"Disrupted in 2014": Seven Companies and Products Were Upended Last Year. We Start With the Hardest Hit, Samsung

Every year some company makes a sad exit. This year it was the turn of a star company that once sold itself as "the other iPhone."

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In the first week of January 2014, Samsung Electronics held a press event at the Consumer Electronics Show in Las Vegas and invited Michael Bay, director of the Transformers films, onstage to praise its new products. Unfortunately, just as Bay began talking about his mission as a director, the teleprompter failed. He tried several times to put a sentence together, but still could not say what he had to offer audiences. Finally he said, "Sorry, I'm sorry, I'm so sorry," and fled the stage.

Less than a year later, Samsung's most profitable business, smartphones, has stalled just as awkwardly as Bay's speech.

Two months ago, Samsung reported its worst quarter in years. Profit from its handset business fell by about three-quarters from a year earlier, cutting the whole company's profit by 60%.

As a result, Samsung's expansion has come to a halt.

On Christmas Eve, a notice announcing permanent closure went up at the entrance of Samsung's largest experience store in London. The display stands had been emptied, and packaging boxes and power strips lay scattered across the floor. The experience stores were the crown jewels of Samsung's retail network: like Apple Stores, they occupied huge spaces in busy shopping districts and laid out every product the company made on clean display tables for people to try. Early this year, Samsung had announced plans to open 60 new experience stores in Europe and 1,400 shop-in-shops in US retail stores.

Meanwhile, Samsung's share of the smartphone market has fallen back to where it was three years ago:

Just a year ago, Samsung was the miracle of the phone industry. The company did not seriously enter the smartphone market until 2010, yet two years later it had overtaken early movers such as Nokia, BlackBerry, Apple and HTC to become the world's largest smartphone maker. By 2013, Apple and Samsung split almost all of the smartphone industry's profit between them.

As Samsung slides, Chinese phone makers such as Xiaomi, Lenovo and Huawei keep growing fast. Xiaomi in particular is growing as astonishingly fast as Samsung did in 2010.

The Carriers' Other iPhone

Samsung's decline is not especially surprising, because its rise did not come from a disruptive product like the iPhone. It came from sales channels that pushed it to the top at the right moment.

This chart made by Asymco shows that Samsung's explosive growth began in 2010:

By then the iPhone had been around for three years, and the world understood that a full touchscreen combined with an app store was the future of the smartphone. Mobile carriers, a key sales channel for phones, needed such a product.

But in almost every important market it entered, Apple's strategy was to pick a single local carrier and sign an exclusive deal lasting two or three years. To win the best subsidies and promotion terms, Apple usually chose not the largest carrier but a smaller one. AT&T in the United States and China Unicom in China, for example, were both number two at the time.

Timeline of the iPhone's carrier partnerships in China, the US, the UK and Japan:

China (China Unicom exclusive for 33 months):

June 2009 - China Unicom

March 2012 - China Telecom

January 2014 - China Mobile

United States (AT&T exclusive for 44 months):

June 2007 - AT&T

February 2011 - Verizon

October 2011 - Sprint

April 2013 - T-Mobile

United Kingdom (O2 exclusive for 23 months):

November 2007 - O2

October 2009 - Orange (EE)

January 2010 - Vodafone

Japan (SoftBank exclusive for 39 months):

July 2008 - SoftBank

October 2011 - KDDI

September 2013 - Docomo

Every carrier that sold the iPhone paid Apple huge subsidies, but every one of them, without exception, also pulled large numbers of new users onto its network.

So every carrier that could not yet sell the iPhone needed something similar to keep its users, even if the phone only looked as modern as the iPhone. That is why Nokia, whose products lagged far behind the 2007 iPhone, still posted the best results in its history in 2010: Nokia was a good brand, and it had partnerships with nearly every carrier in the world.

