Seeking Alpha
Recommended for you:
Long/short equity, deep value, special situations, contrarian
Profile| Send Message|
( followers)  

There are many advantages to having your own ecosystem. The companies that do, have total control over their business and their destiny. These companies I call "complete control companies".

Apple (NASDAQ:AAPL) is probably the greatest example. Apple designs its own phone, its own processor and controls 100% of iOS. As a result it makes very good products that work great and the market has noticed and rewarded them for that.

BlackBerry (NASDAQ:BBRY) is also a complete control company. It also designs its own phones and also has complete control over the ecosystem. In BlackBerry's case, its ecosystem reaches other sectors far beyond the smartphone space.

Google (NASDAQ:GOOG) is also a complete control company. Google, like Apple, controls every aspect of its ecosystem, and in addition has been making its own devices lately. Google however is in a category by itself, because it does not rely on hardware sales to make money, but instead makes money from everyone else using its ecosystem.

Samsung (OTC:SSNLF) however is not a total control company, for it simply makes a great phone. It has no control over the ecosystem, and is dependent on Google to provide the software that drives its phones. If for some reason in the future Samsung will not be able to license Google's Android OS, it will be in big trouble.

The question is, can Samsung afford to be at the mercy of Google? Can it afford not to have its own ecosystem? Can Samsung afford not to have a backup plan, even if what I am saying is premature or even if I am running to conclusions?

I am pretty sure Samsung and every major Android OEM felt a shiver down their spine when Google bought Motorola Mobility. And even if Google has no intention not to continue licensing Android, can Samsung afford not to have a backup plan? Especially if Google sees Samsung as a threat?

If you recall back in February, the WSJ reported that Google's top Android executive Andy Rubin, said Samsung could become a threat if it gains more ground among mobile-device makers that use Android. Google's recent acquisition of Motorola Mobility served as a kind of insurance policy against a manufacturer such as Samsung gaining too much power over Android.

And indeed Samsung has taken notice of Google's sentiment. During the recent one hour presentation of Samsung's Galaxy S4, Samsung executives not once mentioned the words Google or Android. The only times those words came out of their mouths was when they mentioned that the S4 would run on Android 4.2.2.

In addition, Samsung spent the majority of its time talking about the raft of services found exclusively on the Galaxy S4, including the translator and navigation function that are already built into Android, but Samsung argues that it offers a superior experience that's more fully integrated into the device. So Samsung is paving the way for a future divorce with Google, or even perhaps a full out war.

And what is Samsung doing about the Google threat? It is working quietly helping the Tizen OS get off the ground. In fact, the first Samsung Tizen high-end phone will be out this August. It is anticipated that it will initially have many thousands of apps.

Samsung probably has an armada of developers creating applications and tools for Galaxy phones that will one day run on Tizen. All this in preparation for either a full fledged war with Google if needed, or a peaceful divorce. Either way, Samsung cannot afford not to have contingency plans in place.

I am sure that Google also has some kind of contingency plan in place, in case it needs to fill in the gap if Samsung decides to part from Android in a hurry. And I am also sure both companies know that each company has made plans, and they probably also know what each other is planning to do.

Nokia (NYSE:NOK) is not exactly without an ecosystem, it's just that the ecosystem it has is not exactly Android, OSi or WP8 class. One might say however it doesn't need one since its relationship with Microsoft (NASDAQ:MSFT) is excellent. But what guarantees does Nokia have, that Microsoft will continue to license it its WP8 OS indefinitely? What guarantee does Nokia have that Microsoft won't become its competitor, as the case of Google and Samsung? Does Nokia have some kind of a backup plan? Android is probably an option, but it will still not have its own OS and will still not be in total control.

Actually Nokia does have a backup plan and the name is Asha. It might not be as popular as Android is, but it is a solution that is helping it gain ground in emerging markets, not having to count on Microsoft or anyone else for that matter. However, if Microsoft decides to make its own devices, Nokia does not have the financial firepower to endure an OS war in Europe or the U.S., with Microsoft or anyone else.

And if Microsoft is really serious about wanting to buy Nokia (and I think it is), then Nokia should probably find a way to get a good deal for shareholders, than to fight on its own. All of its major competitors have billions in firepower, which in the end will prove lethal to Nokia, which does not have the balance sheet to fight such a war.

Microsoft on the other hand has an ecosystem, but does not have total control over its smartphone space, because it does not make devices. Some might say it does not need to control the hardware side of things, because it has Nokia and other OEMs for that. I beg to differ. Microsoft's control over the hardware aspect of the business is vital in the long term. It cannot hope to make any real money in this space long term if it does not produce and design its own devices. And I think the recent leak in the WSJ, that negotiations broke down between Nokia and Microsoft, is because Microsoft realizes this. With Samsung, Google, Apple and BlackBerry having complete control over every aspect of their business, can Microsoft afford to do otherwise? I think not.

Winners and losers

First of all, both Apple and BlackBerry will be immune from an OS smartphone war. Both companies are in a class by themselves and have nothing to fear from anyone. They will continue to do their thing and if they do it right, they will increase their market share and profits. BlackBerry more so even than Apple, because it is starting from a very low point.

However in a war between Google and Samsung, Google will definitely be the winner, at least short term. On the one hand it has the financial firepower to dramatically increase capacity in Motorola if needed, and on the other, it has many friends that are not exactly a friend of Samsung. HTC (OTC:HTCCY) and many other OEMs will more than gladly fill the Android void if and when Samsung decides to jump the Android ship.

But longer term it is not a given that Samsung will be a total loser. While Samsung will lose market share at first, the fact that it makes high quality phones might be the reason why it might regain much of that lost market share longer term. If anything else, Android proved to be a wild fire, why not Tizen also?

Finally, Nokia is doing its own thing in emerging markets with Asha and to some extent is shielded from all this. But it is not shielded in mature markets, as Asha cannot compete with other smartphone operating systems. Personally I would like Microsoft to buy Nokia as a whole (ex. NSN) and incorporate it into it. I think Microsoft will be doing itself a favor, and Nokia will probably do good towards it shareholders, if it can get a good premium for the company. And if reports that Nokia's board has been summoned to Finland to discuss the company's future are correct, I think a Microsoft / Nokia deal might come sooner than we think.

Source: Smartphone Operating System Wars