What's Happening to Samsung: Can It Avoid the Fate of Nokia and Motorola?

We've been here before: Blackberrys, Razrs, Nokia 1100s. The 'it' phone that everyone had to have until they didnt. And when things went bad, they went really, really bad, not just for the product, but for the entire company.

Nokia became a forgotten subsidiary of Microsoft. Motorola?Who can remember - or care? And Blackberry is on life support, still cranking out new products that few people want until it figures out what it might become when it grows up. The history of not staying ahead of the curve, or of failing to remember the Innovator's Dilemma, the disruption that comes from the cheaper, newer concept (and re-emphasize cheaper), is relentless and unforgiving.

Samsung, until  a few months ago, appeared to be more than holding its own as the leading purveyor of affordable smartphones. It had battled Apple to a draw over patents and its relationship with Google appeared to assure, if not a second Wintel-like partnership, at least a pretty secure and profitable future.

The strategic challenge is that competitors are attacking Samsung at the head and the tail of the market. Apple's iPhone 6 and the jumbo-sized 6 Plus have re-confirmed dominance at the high end while a host of competitors from China and elsewhere in Asia are nibbling away at Samsung's lower end base.

Differentiation is hard to come by when you are competing on both technology and fashion. Price is a tough way to make a living. Design and brand aura are owned by someone further upmarket. Samsung is too big to be a niche player but maybe just big enough to hang around till the next cycle. JL

Simon Mundy reports in the Financial Times:

Samsung’s lack of control over the “ecosystem” means that “the options that it has to differentiate its products in the future are extremely limited”.
Samsung Electronics’ smartphone business may never have matched the brand power of Apple, but for several years the South Korean group’s aggressive marketing and swift product development have set it apart from every competitor in the sector when it came to sales.

But as the company’s latest sharp profit fall shows, it faces a battle to differentiate itself from an increasingly strong pack of challengers – and to prevent its most profitable division from becoming a purveyor of “commoditised” products.

Samsung’s operating profit fell in the third quarter by 60 per cent, year on year, to Won4.1tn ($3.8bn), it said on Tuesday, the lowest figure for more than three years, and the fourth consecutive quarterly earnings decline.

The reversal in fortunes for the group – which entered the smartphone market late but rose rapidly to become the world’s leading manufacturer by sales – has unpleasant parallels with the woes of once dominant mobile producers such as Nokia and Motorola, said Richard Windsor, analyst at Edison Investment Research. The company’s smartphone market share was 25 per cent in the second quarter, well down from the 32 per cent share it reported a year earlier, according to research group IDC.

A key problem is that Samsung has been hit at both ends of the market.

At the low- and mid-range market, it has struggled to cope with the growing threat from Chinese smartphone makers such as Xiaomi, Huawei and Lenovo, as well as a host of smaller peers. Like Samsung, these companies produce phones that run on Google’s Android operating system, and each has been steadily eroding Samsung’s market share in China and other Asian markets.

Xiaomi, which makes high-end handsets that it sells at low prices, has been hugely popular in China where it has become as popular a brand as Apple and overtaken the US group in sales. Now it is vying with Samsung for top spot in the world’s largest smartphone market and looking to expand globally in other fast-growing markets such as India, Brazil and Indonesia.

Huawei’s and Lenovo’s combined smartphone market share, meanwhile, rose to 12 per cent in the second quarter, an increase of 3 percentage points year-on-year.

Peter Yu, analyst at BNP Paribas, said Samsung has been guilty of complacency, marketing phones that compared poorly with Chinese rivals on both technical aspects and price. “They were a bit arrogant,” he said. “They thought [the phones] would sell because of the Samsung brand, but it didn’t work that way.”

At the same time, Samsung is facing a redoubled threat from Apple in the premium market. Last month, the US group unveiled two new versions of the iPhone with much larger screens than previous models. This instantly eroded a key selling point for Samsung, which uses large screens and had pioneered the “phablet” concept. The two versions of the new iPhone sold a record 10m units in just their first weekend, Apple said, despite not being sold in China after regulatory hurdles delayed the launch in the country.

For the second consecutive quarter, Samsung issued an explanatory statement to allay investor concerns and give a sense of how it is trying to combat these twin challenges.

The company said profits had been dragged down by increased marketing expenditure, as well as price decreases for older smartphone models.
Analysts said this reflected efforts by Samsung to clear inventories of its budget phones, ahead of an anticipated overhaul of the portfolio later this year.
“Samsung has clearly decided to be much more aggressive on specs and pricing in the mid-end and low-end,” said Mark Newman, analyst at Bernstein.
But Samsung’s statement also reinforced fears that it had been hurt by the Apple launch, as it reported a fall in the proportion of high-end phones in its quarterly sales.
Moreover, unlike Apple, Samsung has been hurt by its inability to build a proprietary operating system. Tizen, its effort to build the sort of ecosystem that Apple and Google have, has been hit by years of delays, and the first phone supporting it was unveiled only in June.
Mr Windsor said that Samsung’s lack of control over the “ecosystem” means that “the options that it has to differentiate its products in the future are extremely limited”.
The one bright spot for the company was its semiconductor division, which has been Samsung’s most profitable unit for most of the past two decades, and looks set to benefit from a period of higher pricing.
But like other analysts, Mr Yu said the company’s fortunes with consumers will depend on its new range devices in the mid- to low-end smartphone market. “If people don’t respond to that, it’s going to be very bad,” he said.