In February 2011, Nokia abruptly announced it was abandoning its existing products and teaming up with Microsoft on Windows Phone. For about a year afterward, Nokia released no competitive new phones. But carriers could not wait a year. They abandoned Nokia before users did, and Samsung became their first choice to replace it. That year, Samsung's growth curve shot up almost vertically.

Carrier promotion lowers the cost of buying a phone, which is crucial for selling high-end smartphones. In the market of the time, Samsung could have succeeded with merely decent products. But Samsung was better than decent, especially at reading consumer trends: the Galaxy Note series it launched in 2011 led the trend toward ever-larger phone screens:

By competing on screen size, Samsung's Galaxy S and Note series avoided going head to head with the iPhone in 2013 and kept growing fast.

Is There Still Room for Another iPhone?

In 2014, the business of being "the other iPhone" began fighting for survival.

Internal figures obtained by The Wall Street Journal show that the Galaxy S5, Samsung's flagship this year, sold only 12 million units in its first three months, about a quarter fewer than the Galaxy S4 over the same period last year. Samsung had expected the S5 to sell 20 million.

Apple has now signed up carriers almost everywhere. In smartphone markets such as China, the United States and Western Europe, nearly every major carrier now sells the iPhone with subsidies. And although it was slow to react, Apple finally released the iPhone 6 and 6 Plus in September, with screens close in size to Samsung's. Third-party analysts now expect Apple to have the best quarter in the iPhone's history in the fourth quarter.

With its edge in sales channels and screen size gone, Samsung must compete with Apple on design, software and brand, and Apple is strong in all three.

As the market leader with no one left to copy, Samsung has tried to stand out in every way it could. Each generation of the Galaxy S, for example, has used better components and materials, and its production cost has risen every year, while the iPhone's has stayed roughly flat:

No one matches Samsung's marketing either. In 2013, Samsung spent $14 billion on marketing, $4.3 billion of it on advertising and most of the rest on incentives for retailers and carriers to push its products. Apple spent only $1 billion on advertising over the same period. Among the world's 20 companies with the highest sales, Samsung ranked first in marketing spending as a share of sales, at 5.4%, nine times Apple's ratio.

In 2014, Samsung's ads were everywhere. Samsung briefly renamed Terminal 5 at London's Heathrow Airport the Galaxy S5 Terminal, and at the Oscars, celebrities took selfies with Samsung phones. Even the unnoticed spaces below the card readers at Beijing subway gates carried Samsung logos.

If marketing on this scale could not stop the Galaxy S series from sliding this year, there is clearly reason to doubt that the market has room for an "iPhone on Android."

Android Is Samsung's Bigger Problem

Apple competes with Samsung by making better products. Chinese Android makers, by making similar ones, already threaten the survival of Samsung's high-end lineup.

As low-end processors get faster and Android improves, cheap Android phones offer an experience ever closer to that of expensive ones. A few years ago, these companies lacked the technical strength to take on international makers. With Android's help, they now sell smartphones at half the price of their rivals' that are nearly as usable.

Even phone designs are converging. Today's smartphones all have ultra-thin bodies with a large screen covering the front. When phone makers start hyping steel plates, photos of the moon and glue in their marketing, you can see how hard it has become to make hardware that is even slightly different.

Whether you buy a 5,000-yuan Samsung Galaxy S5 or a 2,000-yuan Xiaomi Mi 4, the vast majority of apps work no differently.

Apple has built a distinct experience on iOS, a system only it can use. Samsung has no such advantage, and it finds it ever harder to persuade users to pay two or three times as much for a phone that works much the same.

Against this backdrop, Chinese Android makers such as Xiaomi, Lenovo, Huawei, Coolpad and OPPO have grown fast and now hold seven of the top ten spots among global smartphone makers.

Samsung still sells more, but its plunging profit shows it can no longer hold on to its old high-end position

With little to tell brands apart, the Android smartphone market is sliding into a price war, as the Windows laptop market once did. In that market, Lenovo pulled ahead of HP and Sony.

