January 27, 2014 7:46 am

Fresh urgency for Samsung reinvention drive

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Images Of Samsung Electronic Co. Galaxy Round Smartphone In SK Telecom Store As Samsung Moves Toward Bendable Display©Bloomberg

Lee Kun-hee, Samsung Electronics’ 72-year-old chairman, likes to begin each new year by reminding his employees of the need to reinvent the company.

This year’s proclamation carried unusual weight. For most of the past three years smartphones – of which Samsung holds one-third of the market – have driven galloping profit rises but over the past year these have slowed sharply. Last week it confirmed its first annual decline in quarterly operating profit in two years, blaming an increasingly crowded smartphone arena.

As it seeks to reassure investors who have sent its shares down by 13 per cent since the start of November, Samsung is pumping resources into a slew of new growth areas – notably software, where it is teaming up with Intel to produce a new operating system for mobile devices.

“We should explore new business areas by turning our eyes to the fusion of industry and technology,” Mr Lee told employees. “Let’s throw away the hardware-oriented system and culture.”

Manufacturers of consumer electronics have long sought to tap more lucrative non-commoditised areas – hence Apple’s revenue model designed to hook consumers into an inclusive circle of hardware, software and content and Sony’s embrace of movies and music. But the record on these ventures is chequered.

Apple last year made revenues of $16.1bn from iTunes, software and services, or 9 per cent of the US group’s total sales. Sony’s content businesses have struggled in the face of the shift to digital distribution, as well as a surge in content piracy.

Samsung, whose devices mostly rely on Google’s Android operating system, is now pouring substantial resources into software and services, which accounts for a growing share of a research and development budget that reached Won14tn ($13bn), or about 6.3 per cent of sales, last year.

Samsung does not give a detailed breakdown of its R&D spending but of its 65,000 staff in that area, 35,000 are now working on software projects including Tizen, the Samsung-driven mobile operating system aimed at addressing its overwhelming reliance on Android.

But Tizen, which is set to debut in a smartphone to be launched next month according to local media, has had a difficult incubation, with the launch of the first Tizen device, initially slated for 2012, repeatedly pushed back.

The latest blow came this month when NTT DoCoMo – Japan’s largest mobile phone company by market share and part of the Tizen Association along with European operators Vodafone and Orange – indefinitely suspended plans to launch a handset using the platform. It said the Japanese smartphone market was “not big enough to support three operating systems at this time”.

Meanwhile, some European mobile operators privately say they have more or less written off Tizen, whose success would help Samsung differentiate itself from other Android-reliant manufacturers such as China’s Huawei and Taiwan’s HTC, as a viable contender.

A key challenge facing Tizen is the need for developers to show interest in developing the huge array of apps that consumers will demand.

Tizen’s backers are promoting web apps that use the HTML5 framework, which is compatible with any mobile operating system, but many developers complain that HTML5 does not allow them to create software as sophisticated as the dedicated apps for Android or Apple’s iOS.

At last month’s Consumer Electronics Show in Las Vegas, Intel executives quietly played down expectations for Tizen, and even Samsung representatives told analysts that “the time wasn’t right” for the system, according to Carolina Milanesi, a mobile analyst at Kantar Worldpanel ComTech.

This supports the view that Samsung considers Tizen primarily an insurance policy in case of problems with Android. Indeed, the company is simultaneously pursuing an array of other software initiatives ranging from a suite of proprietary apps ranging from a language translator to a personal health monitor that come preloaded on Samsung phones to Knox, a mobile security product aimed at businesses.

It is also pouring extensive investment into software that will enable better communication between electronic devices and appliances, helping Samsung capitalise on a consumer product offering spanning televisions to refrigerators.

Sceptics of the software push argue that Samsung’s rigidly hierarchical business structure cannot foster the necessary creative environment. But Samsung is no stranger to reinvention – its entire consumer electronics business was seen as a secondary concern until the late 1990s.

“The company was a commodity components and low-end TV maker until about 10-15 years ago,” says Mark Newman, an analyst at Bernstein Research. “Samsung is actually quite nimble. It’s one of the very few technology companies in the world that has had success in multiple areas.”

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