The company cautiously expects a more positive outlook in the third quarter with the coming release of its new smartphone lineup’. That was the most important line from a recent Samsung press release that unusually accompanied the company’s earnings report for the second quarter of this year. And it was not pretty. The company has posted operating profits of $7.1 billion which was significantly lower than the $8.5 billion that analysts predicted it would make, and more importantly, 24 per cent lower than the last year. The report has just added steam to a new narrative that was starting to build up over the past couple of months. As the smartphone market in the West gets saturated and as the devices themselves get commoditised, has Samsung peaked?
The answer for that question could be found in two other events that happened the same day the South Korean electronics giant was announcing its results. One was the announcement that Xiaomi (pronounced she-yow-mee), often dubbed China’s Apple and which makes hugely popular Android phones in China, is entering the Indian market and bringing with it some well-designed, affordable smartphones. The second was a video posted by video blogger Marques Brownlee on YouTube. He gets his hands on a front glass panel of the yet-to-be-announced iPhone 6 and in the video goes onto subject it to a series of torture tests like stabbing it with a knife and trying to bend it. Unable to even put a scratch on the glass, he concludes that Apple is using the highly durable sapphire glass to make its next iPhone display. These two, the entry of Xiaomi into India and the sapphire glass in the iPhone, are symbolic examples of how Samsung is finding itself between a rock and a hard place.
On the rock side there is Apple which continues to dominate premium smartphone markets. For years Samsung had one philosophy that it competed in new markets. That of being a ‘fast follower’. It waited for a company to make a new innovative device and then using its vast components manufacturing business essentially copied that new device that it then sold at a cheaper price. This strategy has been successful with devices like TVs and vacuum cleaners. When it came to the iPhone, it was initially successful with phones like the Galaxy S2 and the S3 but started to lose steam as Apple woke up to the challenge. On the one hand Samsung found out it was not easy to copy and get away with companies like Apple that have very deep pockets and can sue it to the end of the world. On the other hand Apple has cleverly started including technologies in its phones that are very hard to copy like the finger print sensor and the upcoming sapphire glass.
And the hard place. On the lower end of the market, companies like Xiaomi and India’s own Micromax are eating Samsung’s lunch. Since they all use Android and since Samsung has no software chops that will differentiate its phone from million other cheap Androids, the only factor it can compete on is price, which it is unable to do with these small local companies that use local talent, local manufacturing and often sell at cost.
Samsung finds itself in the same position that Nokia found itself in 2010. Since it is a global behemoth that makes everything from battle tanks and ships to theme parks, Samsung won’t quite disappear like Nokia. But it will end up as a player unless it comes up with some ground-breaking technology. And fast.
Matham is a tech geek. Follow him on Twitter @AdarshMatham