The idea is this: Samsung’s loss means it will now have to compete against Apple with its dominant hand — a lower price tag — tied behind its back. This will allow Apple to exact higher prices for its iPhones (and iPads) and thus inflict even more pain and suffering on consumers.

There seems to be a moral aspect, here, as if Apple should be held to a higher standard. Last year, Apple and Nokia settled an IP “misunderstanding” that also resulted in a “Tax”…but it was Nokia that played the T-Man role: Apple paid Nokia more than $600M plus an estimated $11.50 per iPhone sold. Where were the handwringers who now accuse Apple of abusing the patent system when the Nokia settlement took place? Where was the outrage against the “evil”, if hapless, Finnish company? (Amusingly, observers speculate that Nokia has made more money from these IP arrangements than from selling its own Lumia smartphones.)

Even where the moral tone is muted, the significance of the verdict (which you can read in full here) is over-dramatized. For instance, see this August 24th Wall Street Journal story sensationally titled After Verdict, Prepare for the ‘Apple Tax’:

After its stunning victory against rival device-maker Samsung Electronics Co., experts say consumers should expect smartphones, tablets and other mobile devices that license various Apple Inc., design and software innovations to be more expensive to produce.

“There may be a big Apple tax,” said IDC analyst Al Hilwa. “Phones will be more expensive.”

The reason is that rival device makers will likely have to pay to license the various Apple technologies the company sought to protect in court. The jury found that Samsung infringed as many as seven Apple patents, awarding $1.05 billion in damages.

The $1B sum awarded to Apple sounds impressive, but to the giants involved, it doesn’t really change much. Samsung’s annual marketing budget is about $2.75B (it covers washer-dryers and TVs, but it’s mostly smartphones), and, of course, Apple is sitting on a $100B+ cash hoard.

Then there’s the horror over the open-ended nature of the decision: Apple can continue to seek injunctions against products that infringe on their patents. From the NYT article:

…the decision could essentially force [Samsung] and other smartphone makers to redesign their products to be less Apple-like, or risk further legal defeats.

Certainly, injunctions could pose a real threat. They could remove competitors, make Apple more dominant, give it more pricing power to the consumer’s detriment…but none of this is a certainty. Last week’s verdict and any follow-up injunctions are sure to be appealed and appealed again until all avenues are exhausted. The Apple Tax won’t be enforced for several years, if ever.

And even if the “Tax” is assessed, will it have a deleterious impact on device manufacturers and consumers? Last year, about half of all Android handset makers — including ZTE, HTC, Sharp — were handed a Microsoft Tax bill ($27 per phone in ZTE’s case), one that isn’t impeded by an obstacle course of appeals. Count Samsung in this group: The Korean giant reportedly agreed to pay Microsoftbetween $10 and $15 – for each Android smartphone or tablet computer it sells.” Sell 100M devices and the tax bill owed to Ballmer and Co. exceeds $1B. Despite this onerous surcharge, Android devices thrive, and Samsung has quickly jumped to the lead in the Android handset race (from Informa, Telecoms & Media):

Amusingly, the Samsung verdict prompted this gloating tweet from Microsoft exec Bill Cox:

Windows Phone is looking gooooood right now.

(Or, as AllThingsD interpreted it: Microsoft to Samsung. Mind if I Revel in Your Misfortune for a Moment?)

The subtext is clear: Android handset makers should worry about threats to the platform and seek safe harbor with the “Apple-safe” Windows Phone 8. This will be a “goooood” thing all around: If more handset makers offer Windows Phone devices, there will be more choices, fewer opportunities for Apple to get “unfairly high” prices for its iDevices. The detrimental effects, to consumers, of the “Apple Tax” might not be so bad, after all.

