Report: Samsung Gains In Grab For Google's Mobile Ad Revenues

For the better part of the past year, conflicts between once-friendly partners Google and Samsung have threatened to blow up into something like its war with iPhone maker Apple.

Those conflicts have centered on both Samsung's increasing dominance in smartphones that use Google's Android software and on Google's acquisition of Motorola Mobility and its plans to produce its own phones. The recent launch of Samsung's newest phone, the Galaxy S4, was remarkable less for the phone's features than for Samsung's pointed omission of much discussion of Android.

A new report from Sterne Agee analyst Shaw Wu says nothing like Samsung's full-blown war with Apple is likely to develop with Google. But he says it's pretty clear Samsung is attempting to assemble the pieces for a "platform" that would--at the very least--give the consumer electronics giant a better chance of extracting more than the 10% of Google's mobile ad revenues Samsung has been getting.

Those pieces include not only more software features on its phones, but even a run at a new mobile operating system, Tizen, with Intel and a recently announced deal with online ad tech firm OpenX to create a mobile ad exchange.

From the report, out this morning:

• Galaxy S4 Launch Touted In-House Software. In Samsung's recent launch of its flagship Galaxy S4 smartphone, we noticed that the company spent a lot of time touting its in-house developed software and Internet services including Samsung Knox security, ChatOn messenger, and S Voice voice command system. Many in the press noted that Samsung did not spend much time on Google Maps, Google Now, and Google Play and frankly, we are not surprised.

• Samsung by Far Largest Android Player. One of the most interesting data points is that despite a large number of Android hardware partners, Samsung is by far the largest with what industry data indicates 42% market share in Android smartphones, up from 38% a year ago. Huawei, the No. 2 player, has a distant 7% share while others like ZTE, HTC, and GOOG's own Motorola division each have only 3%-6%. We believe this dominance of Android gives Samsung some leverage in negotiating better terms in sharing mobile advertising and apps revenue. GOOG is not standing still - it is beefing up its hardware efforts with Motorola, Nexus, Chromebooks, and potential retail stores.

• Samsung Pursuing Platform Model. We see Samsung seeking to transition to more of a vertically integrated platform play of hardware, software, and services to compete more effectively against AAPL, GOOG, AMZN, MSFT, and others. The company has been co-developing Tizen OS with INTC, while also ramping software efforts, including investments in Silicon Valley. However, with Android and iOS accounting for more than 90% market share and Windows 8 and BlackBerry 10 fighting for a spot, it remains to be seen how successful Tizen will be.

• Not Easy to Be GOOG or AAPL But Samsung Has Leverage. We believe replicating GOOG and AAPL's model as a platform play will prove very difficult where arguably only AMZN is seeing success. For Samsung, we appreciate the efforts and believe it bears watching. However, we think the company's biggest leverage point is negotiating better terms in sharing mobile advertising revenue. This is an issue we think investors may be underestimating.