Cy office photo 4NEW BLOG: Reports last week that Samsung attempted to buy BlackBerry for $7.5 billion highlight the dilemma Samsung management faces.

During its reign as the world’s largest producer of smartphones, Samsung piled up its cash reserves instead of investing heavily in the software that would power its next generation of smart products. At CES in Vegas earlier this month Samsung management boasted that all its products would soon be connected to the internet. It forgot to mention that many would still be powered by Google Android software.

Now Samsung faces commoditisation of its entire consumer electronics hardware division, because a string of new technology cycles about to hit Samsung are all controlled by software: the Internet of Things, internet TV, big data, mobile payments, mobile commerce, online gaming, cloud, cyber-security, software defined networking and the list goes on.

In all these technology cycles, controlling the software is the only way Samsung can hope to maintain the profit margins needed to justify its valuation.

Buying BlackBerry is seen by many analysts as a viable solution to these woes. But Samsung’s problems are more structural than many analysts care to admit. Like Cisco, Samsung is a hardware company caught up in a software revolution. Let’s use the Internet of Things – one of the next mega themes to hit the global technology sector – to illustrate the point.

The problem Samsung faces
One way to visualise the Internet of Things is as an explosion of connected devices. The average high-income consumer in the developed world today has around three connected devices – a laptop, a smartphone and a tablet. By 2020, a typical consumer may have 20 connected devices, which might include a smartwatch, an internet TV, a connected car, a domestic robot, a connected washing machine and a smart thermostat. These “things” that will be connected to the internet will need to speak a common language and connect using a host of communications standards.

Qualcomm, Arm and Intel are in the race to develop the communications standard. Apple, Google and IBM are in the race to develop the common language — the operating system for the Internet of Things. If Samsung is left out of both of these core standard initiatives, it will have very little to offer shareholders apart from commoditised margins. The third leg of the Internet of Things is the back end cloud infrastructure that runs many of the apps that control connected devices. That leg is dominated by Amazon, Microsoft, Google and IBM.

The solution
The Korean technology titan needs to make acquisitions in three areas just to stay in the game: communications chips, operating software and cloud infrastructure. Within the chip sector, Samsung may look at buying the leading makers of microcontrollers like Atmel, Freescale Semiconductor, Imagination Technologies or Microchip.

Within the software sector, Samsung is already developing Tizen (after the failure of Bada, its first attempt at developing an in-house operating system). But Tizen looks far behind its competitors. BlackBerry would be a considerable improvement. Other mobile operating systems that might be targets include Jolla’s Sailfish.

Within the cloud infrastructure sector, Samsung already acquired SmartThings, the developer of a smart home control hub, for $200 million in August. It may also consider Opera Software, a web browser, or private companies in the internet infrastructure industry like AlertMe, Appcelerator, Arrayent, Thingworx, Ayla Networks, Evrythng, GreenPeak Technologies and others.

But M&A is only half the solution.

The other half is organisational, even cultural. Samsung needs to think like a software company and be led by a management team that is comfortable with cutting edge software development. It can learn from LG Electronics’ mistakes. Two years ago, LG acquired WebOS from HP and used it to power its new smart TVs sold in 2014. But now we learn that LG’s smart TVs loaded with Version 1 of LG’s WebOS cannot be upgraded to the new 2015 Version 2.

Korean hardware companies simply don’t get software. Apple introduced the first iPhone in 2007. It has taken Samsung eight years to see the writing on the wall and it still doesn’t have a competing product (i.e. one powered by its own software). Hence, the talks with BlackBerry.

The problem facing Samsung management is much deeper than many analysts fear. It is not just a lack of software. It is a longstanding lack of understanding where long-term technology cycles are heading. This will take more than an acquisition to fix.

Cyrus Mewawalla is managing director at CM Research, an independent research house —

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.