Chinese Android phone makers also have a better business model than Chinese makers had in the laptop era. They do not just sell hardware. In China, Xiaomi uses relatively cheap phones to win as many users as possible and so controls a gateway to them. Once it owns that gateway, it earns money by promoting games, e-commerce, video and other services, so the hardware itself does not need to make much. For makers like these, the mid- and low-end market that Samsung looks down on is their main business, and they put everything into it.

"Change Everything Except Your Wife and Children."

In November 2014, Robert Yi, a Samsung Electronics vice president, told investors in New York that the company would cut its number of phone models by a third to a quarter next year, lowering the cost of the models that remain. A little earlier, Samsung had also said it would share more components across its phone models next year to cut production costs. But changes like these are not enough to let Samsung make good phones at iPhone prices and hold off Chinese smartphone makers at the same time.

If Samsung's own mid- and low-end phones are not different enough from the Galaxy S series, they will eat into sales of its high-end lineup.

If they fall too far below the Galaxy S series, they will have even less chance of standing out from Xiaomi and its peers. As long as Samsung competes with Chinese companies inside the Android world, it will struggle to serve the high end and the mid-to-low end at once, just as in the Windows laptop market.

In 1993, Lee Kun-hee, then chairman of Samsung Electronics, pushed the company to transform itself and told a room of executives: "Change everything except your wife and children."

Samsung has since fulfilled Lee Kun-hee's hopes and become one of the world's leading technology giants. But if its core phone business is to endure, it needs another complete transformation. And this time will be harder than 20 years ago.

Others Disrupted in 2014

Microsoft Office: Still very profitable, but drifting ever farther from you

Over the past year, Microsoft made two major changes to its Office business. First, at the end of March, it released Office for iOS. The first version of Office designed from scratch for touch devices launched on the iPad rather than on Microsoft's own Windows. Then in early November, Office became completely free on mobile platforms: users no longer needed an Office 365 subscription to edit documents.

But growth has disappointed. According to App Annie, even Word, the best performer in the Office suite, began sliding down the download rankings after its launch peak:

Ranking of Microsoft Office Word in Apple's App Store, from App Annie

In the PC era, Office was an all-purpose tool. Everything from company business to household chores was stored and passed around in Microsoft's docx and xlsx files.

In the smartphone era, open Office on your phone and the default templates offer you posters, travel diaries, schedules, household account books, movie lists, to-do lists...

But for almost every one of these templates, other internet companies offer apps or websites that do the job better. Evernote, another productivity tool, passed 100 million users this year. Office is drifting ever farther from people's daily lives.

Now that everyone has a phone and is online around the clock, the Office files Microsoft controls are no longer the most effective way to share. The most effective way is content and links that internet services push into social networks.

Microsoft is still safe. For more than a decade, Office has been its most profitable business, steadily contributing about a third of its revenue every quarter and helping make Microsoft the most profitable machine in the tech industry after Apple. For a long time to come, Office will clearly keep doing well with businesses.

But if BlackBerry's decline teaches anything, it is this: when a product that once served both personal and business use loses the personal market entirely, it will not survive forever in the business market either.

China Mobile: The iPhone and 4G made it a better pipe

In 2014, China Mobile rolled out its 4G network nationwide, and two generations of iPhones that support its 4G went on sale. With its weaknesses in network and handsets fixed, China Mobile added more than 27 million 4G users in the third quarter alone, an increase of nearly 200%.

Yet although 4G users are growing fast and data use keeps rising, China Mobile's profit in the first three quarters of 2014 still fell 9.7%, its lowest since it went public in 1997.

According to a CNNIC report, from June 2013 to June 2014, more than half of Chinese mobile users used five types of apps: instant messaging, search, news, music and video.

All of these, except search, were once carrier businesses. China Mobile in particular carried instant messaging through text messages and Fetion, delivered news through mobile newspapers, and once made billions from music downloads and ringback tones. But in the smartphone era, internet companies have taken over every one of these businesses. As for newer services such as mobile shopping, ride-hailing, food ordering and travel booking, carriers have no part in them at all.

