Samsung Group, the massive conglomerate that includes the electronics division, is sprawling – composed of some 80 different businesses that operate in areas ranging from construction to shipbuilding.
It is Samsung’s size that is perhaps most responsible for its ability to generate profit in the smartphone market. Unlike many of its competitors, the company makes most of the parts that go into its phones – from memory chips to screens. In fact, Samsung manufactures components for many of its competitors. If you’re holding an Apple mobile device in your hand, chances are some part of the hardware was built by Samsung.
“Creating a virtuous circle, the company’s success in the smartphone market enhances the competitiveness of its semiconductor and display divisions,” Woori Investment and Securities analyst Young Park said in a recent note. “In turn, the strengthened semiconductor and display divisions [enable] the company to provide the best-available smartphones at each price level.”
That ability to produce components in-house allows Samsung to micromanage its supply chain, keep costs low and, as a result, make money off its smartphone sales. The control over hardware also partly offsets Samsung’s reliance on an outside source – Google – for its software.
Like almost all Android-based phone makers, Samsung chose Google’s operating system because it is cheap to use and has a vibrant app developer ecosystem. Increasingly, developers have chosen to design software only for the two or three leading smartphone platforms – Apple’s iOS and Google’s Android being by far the two most popular. That trend has seriously hurt companies such as RIM and Nokia, which for years opted to develop their own proprietary smartphone operating systems.
At the beginning we thought there were a couple of ways we could go,” said Paul Brannen, Samsung’s Canadian vice-president for mobile. “We could build our own operating system, but you look at the downfall of companies that haven’t embraced apps. You look at what operating systems apps are co-developed for – they’re developed for iOS and Android.”
Nonetheless, the decision to go with Android means Samsung now competes with Motorola, HTC and many other smartphone players that offer essentially the same software experience on their phones (although most Android handset makers try to at least tweak the version of the operating system to make it look unique).
As such, Samsung has tried to differentiate itself by following in Apple’s footsteps and creating a brick-and-mortar retail store all to itself. Recently, the company began working on a Samsung store in British Columbia, possibly the first of several in Canada.
The standalone store, located at the Metropolis shopping centre in Burnaby, is in many ways a progression of Samsung’s retail strategy. Already, the company has deals with many of its carrier partners to build Samsung-only display tables at those carriers’ stores. Dubbed “Galaxy Headquarters,” those displays are meant to immediately distinguish Samsung’s devices from myriad other smartphones and tablets that also run on Android.
So far, the strategy seems to be working. In 2011, Samsung posted year-over-year smartphone sales growth of 278 per cent. But the company has yet to prove it can unseat Apple as the most profitable name in the business. That’s why this summer will be critical for both companies.
Samsung’s new high-end phones hit the all-important U.S. market in the second half of this month. Realistically, the company will have only a short window to generate traction before Apple is expected to unveil the newest version of the iPhone, which will undoubtedly cause a frenzy among consumers.
But the Samsung phone’s U.S. debut might be over before it begins. Currently, Apple and Samsung are caught in a brutal legal battle, with Apple accusing Samsung of copying the design of its products. As part of that battle, Apple is seeking an injunction to stop the selling of the Galaxy phone in the U.S.
Such an injunction, if approved, couldn’t come at a worse time for Samsung, which is tying the release of the Galaxy to the start of the London Olympics. But in addition to the Apple lawsuit, the Android operating system itself is the subject of myriad intellectual property lawsuits, the outcome of which will have a major impact on all companies that rely on the operating system.
As such, the company so obsessed with controlling the production of its devices could see its fortunes determined by judges and juries. Where Samsung stands at the end of this summer will go a long way toward determining whether it can one day dethrone Apple as the most profitable smartphone maker in the world.