The Samsung trial recalls the interesting peace agreement that Apple and Microsoft forged in 1997, when Microsoft “invested” $150M in Apple as a fig-leaf for an IP settlement (see the end of the Quora article). The interesting part of the accord is the provision in which the companies agree that they won’t “clone” each other’s products. If Microsoft could arrange a cross-license agreement with Apple that includes an anti-cloning provision and eventually come up with its own original work (everyone agrees that Microsoft’s Modern UI is elegant, interesting, not just a knock-off), how come Samsung didn’t reach a similar arrangement and produce its own distinctive look and feel?

Microsoft and Apple saw that an armed peace was a better solution than constant IP conflicts. Can Samsung and Apple decide to do something similar and feed engineers rather than platoons of high-priced lawyers (the real winners in these battles)?

It’s a nice thought but I doubt it’ll happen. Gates and Jobs had known one another for a long time; there was animosity, but also familiarity. There is no such comfort between Apple and Samsung execs. There is, instead, a wide cultural divide.

JLG@mondaynote.com

Apple: Three Intriguing Numbers

No Monday Note last week: I was in The Country of Sin, enjoying pleasures such as TGV trips across a landscape of old villages, Romanesque churches, Rhône vineyards — and a couple of nuclear power plants. All this without our friendly TSA.

Back in the Valley, Apple just released their latest quarterly numbers. They weren’t as good as expected, a fact that launched a broadside of comments ranging from shameless pageview whoring (I’m looking at you, Henry) to calm but worried (see Richard Gaywood’s analysis).

As I’ll attempt to explain below, Apple’s latest quarterly performance is unusual. But, stepping back a bit, the company’s numbers are nonetheless phenomenal.

Net sales, growing 23%, are more than three times larger than Amazon’s — and Apple’s net income is more than 1,000 times larger, $8.8B vs. a tiny $7M for the Seattle giant, whose shares went up after disclosing its earnings release anyway.

Turning to Google, Apple sales of $35B are more than three times Google’s $11.3B (including Motorola, for the first time), with net income numbers in a similar ratio at $8.8B and $2.8B respectively.

Ending comparisons with Microsoft, its revenue grew 4% to $18B, about half of Apple’s and, for the first time, the company posted a net loss of $492M, due to the huge $6.2B aQuantive write off, a one time event. Excluding that number, Microsoft net income would have been about $5.5B, two thirds of Apple’s. iPhone revenue at $16B for the quarter, approaches Microsoft’s number for the entire company, iPad, at $9B is about half.

For in-depth coverage of Apple’s Q3 FY 2012, you can turn to Philip Ellmer-DeWitt’s Apple 2.0 or Horace Dediu’s Asymco — possibly the best source of fine-grained industry analysis. I can also recommend Daring Fireball for John Gruber’s lapidary comments and carefully chosen links, and Brian Hall’s Smartphone Wars — vigorous commentary and insights, occasionally couched in NSFW language. Of course, you can always wade through Apple’s 10-Q SEC filing, if you have the time and inclination. Of particular interest is Section 2 MD&A, Management Discussion and Analysis, starting on page 21.

Out of this torrent of information and argument, I suggest we look at three numbers.

First, the 3% “Miss”, Wall Street’s term for failing to hit the revenue bull’s eye. I’m not referring to the guessing games played by Wall Street analysts, both the pros and the so-called amateurs. In the past, the amateurs have done a consistently better job of forecasting revenue, gross margin, profit, unit volumes, but this time, the pros won. Although almost everyone substantially overestimated Apple’s numbers, the pros weren’t nearly as optimistic as the amateurs.”

Instead of measuring Apple’s performance against the predictions of the traders and observers, we can recall what the company itself told us to expect. About a month into each quarter, management provides an official but non-committal estimate of the quarter’s revenue. This guidance is a delicate dance: You want to be cautious, you want to sandbag a little, but not so much that your numbers aren’t taken seriously. Unavoidably, a lot of second-guessing ensues.

