Good is not great

Samsung Electronics must be feeling pretty miserable, beaten and humbled on every side on the smartphone front. Once-dismissed as knockoff makers, Xiaomi and Huawei are making big strides and threatening Samsung’s status in the Red Ocean of the heavily contested mid- and low-end smartphone markets. The company’s performance in the premium and high-end market also has been mediocre, as matching up with Apple has been more difficult than expected. In the third quarter, Samsung Electronics’ operating profit was half of what it was a year ago. Meanwhile, Apple posted year-on-year growth of 11 percent. The local subsidy law and Apple’s release of the iPhone 6 and 6 Plus have only worsened the situation. Apple stock has reached an all-time high of $108 a share, and foreign media are writing off Samsung Electronics as a formidable competitor for Apple.

Samsung has launched an aggressive marketing campaign to steal iPhone shares in Europe, where it was at its peak only last fall. Despite bargain prices with subsidy packages, inroads into the high-end smartphone market had not been satisfactory.

“Users of iPhones have been downloading music and apps from the Apple store since the iPod days. They had on average 800,000 won ($746) worth of content. There were few reasons for them to dump their paid app service and jump to Android-based Galaxy phones,” said one Samsung official. “We realized Apple is an entirely different business.”

Samsung produces and sells smartphones and Apple offers a smart ecosystem. Samsung fishes in a sea where all other fishermen are aiming for the same fish. Apple, on the other hand, has its own fish farm. People who buy iPhones are loyal and not easily won over by bait from Samsung and other vendors. Once they are accustomed to the iPhone service base and ecosystem, they prefer to stay. In fact 76 percent of iPhone users shift to newer models, while the number migrating to the same phone brand is 20 percent to 30 percent among the competition.

Apple keeps to the premium-end market and profits from content sales. It is how the company remains the most lucrative in the smartphone market. Apple accounts for 70 percent of the operating profit in global smartphone sales with a market share of 12 percent.

To challenge the Apple empire, Samsung needs a dramatic game-changer. It needs an innovative splash as big as Motorola’s RAZR in 2003 or Apple’s first iPhone in 2007. A waterproof and foldable Galaxy won’t do any good. To phone users these days, Android phones are all alike. Samsung needs to come up with a new value for its phone, not better functions, which all knockoff vendors can replicate. The company knows what it has to do, but not how.

Apple on Sept. 9 unveiled the Apple Watch. Pundits were surprised to find nothing new or innovative about it. It was little different from the wrist gear Samsung had been offering with Galaxy phones for months.

But a closer look revealed a secret weapon behind the new gear: Apple Pay, a kind of digital credit card. The pay system uses Near Field Communication, Wi-Fi-lite technology that can transfer data between two devices that is hardly a new idea.

But if Samsung wanted to implant this system on its Galaxy phone, it would have had to lobby hard with financial authorities for approval. It also would have had to persuade credit card companies and retail stores. Apple signed contracts with all the major credit card issuers - American Express, Visa and MasterCard - as well as retailers like Macy’s, Bloomingdale’s, Walmart and fast food chains. In just a few days, more than 1 million cards have been activated on Apple Pay. A global network of American financial and retail power and mobile technology joined to create a new digital settlement system. Samsung joined forces with PayPal, but by the time it uploads the service on its phone, it would again only be accused of chasing Apple.

Samsung Electronics is a “good” business, but not a “great” one like Apple. First of all, it was not fortunate enough to be born with a silver spoon in its mouth. Apple Pay was possible because the American standard is the global standard. The iPhone has been swimming in an exclusive ocean, while the Galaxy jumped into the easily accessible Android market, where Chinese vendors have the edge with mass-production of cheaper models. On Samsung’s home turf, too, the iPhone population is ever growing, while the Galaxy’s is slowly dying.

The biggest enemy could be within. Samsung always had been a fighter. But after several losing rounds, the company has the look of defeat. Its peak has been brief and the free fall painful. Samsung must recover its animal spirit and get back into the game.

JoongAng Ilbo, Nov. 3, Page 30

The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho