Let Samsung Deal With the South Korean Government
South Korea just became the only nation in the world that mandated that smart phone makers have to allow alternate payment processing options on their app stores. Apple and Google should completely ignore this new law.
If you’re a car enthusiast in the United States, you know what happens when one nation unilaterally passes regulations that are above and beyond what other nations have. It means that foreign companies won’t sell their products to you.
In 1988, the US Government passed the Motor Vehicle Safety Compliance Act, which meant that any foreign car company wanting to sell their vehicles in the United States would have to meet a whole slew of new crash standards and emissions testing. A government can set the standard which must be met but they can’t force manufacturers to actually meet it. Which means that companies can simply decide it makes more financial sense to ignore the standards and not sell to that specific market. As a result, there were many car models which were never sold in the United States.
Whether or not Americans got certain models of foreign vehicles wasn’t really a big deal since there is a robust American auto manufacturing industry. But the tech world for South Korea is in a very different situation. Samsung does make their own Tizen phone OS, but it’s not their dominant seller. That honor goes to Google’s Android. And Apple actually sells a huge number of phones in South Korea.
The tech pundits are all asking how Apple and Google will handle this new South Korean law. In their limited understanding of business there are only 2 options. They think that either there is an OS made just for South Korea or the South Korean law will impact the whole world. But there is a 3rd option that they can’t fathom, Apple and Google can simply ignore the law and South Korean phone retailers are left with nothing to sell.
As usual, most decisions made by Apple or Google will be made based on the most profitable way forward. So financial analysts like myself will develop 5 year models which create forecasted income statements for each of the 3 options.
Option #1 – Open payment options to the whole world
This scenario involves much less work than forking an OS into two so the software engineers would much rather do this. From a cost perspective, it’s much cheaper to manage one OS than creating a separate version just for South Korea. But it also means losing much more revenue, so the financial analysts would hate this option. The revenue lost in comparison to the money saved by having one OS is too great. This is the least likely outcome.
Option #2 – Create an OS just for South Korea
This is going to cause a lot more work for the software developers to manage a separate version of the OS just for South Korea. But it also means that revenue losses for Apple & Google are limited only to South Korea.
Option #3 – Ignore the South Korean Law
If Apple and Google do nothing they incur no extra expense on the software development and maintenance side. However, they lose hardware and service revenue from South Korea for all of those lost South Korean handset sales. But for how long?
I suspect that option #3 is the best financial option. However, I’m not privy to hardware and App Store gross margin data so I can’t know for sure. And it also depends on how the South Korean government reacts to an effective boycott of South Korea.
South Korea can pass all the laws it wants, it doesn’t mean that anyone has to pay attention to them. If Apple and Google decide to ignore the law, it means that phone retailers can’t sell iOS or Android phones in South Korea. Where would that leave Samsung?
If anyone thinks for a minute that Samsung is going to sit idly by while their phones are effectively banned in their home country, they are not thinking straight. Samsung primarily sells Android handsets. So any ban on Google is a ban on Samsung.
Samsung has an extraordinary amount of political power in South Korea. If they want a law changed, it gets changed. Samsung is content to sit quietly on the sidelines for now to see what Google does. If Google opens up their Play Store, there could even be a potential upside for Samsung.
But if Google was to call South Korea’s bluff and ignore the law, Samsung isn’t going to allow their own phones to be banned. At that point, Samsung will pull out all the stops to get the law repealed. They will make the case that what is good for Samsung is good for South Korea. It will be Samsung, not Google, that will yell at lawmakers that they are shooting themselves in the foot.
Samsung has way more to lose than Apple or Google. Samsung sells many more phones in South Korea than Apple does. And the revenue lost by the Google Play Store would be relatively small. If Apple and Google ignore the law, Samsung becomes the biggest loser.
Obviously, Samsung would never allow their own phones to be banned in their home country. There would be an avalanche of pressure by lobbyists and the media on the government to repeal the law. Which they most certainly would. Probably within mere weeks if not days. This outcome is so certain that there is very little risk to Google or Apple. They simply need to wait out Samsung.