Apple has consistently beaten its own guidance, by 19% on average over the past three years, and as much as 35% in Q1 2010. But in this past quarter, Apple “achieved” a historic low: Actual revenue came in at only 3% above the guidance number. Richard Gaywood provides a helpful graphic in his TUAW piece:

Apple management offered explanations during the conference call following the earnings release: The economy in Europe isn’t doing so well, “rumors” about the iPhone 5 have slowed sales of iPhone 4s… These might very well be the causes of the lackluster performance, but one has to wonder: Weren’t these issues known two months ago when the guidance number was announced? Apple is praised for its superbly managed supply chain, its global distribution network, its attention to detail. How is it possible that it didn’t see that the European economy was already cooling? How could management not have heard the steady murmur about an upcoming iPhone?

Put another way: What did you know and when did you know it? And, if you didn’t know, why didn’t you?

There is a possible alternative explanation: Samsung is making more substantial inroads than expected, as their impressive quarterly numbers just released would attest: 50.5M smartphones shipped, almost twice as many as Apple’s 26M.

Sharp-eyed readers may protest the comparison: Samsung reports the number of devices “shipped” while Apple reports units “sold”. But even if we allow for unsold inventory, Samsung’s performance is impressive.  (And, as circumstantial evidence, I noticed an unusually heavy amount of advertising for the Galaxy S III during my recent overseas trip.)

Samsung’s strong showing will almost certainly continue — so how will Apple react? A new product? Price moves? Both? In the conference call, Tim Cook assured his audience that Apple won’t create a “price umbrella” for competitors, that it won’t insist on premium price tags and thus leave small-margin money on the table.

Which leads us to the second number: Gross Margin guidance for the current quarter, ending September 30th, is 38.5%, down from 42.8% for the quarter that just ended. In consultant-speak, that’s an evaporation of 430 basis points (hundredths of percent) in just one quarter — and we’re already one month into it with no visible change in the product lineup other than the full availability of newer MacBooks (Air, Pro, Retina), and no evidence of heavy-handed discounting.

During the conference call, a Morgan Stanley analyst noted that Apple hadn’t shown Gross Margin numbers below 40% for the past two years. Would Apple care to comment?

We expect most of this decline to be primarily driven by a fall transition and to a much lesser extent, the impact of the stronger U.S. dollar.

The entire Gross Margin drop of about $34B of sales (the latest guidance) amounts to $1.5B, a sum that will shift in less than two months, and probably less than one as any momentous announcement is unlikely before Labor Day (the first Monday of September for our overseas readers). This could portend a strong price move in the “fall transition”. To put the $1.5B shift in perspective, imagine Apple dropping its “usual” Gross Margin by $100 per device (new or existing); this means 15M lower-margins devices in the three weeks of September after Labor Day. Or perhaps Apple’s CFO is sandbagging the guidance once again.

The third curious number is the most perplexing: While the entire company grew by 23% compared to the same quarter last year, Apple Store revenue grew by only 17% — and this in spite of adding 47 stores over the year, for a total of 372. Why would Apple’s much vaunted retail channel grow more slowly than the company? The weak Euro economy can’t be the explanation, there are relatively less Apple Stores there. The same can be said for “rumors” of newer devices, they impact all channels and not just company stores.

We’ll see if this last quarter was simply a manifestation of a natural “granularity” of its business (as opposed to the unnatural smoothing of quarter after quarter numbers favored by Wall Street), or if the company is entering a new chapter of the smartphone wars and, if this is the case, how it will change tactics.

JLG@mondaynote.com

iPad Mini: Wishful Thinking?

Or another killer product? Or, on the pessimistic side, a loser defensive move showing Apple’s fear of competitors such as Amazon, with its Kindle Fire, and Google’s 7″ Nexus tablet?

Recent leaks from purported sources inside Apple’s traditional suppliers have ignited a new frenzy of speculation. And not just from the usual blogging suspects — often better informed and more insightful than the official kommentariat. BusinessWeek and the Wall Street Journal both stuck their august necks out: The so-called iPad Mini will be launched this coming September.

On this matter, my own biases are on the record.

