The year 2014 cannot be marked as one of the best years in the books of Samsung (SSNLF, Financial). The Korean electronics giant’s share in the smartphone market declined heavily as the likes of Apple (AAPL, Financial) (in the high-range smartphone market) and Xiaomi (in the low-range smartphone markets) took a stab at its customer base. In December 2014, CNET reported that even though Samsung remained the leader in the smartphone market in the third quarter, the market share in Q3 2014 stood at 24.4 percent as compared to a 32.1 percent share in prior year period. In keeping with the slumping smartphone sales, the company has now turned its attention to the next tech revolution i.e Internet of Things. Recently, Samsung’s CEO BK Yoon announced his intent to go big with the IoT opportunity at the CES 2015 in Las Vegas.
Slumping smartphone sales
Before I proceed to discussing the potential for Samsung in the IoT market, it is significant to understand Samsung’s deteriorating position in the smartphone market. The IM (IT and Mobile communications) division accounts for almost 50 percent of Samsung’s overall revenue as can be seen in the third quarter earnings report. The revenue from smartphone sales is aligned to this division. Although the exact revenue from smartphone sales is not available, the company saw a reasonable decline of 14 percent in revenue from the IM division on a Y-o-Y basis. The management highlighted a reduction in Average Selling Price (ASP) for the older line of products and marginal addition to the top line by new product releases as primary reasons behind this decline. During the earnings call, the management cited that it expects the competitive pressure from other handset makers to intensify in the fourth quarter and year ahead.
It is not that Samsung has a weak product portfolio because it has been consistent with product launches throughout 2014. However most of its product releases including the Galaxy S5 and Note4 have been unsuccessful in arresting a decline in smartphone sales. This indicates that the problem lies with Samsung’s positioning. Basically, Samsung competes in both the high-range and low-range smartphone markets whereas rivals Apple and Xiaomi have built niche customer base and stayed on with a particular segment. Samsung has been particularly hit in the emerging markets where Xiaomi grew in leaps and bounds. As a matter of fact, the Chinese company now occupies 5.3 percent of the global smartphone market. Considering the above-mentioned points, it is hard to stay bullish on Samsung’s smartphone sales. To that effect, even the management has realized that growth will decelerate in coming quarters and perhaps, this is the reason that the company is aggressively pursuing opportunities outside the smartphone zone.
Going beyond smartphones
Samsung’s presentation at CES 2015 highlighted an extremely significant phase that the company is planning to undergo. Basically, the slowing mobile sales has prompted the company to invest in opportunities beyond mobile phones. One of such initiatives is implementation of Samsung’s home-grown operating system Tizen in televisions, starting this February. Samsung experimented with the Tizen platform on its devices in the last year, but the platform failed to find acceptance among users. In a world where Google’s Android platform powers more than 80 percent of devices sold, Samsung’s attempt was side-lined as a miniscule try.
However, the company now intends to include Tizen in TV’s and beef up its own software capabilities in order to better compete with Google (GOOG, Financial) (GOOGL, Financial) and Apple and create a disruption in the OS market, which has been hitherto dominated by the Android-iOS duopoly. Undoubtedly, this is an apt move and reflects good business acumen but considering the past trends, the proposition looks dicey.
Besides launching Tizen on TVs, Samsung is now focusing hard on the IoT-driven market. In my opinion, the company has erred in delaying a full-fledged investment in the IoT markets. Samsung is a leader in the smartphone markets and as a semiconductor company, it holds more than one-third share in global DRAM supply. Therefore, it is only sensible that the company leverages the anticipated gains from IoT opportunity.
Samsung's calculus is IoT – after years of considerable hype – is poised to touch every facet of consumers' lives, reducing their time, cost and resources on most daily tasks. Although nearly one-third of consumers are interested in IoT, only 2% have such devices, according to Samsung. In order to establish its presence in this space, CEO BK Yoon said that by 2017, 90% of Samsung products will be IoT devices. Within five years, every piece of Samsung hardware — from air purifier to oven — will be an IoT device.
The strategic tilt is a natural course for a company that makes nearly every conceivable electronic device in a home and is lauded for its hardware design. It's also a prudent strategy: Intensifying pressure in the smartphone market has undercut the financial results of Samsung and others of late.
Takeaway
There is no denying the fact that Samsung is making considerable shift in its overall business strategy and IoT will have positive repercussions for its business. However, these strategies will take time to bear fruit and in the meanwhile, the rising competition from Apple, Xiaomi and other players like Lenovo, LG, and Huawei will continue to deplete Samsung’s share in the smartphone market. Therefore, it is prudent to watch the stock from the side-lines and wait for the planned changes to feature in Samsung’s earnings.
