Samsung promises new phones but faces a battle on two fronts

The world’s largest smartphone maker is confronting increasing competition from Apple and low-cost Chinese rivals.
Written by Steve Ranger, Global News Director

Samsung faces a two-front battle as it needs to defend its position as the world's biggest smartphone maker.

The company said in preliminary guidance that its third quarter revenue was expected to be 47 trillion won ($44bn), a 20.45 percent decrease from a year ago and a 10.22 percent drop from the previous quarter.

Along with weak demand for TVs, Samsung blamed falling profits on declines in its mobile business "due to intensified smartphone competition", which have also had an adverse effect on the performance of its smartphone display panel business.

Samsung is the largest smartphone manufacturer in the world, accounting for 25 percent of the market according to figures from IDC, down from a 32 percent share a year ago. It shipped 74 million handsets in the second quarter of this year, the analyst said.

Samsung said its smartphone shipments increased slightly in the third quarter, but its margins suffered due to rising marketing spend and lower average selling prices for the its handsets as a result of "reduced proportional shipments of high-end models" and price cuts for older models.

 The company is facing a struggle in two areas: firstly, against Apple at the high end after Cupertino caught up with the trend towards larger, so-called phablet, devices. By making phablets, a category popularised by Samsung, Apple has removed one of the big advantages the Korean company had over its US rival.

Meanwhile, at the low end, the company is facing greater competition from Chinese smartphone makers such as Xiaomi and Huawei who are delivering solid smartphone experiences at a lower cost.

 The bigger problem for Samsung is the ongoing commoditisation of the smartphone market; even cheap smartphones can provide nearly all the functionality required by most users (phone, web browsing and popular apps). It's getting increasingly hard for smartphone makers to differentiate their products, which is why they're putting more effort into building the surrounding ecosystem and experimenting with wearable devices. Samsung is so big, and makes so many different phones (and tablets) at many different price points making it hard for many apart from its flaghship S5 to stand out. Because it has focused on using Google's Android operating system also makes it hard to stand out from the crowd of other, in many cases cheaper, Android devices.

Aleksi Aaltonen, assistant professor of Information Systems at Warwick Business School, said the change in the market dynamics has been coming for a few years.

"Samsung's phenomenal success across the whole spectrum of smartphones has put it into a position where it now has to fight on two very different fronts. This can, for instance, make it more difficult to fully develop and leverage your brand. On the one hand, you are not as good value for money as your competition because you put a lot of money into advertising, but, on the other hand, you are not as cool as those who focus exclusively on the premium segment. Giving up one of them, either the low-end, that is, market share, or the high-end, that is, profitability, is not easy but may be an unavoidable strategic choice that Samsung needs to make," he said.

Aaltonen said that Google remains another important factor in the market: "Google needs device manufacturers with enough profits to stay in business to populate markets with handsets. However, it also wants to make sure that the majority of profits are done by showing advertisements to smartphone users."

Samsung isn't taking its waning mobile fortunes lying down, however. The company said it is working on a new smartphone lineup featuring new materials and design, "as well as a series of new mid to low-end smartphones with strong competitive positioning on both hardware specifications and price".

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