The "OTT" services that carriers complain about every day are becoming the most basic services in mobile users' eyes, more basic even than text messages and calls. Despite its better network and better choice of phones, all China Mobile can offer in the new businesses created by the mobile internet is a better pipe.

Xunlei: Built on downloads, disrupted along with them

Xunlei listed in the United States in the summer of 2014. Half a year later, its share price has fallen to half its IPO price. Its latest quarterly report shows net profit of just $300,000, about 5% of the figure a year earlier.

Xunlei began as a download tool that spread pirated content, and made money by charging for faster downloads and offering online playback. But downloading is now an outdated way to consume content, and streaming has become the norm. According to a CNNIC report, by the end of 2013, 428 million Chinese users watched video through video sites and their apps. The sites with the most users were Youku Tudou, iQiyi PPS and Tencent Video.

Every one of these sites spends hundreds of millions on video rights from Chinese and foreign producers and on making its own shows. Thanks to the video sites, a great many films and TV series that once had to be downloaded through Xunlei, or watched online by paying for a Xunlei membership, can now be watched online directly. And the giants that paid heavily for rights have every reason to crack down on piracy. Around the time of its listing, Xunlei began cracking down on downloads of pirated content on its own platform. Without pirated content, what reason does Xunlei have to exist?

Xunlei rose on pirated downloads, and it has been disrupted along with them.

Nintendo: Missed the most important innovation in how we play

Squeezed by mobile games on one side and by Microsoft and Sony on the other, Nintendo has been struggling for some time. But 2014 was especially bad: Nintendo's total game revenue, including home consoles and handhelds, was only $5 billion, less than half what it was four years ago:

Meanwhile, global mobile game revenue over the past year passed $20 billion.

Nintendo's refusal to put any of its major games on phones is not hard to understand.

Over the past three decades, Nintendo has driven almost every innovation in how people interact with game hardware. In 1995 it entered virtual reality with the Virtual Boy; in 1996 the Nintendo 64 made the analog stick and trigger buttons the standard controls for home consoles; in 2004 the DS introduced stylus-based games; in 2006 the Wii brought motion control; and in 2011 the 3DS brought glasses-free 3D to ordinary consumers.

New ways to play, combined with outstanding game design, helped Nintendo stand apart from its rivals and sell more games.

But today the most important and most widely used innovation in interaction is the smartphone touchscreen. And the App Store, which Apple made mainstream, has turned every phone around you into a game console competing with Nintendo for your time.

By refusing the most important change in interaction of the mobile era, Nintendo may avoid becoming just another company making games for iOS. But its attempt to win users' time from smartphones with handheld consoles is bound to fail.

Mechanical hard drives

Round-the-clock connectivity and the spread of online music and video have greatly reduced how much users rely on local storage. Solid-state drives, which hold less but are faster and smaller, have also spread over the past few years along with mobile devices and ultra-thin laptops.

In September 2014, Seagate completed its purchase of LSI's flash business. Seagate had already dipped into the solid-state drive market with several products in 2013, and this acquisition marks a shift in how a giant of mechanical drives views solid-state storage. Traditional mechanical hard drives will fade out of the computers we use every day.

Brick-and-mortar retail

Brick-and-mortar retail, an industry that has been under disruption for years, had another bad year. On the recent Singles' Day, Alibaba sold 57.1 billion yuan of goods in a single day, half of the 2013 annual revenue of Suning, China's largest retailer.

Even American retail giants, which have experimented more with combining online and offline, have seen limited results after trying countless measures: closing big stores and opening small ones, slowing global expansion, building branded shop-in-shops, offering in-store pickup. Walmart, Best Buy, Suning and other brick-and-mortar retailers have spent all their strength trying to avoid disruption. But for now, it looks as if they are only slowing the process down.