Samsung has set up an ambitious goal for its wireless network business in 5G to have 20 percent market share by 2020. The South Korean tech giant has come a long way, and it seems there are many opportunities and hurdles ahead -- notably the Huawei controversy.
Among Samsung's numerous businesses, probably no other has been plagued more by rumors of an imminent exit than its network business in recent years.
From 2014 to 2016, when Samsung Group -- of which Samsung Electronics is the crown jewel -- was commencing its biggest restructuring in over a decade, many considered the network business to be at the top of the list to go.
Meanwhile, a report in 2014 claimed that Samsung Electronics was preparing to merge its network business with its IT service affiliate Samsung SDS, to offer it as a total enterprise solution in the mould of Cisco. Samsung strongly denied the claim. Then in 2015, a different report claimed the company was considering selling the business altogether. Samsung, again, strongly denied the report. The rumor surfaced again in 2018 around the time of Mobile World Congress, forcing its network boss to deny them once again.
The main reason behind the exit logic is that it hasn't been profitable for years. It's an accepted fact that it failed to clinch any major clients in 2014 for its 4G LTE equipment, for example. Second, networking revenue has been relatively small for Samsung: the company boasts over $200 billion in annual revenue and its consumer and semiconductor businesses contribute tens of billions each year, while the network business has never got close.
To affirm that it won't be exiting its network business anytime soon, the company announced in November last year that it wants 20 percent market share in the network equipment market by 2020. In Samsung's traditional year end reshuffle for 2018, there was no major restructuring in other businesses, but the network division's boss changed from Youngky Kim, who had led it since 2010, to Kyungwhoon Cheun. Samsung said Cheun, who joined the company in 2012, has been heading next-generation technology development and his promotion meant it was strengthening its network business for the 5G era.
It's quite an ambitious goal for the industry's number five to make -- 20 percent share equates to second or third place. But the South Korean tech giant has spent decades on becoming technology-independent in wireless networks and likely sees 5G as a golden opportunity to secure its return on investments. There are many opportunities and pitfalls ahead -- chief among them is its leverage in smartphones and the Huawei controversy. So will it succeed?
Despite being less well known than Samsung's other businesses, the network division has a history stretching back decades. In 1977, Samsung formed a joint venture with US-based GTE (which was acquired by Bell Atlantic in 2000 and now is part of Verizon) in South Korea for technology transfers. The business was then combined with Samsung Semiconductors in 1982, before finally merging with Samsung Electronics in 1988. The technology it offered was rudimentary: good old-fashioned telephones, with wires and all.
In 1992, it collaborated with SK Telecom to offer South Korea's first-generation wireless service that adopted the Advanced Mobile Phone Service (AMPS) developed by Bell Labs. In the same year, South Korea announced that it would set Code Division Multiple Access (CDMA) as its single wireless standard, and started paying royalties to Qualcomm. From this point onwards, the network division's history mirrors that of another business with a similar trajectory: the System LSI business, which makes logic chips and also existed since the beginning of Samsung. Until recently, the South Korean tech giant had long relied on Qualcomm's modems and processors for its handsets. It was the same for network equipment. As the country and Samsung didn't have the core technology necessary to build advanced chips and equipment on its own, the resultant reliance on Western companies had long been an issue for the South Korean tech giant, which wanted technology independence.
Samsung commercialised WCDMA in 2003, with an intention of getting into wireless network equipment seriously for the first time as it continued to strongly push its handsets. Mobile phones were dominated by Nokia and Motorola, while the network equipment market was controlled by Ericsson with Nokia the runner-up. In 2006, Samsung developed WiBro, known as Mobile WiMax, with the Electronics and Telecommunications Research Institute as an attempt to gain independence and a foothold in 4G. WiBro, however, was only a minor hit and long-term evolution (LTE) became the accepted standard for 4G networks. Samsung, in essence, didn't have the technology, market share, capital, or clout with enterprise partners it has today to dictate terms. The failure prompted the South Korean tech giant to drop WiBro and belatedly enter the 4G LTE equipment market. Samsung became the biggest LTE patent holder in 2015, with the company's LTE patents being a key point of dispute during its infamous lawsuits against Apple.
Thank you, smartphones
Samsung isn't the same company it was ten years ago. It's now the world's largest electronics maker by revenue and is among the top globally in R&D spending. It has many LTE-related patents. Samsung has gone mostly independent from Qualcomm, preferring to use its own processors and modems.
What Samsung has now is an end-to-end portfolio when it comes to 5G, from network equipment to smartphones.
Crucially, its dominance in the Android handset market has given it considerable clout and capital when it deals with carriers. The handset and network businesses are a natural mix -- the history of Nokia being a classic example.
