Tuesday 20 March 2018

Samsung pays the price of Google domination

Samsung's second-quarter profit is lower than expected (AP)
Samsung's second-quarter profit is lower than expected (AP)

Matt Warman

Samsung has posted a year-on-year decline in profits for the first time in three years, with a 20pc fall in the second quarter resulting in £3.6bn net profit. Operating profit fell 24.6pc from a year ago, while sales fell 8.9pc.

In part, those numbers reflect Samsung’s domination: for a company that says it only enters a market if it can get to number one in it, there’s often only one place to go. But there’s a much more systemic problem facing the company too.

It’s relied on smartphone sales in increasingly saturated, mature markets to bolster its bottom line, and in turn that means relying on Google’s Android operating system. When the market was racing ahead in terms of product innovation, Samsung led the pack, but today that innovation has plateaued.

Samsung is finding out that consumers who snapped up its products when they were the best available are not so loyal when they are not. And that’s a direct consequence of the South Korean giant handing over so much control of its own software to Google, who shape the experience of owning a mobile phone far more than the mere plastic and glass for which Samsung is responsible. Of course the quality of the camera and casing and screen and sound all matter, but when consumers come to buy a new phone, Samsung is finding out that for most familiarity and price are the two most important things.

Any one of countless manufacturers can provide that familiarity, with Sony, HTC, LG and others all producing premium devices. And a growing number of Asian brands, plus companies such as Motorola, are all going after the cheaper end of the market.

Samsung’s response has been to fire the man responsible for the critically unsuccessful design of the S5 phone, which despite being Samsung’s flagship is now being outsold by the ageing iPhone 5s. It has also pledged a new large screen phone – presumably an update the successful Galaxy Note – and a phone made from “new materials”. That’s a tacit acknowledgement that its commitment to plastic has not served it well, and also the LG and Nokia have made classier plastic phones that have appealed to consumers.

Google, of course, is the big winner from Samsung’s struggles: it essentially outsources much of the research and development of the devices that are the best adverts for its software while taking none of the risk. Samsung is trying, slowly, to move away from its reliance on Google but its attempt to establish a new operating system is a difficult gamble when there are a billion Android devices in the world, and its efforts to make smartwatches that work solely with its mobile phones could simply encourage people to try this key new category from other manufacturers who are not so closed-minded, in part prompted by Samsung’s extensive marketing.

None of this, of course, is to suggest that Samsung is in trouble. But like Apple it is operating in an area where its products are likely to be come more like commodities than ever. When all screens are a better resolution than the eye can perceive, for instance, it matters less who makes the one you’re holding.

But for Samsung and not for Apple, there is at least the ongoing promise of the connected home, from washing machines to security systems and from luxurious kitchen appliances to wireless music players – all of this means, even if there will not be one next big thing to rival the smartphone, Samsung may yet find its way in to ever more aspects of our everyday lives, driven by a scale that none of its rivals can offer.

Online Editors

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