In an August 2009 Note titled “Apple’s Jesus Tablet: What For?“, I went as far as measuring the pocket on men’s pockets. As a result, I posited a 10″ (diagonal) tablet might not provide the same desirable ubiquity as a 7″ one that men could carry in a coat or jacket pocket, and women in a purse.
(Apple once came to a similar conclusion: the original Newton project started by Steve Sakoman in 1987 was a letter-size tablet. After he and I left, the screen size was cut in half and the actual Newton came out as a pocketable product.)
Five months later, on January 27th, 2010, Steve Jobs stood up and changed the personal computing world for the third time with the 9.7″ (diagonal screen size) iPad. The take-no-prisoners price ($499 for the entry model) was a big surprise. Another one, much less obvious, was Dear Leader’s unusually tentative positioning statement: ‘We’ll see how the iPad finds its place between the iPhone and a MacBook’. (I’m paraphrasing a bit but the tone was there.)
The iPad surprised many, Apple included and, at the beginning, was often misunderstood. I recall my initial disappointment at not being able to perform the same tasks as on my laptop. A huge number of normal humans of all ages thought differently. As we know now, the iPad grew even faster than the iPhone. Notwithstanding Microsoft’s clinging to its ossified PC-centric rhetoric, this turned out to be the true beginning of the Post-PC era.

This excited competitors around the world: You’ll find here a list of 76 tablets announced at CES. By the end of 2011, few had accomplished anything. One exception was Amazon’s Kindle Fire, its Xmas season numbers were rumored to reach more than 4M units, even 6M by some rumored estimates. This rekindled, sorry, rumors of a smaller iPad.
In October 2010, Jobs famously dismissed the idea: “7-inch tablets should come with sandpaper so users can file down their fingers.” None of the journalists present at the time had the presence of mind to ask him about the iPhone screen…
Tim Cook, Steve’s disciple put it well at the D10 conference last June when he affectionately (and accurately) called Jobs a great flip-flopper, citing examples of products features his then boss ended up endorsing after repeatedly nixing them.
In an April 2012 Monday Note, I discussed the possible end of Apple’s One Size Fits All for  iPhones and, in particular, iPads. There, I linked to an A. T. Faust III post lucidly explaining how the original 1024 x 768 resolution could easily scale down to a 7.85″ tablet and achieve a nice 163 ppi (pixels per inch) resolution, the same as pre-Retina iPhones. This leads one to believe there is abundant (and inexpensive) manufacturing capacity for such pre-Retina displays.

A few questions.

First, developers. As we saw with iOS apps for iPhone and iPad, size matters, apps don’t scale. That hasn’t dampened the enthusiasm of developers for investing in app versions that take advantage of each device unique characteristics, as opposed to committing the cardinal sin of “It’s like the other one, only smaller/bigger”.
So, if developers believe a 7″ iPad would sell in large numbers, they’ll happily fire up Xcode, adapt their existing app, or write a new one. As for the belief in large unit volume for a 7″ device, the initial reception accorded to Google’s Nexus tablet shows there is potentially a lot of life in a smaller iPad.

(I ordered a Nexus tablet and will dutifully report. Last April, I bought a Samsung Note phablet and promised a report. Here it is: I’ll sell you mine for $50. A respectable product, I could definitely live with it. But, IMO, too big for a phone, too small for a tablet.)

Second, Apple was on offense. Now, competition succeeded in putting it on the defensive. While initial Kindle Fire sales were rumored to be huge, the same “sources”, checking on display supplier suppliers, now claim sales of Amazon’s tablet dropped precipitously after the Holidays. Amazon keeps mum, but is also rumored to prepare a slew of not one but several tablets for this year’s Xmas quarter.
As for the Nexus tablet, it isn’t shipping yet.
Instead of a defensive move, I think a 7″ iPad might be another take-no-prisoners move:

From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

If this cannibalizes 10″ iPad sales, no problem, better do it yourself than let Google, Amazon or Samsung do it.

