Smartphones Throw Samsung a Curve; The Electronics Giant Needs to Shift its Focus to Software From Hardware

Smartphones Throw Samsung a Curve

The Electronics Giant Needs to Shift its Focus to Software From Hardware

AARON BACK

Updated Jan. 8, 2014 1:29 a.m. ET

Heard on the Street columnists discuss Samsung Electronics profit warning and what the company needs to do as its smartphone glory days wane. Samsung Electronics 005930.SE -1.00% ‘ turn in the smartphone sun is coming to an end. To keep prospering, it needs a compelling software platform that sets it apart from rivals, not more hardware gimmicks like curved screens.Samsung told investors Tuesday that fourth-quarter operating profit was likely down by 3.8% to 8.4% from a year earlier, the first year-on-year decline in nine quarters. Analysts had expected a 9% rise. Share-price reaction was mild because Samsung’s stock had already fallen by over 7% since Christmas in anticipation of weak fourth-quarter results.

A full breakdown isn’t available yet, but it is likely the electronics giant’s cash cow, smartphones, were the main culprits. A stronger Korean currency and employee bonuses may have also weighed on results, but slowing sales and narrowing margins in smartphones have been evident for a few quarters already.

Samsung faces brutal competition because its phones use Google‘s GOOG +0.02% free Android software, the same platform used by high-end rivals like HTC and low-end Chinese phone makers like Xiaomi. Google’s in-house Motorola MSI -0.06% Mobility recently slashed the price of its flagship Android-powered Moto X to $399 from $550. That compares with $600 for Samsung’s Galaxy S4. As a small unit of Google, Motorola doesn’t have to fret over profit margins.

At the Consumer Electronics Show in Las Vegas this week, Samsung continued its time-honored strategy of trying out every possible hardware design and seeing what sticks. This included a 105-inch bendable television and a tablet with a 12-inch screen—bigger than the already-large 10-inch screen on the standard iPad.

It is unclear why exactly anyone would want these devices, and designs can always be copied by rivals. The only real solution for Samsung is to drop its addiction to hardware and differentiate on software. Samsung’s “smart home” initiative, also unveiled at CES, is a step in the right direction. It will allow, for instance, people to control home air conditioning and lights from their phones.

This is the kind of technology ecosystem—like Apple’s—that binds people to a company and build moats against competitors. But Samsung is just one of many vying to remake the home experience for the Internet age, including Microsoft, MSFT -1.43% bidding to take over the living room with the Xbox One.

Samsung Chairman Lee Kun-hee’s annual speech to employees at the start of the year was strident call for change. He urged employees to “get rid of business models and strategies from five, 10 years ago and hardware-focused ways.”

So Samsung is at least aware of the challenges it faces. Whether it can overcome them remains to be seen.