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Profits fall suggests smartphone buyers could be ready to hang up on Samsung: Company issues statement in attempt to justify poor second-quarter results

July 9, 2014

Charles Arthur

Samsung, the world's biggest maker of mobile phones, is under threat. After years in which it has set the pace for smartphone sales, the South Korean firm announced yesterday that its second-quarter results will hit a two-year low, with operating profits of 7.2tn won (pounds 4.2bn) - down 24.5% from a year ago, and significantly below analysts' expectations of 8tn won. Revenues would be 52tn won, it said, down 10%.

Unusually, the company has put out a statement in which it sought to justify the lower numbers, variously blaming the rising Korean won - it has gained about 9% against the US dollar in the past quarter - excess inventory in Europe, lower smartphone and tablet shipments, competition at the mid- and low-end parts of the market, delayed purchasing in China as buyers await 4G rather than older 3G phones, cannibalisation of its smaller 7in and 8in tablets by larger-screened "phablet" phones, and the need for increased marketing spending to try to shift the inventory.

It's a litany of reasons - or excuses. As Richard Windsor of the Radio Free Mobile consultancy points out with regard to the top culprit, foreign exchange movements, that works both ways: "Samsung buys much of its componentry and pays a large part of its workforce in foreign currencies."

Analysts have for some time been looking for signs of whether the company would be able to capitalise on its dominant position or would follow the previous mobile leader, Nokia, in falling from grace.

The lower profits come despite Samsung apparently shipping more smartphones than a year ago - an estimated 78m against 73.3m (Samsung does not release official figures). That's down from the all-time peak of 85m in the first quarter - even with the April launch of its flagship Galaxy S5.

Jan Dawson, of Utah-based Jackdaw Research, said: "Samsung is starting to run into several powerful headwinds", citing low-end competition and slower growth in premium sales. "At the same time, it has failed to build a value proposition on top of its hardware with software and services, which has been key to Apple's success."

Samsung's success has instead come from selling a huge variety of phones at every size and price, serving all the market. Apple has thrived by selling one (or more recently two) new phones, and one- or two-year-old models. Between them, the pair have captured virtually all the profit in the mobile handset business for the past couple of years.

But now Chinese sellers are able to compete on price at the low end, accepting lower margins to increase sales. And at the high end, Apple has continued to pick up customers and is forecast to gain even more with the expected September launch of larger-screened phones - a product category Samsung had previously made its own.

Samsung attempted to make itself into an Apple-like integrated player offering music and video streaming, and with its own Samsung-specific apps, but that hit a roadblock in January. According to reports by Bloomberg Businessweek and The Information, Google's head of Android Sundar Pichai warned Samsung during "frank conversations" against trying to create its own interface on Android.

The Information reported that Pichai threatened to walk away from Samsung - that is, block it from using the Android operating system. It would be a high-risk move for both companies, since Samsung sells about 60% of Android smartphones outside China. But other phone makers would surely be glad to pick up the slack - while Samsung would be left starting almost from scratch. (Google did not responded to a question about the claim.) Since January, the Samsung has begun closing some of its Samsung-only streaming services, giving customers less reason to stay exclusively on its devices.

Samsung is throwing its lot in with Google, and is pushing wearable technology such as smartwatches. But without its own app "ecosystem", said Dawson, the company is in trouble: "Its hardware looks undifferentiated and overpriced to many users. The inevitable result is that Samsung will fail to sell as many devices as it has in the past as it sees pressure both at the high end and low end. Its share of the smartphone market will likely start to shrink, and the same thing will likely happen in tablets too unless it continues to discount those heavily. Either way, profits will suffer, especially as high end smartphone sales start to fall."

Though Samsung is forecasting better results in the third quarter, with new devices in the pipeline, others think that rivals will only gain ground. "I think it's entirely possible we've seen a peak for Samsung in smartphones," said Dawson. And with smartphones generating 70% of Samsung Electronics profits, that could mark a turning point.


Analysts say Samsung's failure to build extra services means its smartphones appear undifferentiated and overpriced to many users Photograph: Michael Conroy/AP

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Source: Guardian (UK)

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