Lastly, the price/cost question. As you’ll see on this video, Todd Schoenberger, a Wall Street haruspex visibly off his meds, contends an iPad Mini is a terrible move for Apple, it would be a break with its single product version focus. Like, for the example, the one and only Macintosh, the one and only iPod. Also, he continues, an iPad Mini wouldn’t allow Apple achieve the 37% gross margin it gets from the bigger sibling.
No. If we’re to believe iSuppli, a saner authority on cost matters, the latest 32 GB 4G iPad carries a Bill Of Materials of about $364, for a retail price of $729. Even with a bit of manufacturing overhead, we’re far from 37% today. And, tomorrow, a smaller iPad, with a smaller display, a smaller battery, a correspondingly smaller processor would nicely scale down in cost from the “new” iPad and its expensive display/battery/processor combo.
To where? I won’t speculate, but Apple has shown an ability to be very cost competitive when using previous generation parts and processes. See today’s iPhone 3GS and iPhone 4 prices for an example.

I have no inside knowledge and quite a few inclinations: I’d love a pocketable iPad as much as I like small computers such as the defunct Toshiba Libretto and the lively 11″ MacBook Air.

If Apple comes up with a smaller iPad later this year, I think it’ll be a killer product.

–JLG@mondaynote.com

The Apple-Intel-Samsung Ménage à Trois

Fascinating doesn’t do justice to the spectacle, nor to the stakes. Taken in pairs, these giants exchange fluids – products and billion$ – while fiercely fighting with their other half. Each company is the World’s Number One in their domain: Intel in microprocessors, Samsung in electronics, Apple in failure to fail as ordained by the sages.

The ARM-based chips in iDevices come from a foundry owned by Samsung, Apple’s mortal smartphone enemy. Intel supplies x86 chips to Apple and its PC competitors, Samsung included, and would like nothing more than to raid Samsung’s ARM business and make a triumphant Intel Inside claim for Post-PC devices. And Apple would love to get rid of Samsung, its enemy supplier, but not at the cost of losing the four advantages it derives from using the ARM architecture: cost, power consumption, customization and ownership of the design.

At its annual investor day last week, Intel CEO Paul Otellini sounded a bit like a spurned suitor as he made yet another bid for Apple’s iDevices business [emphasis mine]:

“Our job is to insure our silicon is so compelling, in terms off running the Mac better or being a better iPad device, that […] they can’t ignore us.”

This is a bit odd. Intel is Apple’s only supplier of x86 microprocessors; AMD, Intel’s main competitor, isn’t in the picture. How could Apple ‘‘ignore’’ Intel? Au contraire, many, yours truly included, have wondered: Why has Intel ignored Apple’s huge iDevices business?

Perhaps Intel simply didn’t see the wave coming. Steeped in its domination of the PC business — and perhaps listening too much to the dismissive comments of Messrs. Ballmer and Shaw — Intel got stuck knitting one x86 generation after another. The formula wasn’t broken.

Another, and perhaps more believable, explanation is the business model problem. These new ARM chips are great, but where’s the money? They’re too inexpensive, they bring less than a third, sometimes even just a fifth of the price, of a tried and true x86 PC microprocessor. This might explain why Intel sold their ARM business, XScale chips, to Marvell in 2006.

Then there’s the power consumption factor: x86 chips use more watts than an ARM chip. Regardless of price, this is why ARM chips have proliferated in battery-limited mobile devices. Year after year, Intel has promised, and failed, to nullify ARM’s power consumption advantage through their technical and manufacturing might.

2012 might be different. Intel claims ‘‘the x86 power myth is finally busted.” Android phones powered by the latest x86 iteration have been demonstrated. One such device will be made and sold in India, in partnership with a company called Lava International. Orange, the France-based international carrier, also intends to sell an Intel-based smartphone.

With all this, what stops Apple from doing what worked so well for their Macintosh line: Drop ARM (and thus Samsung), join the Intel camp yet again, and be happy forever after in a relationship with fewer participants?

