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Why is Samsung throwing money at startups?

Why is Samsung throwing money at startups?


As Microsoft and Google start building phones, Samsung tries to buy some software skills

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Samsung accelerator
Samsung accelerator

In a swank office building, waiters handed out fried pickles and caviar-covered sushi. Shiny new LCD screens covered several walls. It was opening night for Samsung’s new startup accelerator in midtown Manhattan, and the company had spared no expense. "The future for us is about the thoughtful integration of hardware and software," said David Eun, the head of Samsung’s Open Innovation Center. "And that means startups."

The smartphone market is increasingly made up of vertically integrated companies that create both the hardware and software for their devices. Apple was the pioneer of this model in its modern form. Google got in the game when it purchased Motorola. And Microsoft completed the trifecta when it acquired Nokia. Samsung, which has risen to become the world’s biggest smartphone manufacturer, wants to follow suit.

Meet hot companies. Incubate. Acquire."The market has shifted from one where you make phones to one where you control or piggyback off an ecosystem. Samsung controls the supply chain to a greater degree than anyone else, but it has realized that it lags the leaders in software, integration, and services," says Avi Greengart, a research director at Current Analysis. "Its thought process is simple: go where the innovation is happening, Silicon Valley and New York, and cozy up to these folks to get a better look at what it takes to build beautifully integrated apps."

Samsung recently announced a new $1 billion venture fund that it will use to back early-stage startups. But the purpose of the new accelerator space was clearly as much about buying talent as making investments. "We’re looking to meet the hottest companies, incubate, and acquire," said Eun. "It’s a different model from our VC arm." Apps that hang at the accelerator, in other words, may become "Sapps" in short order. Samsung has done this before: it acquired the streaming media service mSpot and made it into a featured app that came preloaded on Samsung devices. At the accelerator launch party a number of employees from Boxee, which was recently acquired and folded into the smart TV division, mingled with the crowd.

"The refrigerator is really well stocked."The accelerator space in New York features a series of well-appointed offices and conference rooms where a young startup can ply its trade. Samsung has opened a similar space in San Francisco. "I could definitely get used to working here," said Nate Gosselin, a senior manager at the mobile advertising startup Sharethrough. "The refrigerator is really well stocked."

"As we look to the future, our biggest opportunities to innovate are outside of hardware," said BK Yoon, CEO of Samsung's Consumer Electronics Business, who was in New York for the opening of the accelerator space. As for why young startups would choose this venue over the half dozen other accelerators and incubators in New York, Yoon said that "the companies who work here will get access to Samsung’s roadmap, distribution, and marketing support."

"We are in the unique position of being number one in both television and mobile," said Eun, gesturing around the space to the panoply of LCD screens hung on the walls. "Our goal is to have all these screens communicate with one another, so that we can create the largest platform for distributing apps and, potentially, advertising."

"Our biggest opportunities to innovate are outside of hardware."This ambitious plan is another catalyst for Samsung’s push into software. "Samsung envisions an internet of things where your phone talks to your tablet, which talks to your TV, which talks to your refrigerator," says Ross Rubin, a principal analyst at Reticle Research. "In that scenario, where customers are using devices that don’t have intuitive, native interfaces, software becomes increasingly crucial."

There has been a steady stream of speculation that Samsung will be tempted to pull away from Google and fork Android, much as Amazon has done, giving it the ability to sell devices preloaded with its own services and store, and more importantly, without Google’s. For the time being, the pair are still too closely tied, but it’s clear Samsung is hedging for this eventuality by trying to bolster its own software game. Whether acquiring startups is the smart way to accomplish that, though, remains to be seen.