Samsung's $8 billion deal to buy infotainment and audio hardware giant Harman (HAR) might not be disastrous for Apple's (AAPL) automotive efforts, given Harman's business model. But it does arguably show how Apple's hardware philosophy can be a problem.
The acquisition features a 28% premium to Harman's Friday close, but still only involves a moderate valuation of 15 times Harman's expected 2017 earnings. It gives Samsung a company that supplies infotainment systems to automakers such as Audi, Toyota, Jeep, Mercedes-Benz, BMW and Chrysler, as well as popular audio products for homes and cars under brands such as JBL, Bang & Olufsen (automotive only) and Harman Kardon. Parts of the latter business complement Samsung's TV business.
Harman claims that 30 million cars feature its technology, and that its automotive backlog stands at $24 billion. In addition to its core car and audio businesses, the company provides custom audio and lighting solutions to enterprise and entertainment clients, and IoT and analytics solutions for a variety of customers.
Harman lowers the dependence of Samsung's consumer electronics business on a smartphone business that has had some issues lately, and for which slowing industry growth and tougher competition from Google are going to be long-term problems.
It makes the company a top player in a connected car market seeing healthy if unspectacular growth as consumer interest in advanced entertainment, navigation and connectivity features grows, and also in an audio hardware market where Harman has been taking share.
Samsung and Harman spell out the deal's synergies. Source: Presentation slides.
There are also some behind-the-scenes synergies that aren't getting enough attention. Samsung can include its displays in future Harman products, along with its processors, modems, DRAM, flash memory and other chips.
That could be a problem for Nvidia (NVDA) , whose Tegra processors have been designed into many infotainment systems (including some of Harman's), and also for Qualcomm (QCOM) , which supplies processors and modems to automakers and is about to buy auto chip giant NXP Semiconductor (NXPI) . Nvidia shares fell 4.9% on Monday, though some of that may be due to profit-taking in the wake of Friday's giant post-earnings gains.
Does the acquisition of Harman by Apple's biggest smartphone rival leave the company's CarPlay software platform out in the cold? Not necessarily. It's worth remembering that Harman works with automakers to supply infotainment systems based on the hardware and software needs of automakers.
If a customer wants a system running Google's Android Auto operating system, Harman can do that. If it wants one running Linux or BlackBerry's (BBRY) QNX instead, Harman can do that as well. Ditto if they want custom software running on top of the OS.
Thus Harman has had no problem providing systems that support CarPlay. And unless Samsung wants to upset many of Harman's biggest customers -- BMW, Mercedes, Chrysler and Toyota are part of the long list of automakers that have given CarPlay their backing -- this is unlikely to change.
However, the fact that Apple's automotive offerings for now revolve around iPhone-paired software that runs on third-party infotainment systems does highlight the challenges the company faces in a market such as cars, where manufacturers are used to dictating exactly what the electronics hardware going into their products looks like.
A company such as Harman, which is willing to accept these rules and the engineers needed to work with automakers on custom solutions, can do good business. But Apple, which has no interest in compromising its hardware vision to meet a third party's tastes, is in a tougher spot.
According to a recent Bloomberg report, Apple is now trying to strengthen it automotive position by developing a car OS with the help of former BlackBerry engineers. The OS is said to be part of a "future Apple car platform" that will also feature autonomous driving software running on top of the OS. But there's no word yet on which, if any, automakers are thinking of adopting Apple's solution.
A similar situation exists in the set-top box market. Here, Apple has created a nice side business with its Apple TV set-tops, which provide access to many online video and music services. But it has no presence in the larger pay-TV set-top market, where suppliers such as Arris (ARRS) and Technicolor provide hardware based on specs sought by pay-TV providers, and which feature interfaces often developed by the latter (there were rumors in 2013 that Apple TV boxes would support pay-TV services from Time Warner Cable, but nothing came of them).
In many ways, it's hard to blame Apple for its mindset. The company has a very valuable brand to protect -- a brand that partly owes itself to Apple's reputation for providing top-notch, no-compromise hardware experiences -- and sacrificing its product philosophy to get some additional automotive and set-top design wins could do real harm to that brand.
But there's a real cost involved as well. In some markets, that cost involves effectively ceding multi-billion dollar markets to more pragmatic competitors.