There appear to be a number of reasons to do so.

First, there would be no border war. Unlike Samsung, Intel doesn’t make smartphones and tablets. Intel sells to manufacturers and Apple sells to humans.

Second, the patent front is equally quiet. The two companies have suitable Intellectual Property arrangements and, of late, Intel is helping Apple in its patent fights with Samsung.

Third, if the newer generation of x86 chips are as sober as claimed, the power consumption obstacle will be gone. (But let’s be cautious, here. Not only have we heard these claims before, nothing says that ARM foundries won’t also make progress.)

Finally, Otellini’s ‘‘they can’t ignore us’’ could be decoded as ‘‘they won’t be able to ignore our prices’’. Once concerned about what ARM-like prices would do to its business model, Intel appears to have seen the Post-PC light: Traditional PCs will continue to make technical progress, but the go-go days of ever-increasing volumes are gone. It now sounds like Intel has decided to cannibalize parts of its PC business in order to gain a seat at the smartphone and tablet table.

Just like Apple must have gotten a very friendly agreement when switching the Mac to Intel, one can easily see a (still very hypothetical) sweet deal for low-power x86 chips for iDevices. Winning the iDevices account would put Intel “on the Post-PC map.” That should be worth a suitable price concession.

Is this enough for Apple to ditch Samsung?

Not so fast, there’s one big obstacle left.

Let’s not forget who Samsung is and how they operate. This is a family-controlled chaebol, a gang of extremely determined people whose daring tactics make Microsoft, Oracle, Google, and Apple itself blush. Chairman Lee Kun-hee has been embroiled in various “misunderstandings.” He was convicted (and then pardoned) in a slush fund scandal. The company was caught in cartel arrangements and paid a fine of more than $200M in one case. As part of the multi-lawsuit fight with Apple, the company has been accused of willfully withholding and destroying evidence — and this isn’t their first offense. Samsung look like a determined repeat obstructor of justice. My own observations of Samsung in previous industry posts are not inconsistent with the above. Samsung plays hardball and then some.

This doesn’t diminish Samsung’s achievements. The Korean conglomerate’s success on so many fronts is a testament to the vision, skill, and energy of its leaders and workers. But there has been so much bad blood between Samsung and Apple that one has a hard time seeing even an armed peace between the two companies.

And this doesn’t mean Apple will abandon ARM processors. The company keeps investing in silicon design teams, it has plenty of money, some of which could go into financing parts or the entirety of a foundry for one of Samsung’s competitors in Taiwan (TSMC) or elsewhere in the US, Europe, or Israel. If it’s a strategic move and not just an empty boast on PowerPoint slides, $10B for a foundry is within Apple’s budget.

To its adopters, ARM’s big advantage is customization. Once you have an ARM license, you’ve entered an ecosystem of CAD software and module libraries. You alter the processor design as you wish, remove the parts you don’t need, and add components licensed from third parties. The finished product is a SOC (System On a Chip) that is uniquely yours and more suited to your needs than an off-the-shelf processor from a vendor such as Intel. Customization, licensing chip designs to customers — such moves are not in the Intel playbook, they’re not part of the culture.

I don’t see Apple losing its appetite for customization and ownership, for making its products more competitive by incorporating new functions, such as voice processing and advanced graphics on their SOCs. For this reason alone, I don’t see Apple joining the x86 camp for iDevices. (Nor do I see competitive smartphone makers dropping their SOCs in favor of an Intel chip or chipset.)

Intel isn’t completely out of the game, but to truly play they would need to join the ARM camp, either as a full licensee designing SOCs or as a founder for SOCs engineered by Apple and its competitors.

These are risky times: A false move by any one vertex of the love triangle and tens of billions of dollars will flow in the wrong direction.

JLG@mondaynote.com

Samsung vs. Google

Android is a huge success. Google bought Andy Rubin’s company in 2005 and turned it into a smartphone operating system giant, with more than 50% of the global market and 700,000 activations a day this past December.

