Jonny Evans: Has Samsung stalled?

The smartphone giant's troubles are deeper than its big drop in quarterly profits

There are multiple signals suggesting that the world's biggest smartphone maker, Samsung, is losing momentum.

On the surface, things seem great. Samsung dominates smartphone market share, accounting for one in three of all smartphones sold. Scratch a little more deeply, though, and you'll see that Samsung has accumulated customers by selling cheaper semi-smart devices at deep subsidy. In other words, Samsung has built smartphone market share at the expense of profitability. Is this a sustainable business model?

A bad quarter

The cracks are beginning to show. During Samsung's most recent financial call, the company said that despite its huge chunk of the smartphone market, operating profit for its Samsung Electronics division fell 18% from the previous quarter. That's a big decline. The electronics division has become deeply reliant on its mobile-device business, which now accounts for a whopping two-thirds of the division's profit. It is fortunate the parent conglomerate has such extensive business interests with which to finance its grab for smartphone market share, but have its expensive subsidies enabled Samsung to build the loyalty it needs to drop the subsidies? Let's answer that by asking another question: Has Samsung delivered experiences that surprise and delight customers? It has not.

Customer experience

Smartphones are part hardware and part software. They depend on good software design almost as much as they rely on great hardware. And together, those things offer personal experiences that are measurable by things like customer loyalty and usage.

Samsung's software isn't making the grade, acknowledged company vice chair and CEO Kwon Oh-hyun in November. Promising future improvement, he admitted that Samsung's software innovation has not kept pace with its hardware development.

When it comes to software, Samsung has a big problem: Google. Google develops the Android OS that Samsung's devices are built on, and until very recently also owned Motorola Mobility, itself a direct competitor at the high end of the smartphone market.

No matter how you dressed that up, it meant Samsung was reliant on a company it also competed with. This is why Google's recent patent deal with Samsung was good news for the smartphone maker, though the in tandem deal to sell Motorola Mobility to Lenovo will change the competitive landscape in time.

Despite those deals, the fact remains that much of the software experience of using a Samsung smartphone comes from an operating system it has no control over and that offers zero exclusivity -- pretty much anyone can install Android on its devices, meaning Samsung faces an army of competitors in the low- and mid-range markets, but has no clear way to distinguish itself from them. With companies like Huawei snapping at its low end market and Lenovo gunning to take on Samsung and Apple at the high end, it certainly seems a tough business. All three companies still face Apple, which controls both the hardware and software experiences, and all three are reliant on the same OS. It seems inevitable all three will struggle to make their products distinctive in such a crowded market.

This means Samsung can either bet the future of one of its operating units on the Android OS, in which it has only limited opportunity for future software innovation, or emulate Apple's whole-widget approach by turning to Tizen. The latter move would give it control of software and hardware, but would demand that Samsung convert customers to a new OS that is as yet untested within the mass market.

Customer loyalty

Samsung would perhaps like to exploit customer loyalty to achieve a Tizen switch. But has it generated that kind of user loyalty with its Android devices?

Buried within various Internet usage stats are indications that it has not. They show that Internet access via Samsung Android devices is negligible in comparison to competitors' devices. It's illuminating that IBM reported that, when it comes to online shopping, the totals for iOS were "more than five times higher than Android, driving 23% vs. 4.6% for Android" on Christmas Day. True, "Android" isn't synonymous with "Samsung," but it's close; Samsung accounts for 63% of Android sales. Those IBM stats show that Samsung has failed to match the user experience of its biggest competitor.

More damning than that is the recent news that consumers are dumping Samsung devices for alternatives.

Meanwhile sales of its most recent high-end smartphone, the Galaxy S4, unexpectedly shrank in the fourth quarter, while Apple's device sales spiked. It is also revealing that 81% of iPhone owners stay with Apple when they upgrade their phones. Samsung smartphone owners are much less likely to remain Samsung smartphone owners.

These statistics suggest that Samsung does not have the loyal customers ready and willing to follow it to Tizen-based devices.

Reputation

Loyalty becomes part of a company's reputation. Samsung Electronics has put its reputation on the line in its attempt to create its smartphone business. In the process, it had a very public falling out with its largest customer, Apple, leading to years of international litigation. Years into that struggle, Samsung's reputation seems permanently damaged by a series of successive decisions against it. In the U.S., it must pay $930 million to settle charges that it copied Apple's hardware.

Attempts to defend itself against Apple's litigation through the use of SEP-related patents have driven regulatory investigation against the Korean firm by antitrust authorities in Europe and the U.S. Meanwhile revelations of an online dirty tricks campaign against competitors have raised questions concerning the company's ethics.

And its problems will probably get worse when Apple turns the tables and "copies" Samsung by introducing iPhones with larger displays. "We think one of the key reasons Samsung has managed to take market share from Apple so far is its large-sized screen offerings," BNP analyst Peter Yu told Reuters, warning that the gap between the two could narrow if larger iPhones do indeed appear.

Fading star

So Samsung's challenges are many, including lack of customer loyalty, the costs of subsidy, its weakness in software design, the intense competition it faces, and its own damaged reputation. These challenges have analysts predicting that Samsung's mobile-device business will either grow "by a single digit" or "shrink mildly" in 2014, ending eight quarters of sustained growth.

Samsung faces a time of decision. Can it continue to build momentum by heavily subsidizing its low-end smartphones for the sake of market share, or is it time to consolidate its gains by crafting a unique market position and focusing on the customers it has fought so hard to find? Or will the company resign itself to playing a reduced part in the future of the smartphone industry, as others take their turn in the spotlight? Nokia, Motorola, Apple and hundreds of smaller competitors are eager to steal chunks from Samsung's hard-fought-for market share.

Samsung faces challenges it cannot easily solve. It has extended itself to a point at which its reach can only contract -- good news for consumers eager for fresh competition to galvanize this important market, but not such great news for the company, or its investors.

Has the company's seemingly inevitable contraction already begun? We won't have to wait too long to find out, as Samsung apparently plans to introduce a new Galaxy device next week at the Mobile World Congress. While we can certainly expect a lot of media attention to greet the release, the real test will be sales: Will consumers invest in new Galaxy phones, will they migrate to handsets from Lenovo or Motorola, or might they instead choose to invest in Apple's currently popular iPhone 5S? Analysis of what customers actually do will tell us if Samsung's song is done, or if it has a few smartphone stanzas left in its lyric book. But problems certainly remain.

Jonny Evans is an independent journalist/blogger who first got online in 1993. He's author of Computerworld's AppleHolic blog and also writes for others in the U.S., the U.K. and Europe. Winner of an Azbee Award in 2010, Jonny enjoys new and disruptive technology and likes music almost as much as he likes his large and shiny dog.

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