Before smartphones -- or more precisely, Apple -- it was an accepted fact that carriers had the upper hand when dealing with handset manufacturers, especially in markets such as the US and South Korea where the telcos controlled distribution. Apple has since become a remarkable exception to that rule.
"Since [the] iPhone was in high demand, it was Apple which dictated terms, from sales to advertisement, when it negotiated with carriers," said a senior executive of South Korean telco, who declined to be named.
In Korea, the Fair Trade Commission is investigating allegations that Cupertino effectively forced them pay to advertise iPhones. It is also alleged that stores were also forced to buy phone models for display.
Samsung doesn't quite enjoy the prestige that its arch-rival does (the company is rumoured to have paid huge subsidies to carriers to market its phones), but has built a strong relationship with global carriers, especially in the US, thanks to its long hegemony as the largest Android handset manufacturer.
Samsung is aiming to be the first to launch a 5G phone following the unveiling of the Galaxy S10 series. Despite its woes at the low to mid-end due to competition from Chinese rivals, it's likely that the South Korean tech giant will maintain its lead in the premium market, similar to Apple.
Huawei Controversy: Opportunity or Noise?
Huawei is the 500-pound gorilla in the telecom equipment market. The Chinese tech giant, which also produces smartphones, has shown incredible growth over the past decade -- as, to a lesser extent has its compatriot ZTE.
"In the 90s, Huawei executives visited South Korea, asking for technology transfers from local companies," a senior South Korean diplomat told ZDNet, who declined to be named due to the sensitivity of the issue. "That seems not so long ago. It's still difficult to digest how they have grown to be so big in such a short time frame."
By the second quarter of 2018, Huawei had 29 percent market share in telco equipment, while Ericsson and Nokia controlled 27.6 percent and 25.8 percent respectively, according to market research firm Dell'Oro Group.
ZTE, which was formerly among the top five vendors, was knocked out of that position in the same quarter thanks to the US blocking it in the ongoing US-China trade war.
This could provide an opening for Samsung to expand its market share. Its chief target market this year will be the US and South Korea, and to a lesser extent Japan. Samsung is a vendor for US carriers Verizon, AT&T, and Sprint, and also has strong partnerships with KDDI and NEC in Japan.
However, this doesn't mean it's open season. Ericsson and Nokia are well established in Europe. Western countries may have banned Huawei, but less developed countries will likely be inclined to hedge their bets with Huawei despite security concerns, due to the Chinese company's cheaper prices.
"They offer the same equipment 30 percent cheaper or more, so it can be hard to resist," said a senior executive of a South Korean carrier, who declined to be named.
Yet it would be wrong to say Huawei is winning simply because they are cheap. Much like its Chinese rival, Samsung's key advantage has also been its price-competitiveness. When it comes to 3.5GHz-spectrum equipment, some have argued that the Chinese tech giant's is superior. According to company insiders, Samsung is hoping to change this narrative by offering 28GHz-spectrum equipment, which it plans to roll out later. The South Korean tech giant also said its true 5G standard will be set in December with Release 16.
As the enterprise moves slower than the consumer market, it remains to be seen how much of an advantage, if any, Samsung will gain from Huawei's legal troubles. And of course other vendors, such as Ericsson and Nokia, are taking note too.
Reaffirming its hold in South Korea
Huawei's competitiveness and legal troubles have influenced decision-making in South Korea as well. Late last year, local carriers SK Telecom, KT and LG Uplus named their preferred bidders for 5G equipment. Despite huge security concerns from the public, LG Uplus included Huawei alongside Ericsson, Nokia, and Samsung. As the smallest of the three carriers in South Korea, LG Uplus needs to find competitiveness somewhere, so the inclusion of Huawei makes sense. Unlike its Western allies, the South Korean government has yet to ban Huawei, although this may change as the US indictments against Huawei move forward.
South Korea has acted as a steady base for Samsung's network business. The company has a strong partnership with the country's top wireless carrier SK Telecom, and together they launched a 1G network some twenty years ago. So despite the temptation to choose Huawei's more price-competitive offering, SK Telecom and runner-up KT have put its partnership with its compatriot over the newcomer for 5G. Of course, the two Korean wireless carriers' extensive use of Samsung LTE equipment for 4G also played a key role in their selection, whereas LG Uplus used Huawei for LTE.
5G won't be rolled out in a day. Services deploying this year in March in South Korea will be non-standalone, meaning they will use LTE infrastructure. When standalone services are commercialised next year, Huawei will likely take part in the bid for equipment used for ultra-high frequency spectrum. In its fourth-quarter earnings, Samsung said it will expand its equipment supply for the first markets for 5G in South Korea and the United States, thereby "laying the foundation for global growth".
Samsung's road ahead for 5G wireless equipment may not be smooth, but compared to ten years ago it has a fighting chance this time around.