And then everything goes back to the status quo. And better yet, this would serve as a cautionary warning to any other country that was thinking of doing the same thing. Do you want to end up like Huawei or South Korea? No, I didn’t think so.
In 1988, the US Government passed the Motor Vehicle Safety Compliance Act, which meant that any foreign car company wanting to sell their vehicles in the United States would have to meet a whole slew of new crash standards and emissions testing. A government can set the standard which must be met but they can’t force manufacturers to actually meet it. Which means that companies can simply decide it makes more financial sense to ignore the standards and not sell to that specific market. As a result, there were many car models which were never sold in the United States.
Whether or not Americans got certain models of foreign vehicles wasn’t really a big deal since there is a robust American auto manufacturing industry. But the tech world for South Korea is in a very different situation. Samsung does make their own Tizen phone OS, but it’s not their dominant seller. That honor goes to Google’s Android. And Apple actually sells a huge number of phones in South Korea.
The tech pundits are all asking how Apple and Google will handle this new South Korean law. In their limited understanding of business there are only 2 options. They think that either there is an OS made just for South Korea or the South Korean law will impact the whole world. But there is a 3rd option that they can’t fathom, Apple and Google can simply ignore the law and South Korean phone retailers are left with nothing to sell.
As usual, most decisions made by Apple or Google will be made based on the most profitable way forward. So financial analysts like myself will develop 5 year models which create forecasted income statements for each of the 3 options.
Option #1 – Open payment options to the whole world
This scenario involves much less work than forking an OS into two so the software engineers would much rather do this. From a cost perspective, it’s much cheaper to manage one OS than creating a separate version just for South Korea. But it also means losing much more revenue, so the financial analysts would hate this option. The revenue lost in comparison to the money saved by having one OS is too great. This is the least likely outcome.
Option #2 – Create an OS just for South Korea
This is going to cause a lot more work for the software developers to manage a separate version of the OS just for South Korea. But it also means that revenue losses for Apple & Google are limited only to South Korea.
Option #3 – Ignore the South Korean Law
If Apple and Google do nothing they incur no extra expense on the software development and maintenance side. However, they lose hardware and service revenue from South Korea for all of those lost South Korean handset sales. But for how long?
I suspect that option #3 is the best financial option. However, I’m not privy to hardware and App Store gross margin data so I can’t know for sure. And it also depends on how the South Korean government reacts to an effective boycott of South Korea.
South Korea can pass all the laws it wants, it doesn’t mean that anyone has to pay attention to them. If Apple and Google decide to ignore the law, it means that phone retailers can’t sell iOS or Android phones in South Korea. Where would that leave Samsung?
If anyone thinks for a minute that Samsung is going to sit idly by while their phones are effectively banned in their home country, they are not thinking straight. Samsung primarily sells Android handsets. So any ban on Google is a ban on Samsung.
Samsung has an extraordinary amount of political power in South Korea. If they want a law changed, it gets changed. Samsung is content to sit quietly on the sidelines for now to see what Google does. If Google opens up their Play Store, there could even be a potential upside for Samsung.
But if Google was to call South Korea’s bluff and ignore the law, Samsung isn’t going to allow their own phones to be banned. At that point, Samsung will pull out all the stops to get the law repealed. They will make the case that what is good for Samsung is good for South Korea. It will be Samsung, not Google, that will yell at lawmakers that they are shooting themselves in the foot.
Samsung has way more to lose than Apple or Google. Samsung sells many more phones in South Korea than Apple does. And the revenue lost by the Google Play Store would be relatively small. If Apple and Google ignore the law, Samsung becomes the biggest loser.
Obviously, Samsung would never allow their own phones to be banned in their home country. There would be an avalanche of pressure by lobbyists and the media on the government to repeal the law. Which they most certainly would. Probably within mere weeks if not days. This outcome is so certain that there is very little risk to Google or Apple. They simply need to wait out Samsung.
And then everything goes back to the status quo. And better yet, this would serve as a cautionary warning to any other country that was thinking of doing the same thing. Do you want to end up like Huawei or South Korea? No, I didn’t think so.
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