Google and Samsung: Just Bluffing

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the most important stories in the tech scene during the last year has been the rise of Samsung (NASDAQOTH: SSNLF) as the global leader in the smartphone business, an amazing accomplishment which couldn’t have been achieved without Google (NASDAQ: GOOG) and its popular Android operating system.

This alliance has been tremendously fruitful for both companies, but according to reports by the Wall Street Journal, Google may be feeling anxious about this relationship and considering different alternatives in order to reduce its risks.  Although Google has good reasons to monitor its dependency on Samsung closely, this partnership is just too profitable to be put at risk unless strictly necessary.

Google and Samsung vs. Apple

While Apple (NASDAQ: AAPL) is still the market leader in the US, Samsung has overtaken the Cupertino giant on a global scale and it has become the biggest smartphone manufacturer on the planet thanks to its variety of models and different price points. Samsung is especially popular in emerging markets, where economic growth is higher but income levels are lower and Apple has a pricing disadvantage versus Samsung.

The company makes good hardware, that's out of question, but its success would have been almost impossible if it weren't because of Android. The mobile computing race is not only a matter of hardware and devices; it’s mostly a competition among platforms and ecosystems. Consumers want to make sure they have a deep and trusted ecosystem, and apps developers prioritize those platforms that provide access to big masses of consumers.

Samsung and other manufacturers have overtaken Apple by a wide margin now, and Android has a global market share above 75%. This is great news for Google, not so much on an economic but on a strategic basis. In fact, Google makes more money on iPhones than on Android smartphones, but depending too much on Apple is a fragile position for Google.

The Apple Maps fiasco showed that Apple would really like to cut its ties with Google as much as possible. The only reason why it doesn't do it is that Google builds amazing applications like Maps, Search, Gmail and YouTube among others which can't be replaced without seriously hurting the quality  of the service.

One thing is clear though, Apple would remove Google from the iPhone if it could, and that puts the search engine in a vulnerable place when it comes to the iPhone. That's why Android was a brilliant strategic move by Google, and Samsung has been its most effective partner in its mission to counterbalance Apple's strength.

Creating a monster

According to IDC, Samsung is by far the biggest Android partner; the Korean manufacturer shipped nearly 40% of all Android smartphones in the fourth quarter of 2012, followed at a considerable distance by Huawei with a 6.6% of the market.

Samsung has also been increasing its participation in Android tablets over the last quarters, IDC estimates that Samsung's share in Android tablets jumped to 27.9% in the fourth quarter of last year versus 15.6% a year before.

This means that Samsung could become a problem for Google if it continues to gain market share and intends to renegotiate their agreement, according to The Wall Street Journal:

Several people familiar with the relationship between the companies said Google fears that Samsung will demand a greater share of the online-advertising revenue that Google generates from its Web-search engine.

That's probably the biggest reason why Google bought Motorola Mobility: in order to develop its own smartphones integrating both hardware and software, mostly as insurance in case the relationship with Samsung turns for the worse. At the same time, the company is fostering its relationship with other hardware producers:

Google is meeting with other companies in hopes that their Android devices can keep Samsung's leverage in check by providing legitimate competition, the people said. The Internet-search company is hoping new Android devices from manufacturers such as HTC and Hewlett-Packard can challenge Samsung, they said.

Not only is Google feeling nervous about this relationship, Samsung plans to release a handful of phones running the Tizen operating system in some Eastern countries during 2013. The only reason why Samsung could chose to do something like that would be to spread its bets and reduce its dependency on Android. Demand for Tizen smartphones is not precisely booming, especially not in comparison to customer’s appetite for Android devices.

Poker games

Does Google really want to get deeply involved in the hardware business and hurt its relationship with Samsung?  

Hardly, hardware is a tough business with lackluster profit margins and many difficulties when it comes to areas like logistics and customer service in which Google doesn’t have much experience. It doesn't make much sense to risk a very successful relationship with Samsung in exchange for an uncertain venture into hardware.

The online search leader would certainly welcome a bigger participation by other partners in order to reduce its vulnerability versus Samsung, and owning Motorola can be reassuring in terms of guaranteeing that the company can build its own hardware if necessary.

Google wants to keep its dependency on Samsung under control, but it most likely wants to continue benefiting from its productive relationship with the Korean company.  The same goes for Samsung and its Tizen smartphones; it looks more like a warning sign towards Google than a convenient business venture on its own merits.

Bottom line

I would say both Google and Samsung are quite happy with things as they are, and they are just trying to make sure that the other partner doesn’t push too hard if it gains more leverage in the relationship. Even if they try to keep their mutual dependency at bay, this alliance is just too convenient to be jeopardized by an aggressive move by any of the companies. This is a poker game, and they are both bluffing.

 


acardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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