Perhaps, as Steve Jobs seemed to think, it was Eric Schmidt’s position on Apple’s Board of Directors that infected Google with an itch to enter the smartphone OS market. Or maybe Larry Page and Sergey Brin simply recognized the Next Big Thing when they saw it. (As Page points out, the company had begun Android development a year before Schmidt joined the Apple Board.)

Regardless of the “authenticity” of Google’s smartphone impulse, it’s the execution of the idea, the integration of Android into Google’s top-level strategy where the product really shines. Android improves quickly; the “free and open” platform is popular with developers and, perhaps even more so, with handset makers who no longer have to create their own software, a task they’re culturally ill-suited to perform. And everyone loves being associated with a technically competent winner. (I might be a little biased in my regard for the Android engineering team: Comrades from a previous OS war work there.)

For the past three years, Android has experienced a kind of free space expansion: The platform has grown without hitting obstacles. I’m not ignoring the IP wars, they’re real and the outcome(s) are still unclear, but these fights haven’t slowed Android’s triumphant march.

As we enter 2012, however, it seems the game may be changing. Looking at last week’s numbers for Motorola, HTC, and Samsung, we see a different picture. Instead of the old “there’s more than enough room for every Android handset maker to be a winner”, we have a three-horse’s-length leader, Samsung, while Motorola and HTC lag behind.

From October to December of last year, a.k.a. Q4CY11, Samsung is said to have shipped 35 million smartphones, taking it to the number one spot worldwide. Citing “competitive reasons”, Samsung no longer makes its sales/shipment numbers public, so we have to rely on ‘‘independent” observers to tally up the score. Having worked in the high-tech industry for decades, I’ve seen how this information game is played: firm XYZ sells its “research” to manufacturer W…and ends up as its mouthpiece. I’d love to follow the money, but these private firms don’t have to reveal who their clients are and how much they pay for their services. (For a more detailed discussion of these shenanigans, read an excellent piece by The Guardian’s Charles Arthur: Dear Samsung: could we have some clarity on your phone sales figures now? Another possible bias: The Guardian re-publishes the Monday Note on its site.)

But even if we “de-propagandize” the numbers, Samsung is clearly the number one Android handset maker, and, just as clearly, it’s taking large chunks of market share from the other two leading players: Motorola and HTC both announced lower than expected Q4CY11 numbers. HTC’s unit volume was 10 million units, down from 13.2 million in Q3; Motorola got 10.5 million units in Q4, down from 11.6 million in Q3.

This leaves us with the potential for an interesting face-off. Not Samsung vs Motorola/HTC, but…Samsung vs. Google. As Erik Sherman observes in his CBS MoneyWatch post, since Samsung ships close to 55% of all Android phones, the company could be in a position to twist Google’s arm. If last quarter’s trend continues — if Motorola and HTC lose even more ground — Samsung’s bargaining position will become even stronger.

But what is Samsung’s ‘‘bargaining position’’? What could they want? Perhaps more search referral money (the $$ flowing when Google’s search engine is used on a smartphone), earlier access to Android releases, a share of advertising revenue…

Will Google let Samsung gain the upper hand? Not likely, or at least not for long. There’s Motorola, about to become a fully-owned but “independent” Google subsidiary. A Googorola vertically-integrated smartphone line could counterbalance Samsung’s influence.

And so it would be Samsung’s move…and they wouldn’t be defenseless. Consider the Kindle Fire example: Just like Amazon picked the Android lock, Samsung could grab the Android Open Source code and create its own unlicensed but fully legal smartphone OS and still benefit from a portion of Android apps, or it could build its own app store the way Amazon did. Samsung is already showing related inclinations with its Music Hub and its iMessage competitor.

Samsung is a tough, determined fighter and won’t let Google dictate its future. The same can be said of Google.

This is going to be interesting.

JLG@mondaynote.com