How Samsung won the smartphone wars - then blew it
It started with a bunch of hipster-looking people waiting outside a mock Apple Store for the next iPhone. As the hipsters tick down the hours until they have the right to get Apple's new iThing, they spot others on the street using something better.
The phone, Samsung's former flagship Galaxy S II, had a big screen and a 4G wireless connection, two major features that were missing from Apple's new iPhone 4S. And unlike the iPhone, you didn't have to wait around to buy a Galaxy S II. You could get it now.
The irony was that you didn't see anyone lining up to buy a Samsung, or anything other than an iPhone, in those days. But that started to change with that first "Next Big Thing" spot. Just like Apple poked fun at Microsoft with its "I'm a Mac" campaign in the 2000s, Samsung's goal was to tap into the same strategy - a little guy taking swings at the dominant player in the industry.
By the end of 2012, Samsung's profits were up a whopping 76%, fueled by the growth of the mobile division, which suddenly became the most profitable part of Samsung. Samsung was the only company other than Apple making a profit in mobile, and it seemed to be closing in on Apple's dominance, prompting The Wall Street Journal to publish its famous "Has Apple Lost Its Cool To Samsung?" headline in January 2013.
But it only took another year for things to come crashing down. Profits tumbled in 2014, even during the normally lucrative holiday season. Throughout the year, Samsung blamed increased competition in mobile for the downturn.
Now, Samsung is gearing up for its most important smartphone launch ever on March 1. The question is whether or not the Galaxy S6 will be enough to help Samsung recover from its slump, or if it will share the same fate as former kings of mobile like Nokia, BlackBerry, and Motorola.
How did Samsung get so big so fast, and how did it all go so wrong? Competition from new players like Xiaomi and a renewed Apple are a big part of the equation.
But Business Insider has also learned that corporate politics, and a rift between the company's South Korean headquarters and its suddenly successful US group, also played a role.
The birth of "Galaxy"
As the post-iPhone smartphone era began in 2008 and 2009, Samsung, along with many others, was hopelessly behind the curve. It relied mostly on carriers to sell its smartphones, but even then, there wasn't any distinct branding to separate Samsung's devices from the slew of other generic phones on the shelf. Depending on your carrier, you either got an iPhone, BlackBerry, or whatever your carrier threw in for free with a two-year contract.
By about 2009, Samsung decided it needed to come up with a new brand for its upcoming line of flagship phones designed to run Android, according to sources familiar with Samsung's plans at the time. Samsung had a revolutionary new screen technology called Super AMOLED that it at first wanted to put in someone else's device, perhaps a phone built by a major wireless carrier like Verizon. Samsung has always provided chips and displays for other manufacturers, and it wanted to license its Super AMOLED tech the same way.
Eventually, Samsung decided to make its own high-end smartphone to compete with the iPhone, but it had no way to market it. The "Samsung" name was synonymous with cheap flip phones and really nice TVs. It was never mentioned in the same breath as Apple, BlackBerry, or Nokia. That could've set up the new device for failure before it even launched. Plus, Samsung tested its brand against Apple with consumers and learned it was barely recognizable as far as smartphones go. It needed a change.
So Samsung created a luxury sub-brand for its Android phones moving forward, the Lexus to its Toyota.
It chose Galaxy.
In March 2010, Samsung unveiled the Galaxy S, the first in what would become its successful line of Android phones and tablets. The Galaxy S had hardware specs that rivaled the iPhone, but was also heavily criticized for copying the iPhone's software and physical appearance. That didn't seem to matter. There were hundreds of carriers in the world that still didn't offer the iPhone, and AT&T still had an exclusive on the device in the US.
Samsung made deals with wireless carriers to promote the Galaxy S in stores when it launched that June. Even better, Samsung got AT&T to agree to sell the Galaxy S, even though it was sure to be a strong rival for the iPhone.
Even with the successful launch of the Galaxy S, Samsung was still behind Android rivals like HTC. Both companies were making decent phones, but neither gave customers a good reason to choose one over the other. As Samsung prepared to launch its successor to the Galaxy S, the Galaxy S II, in the spring of 2011, it also formulated a new strategy to market the device, at least in the US.
According to sources familiar with the company's thinking at the time, Samsung's Korean executives wanted Galaxy to be the number-one smartphone brand within five years. (It ranked fifth in consumer surveys at the time.)
Under the US head of marketing Todd Pendleton and his team, Samsung was able to do it in 18 months.
At first, the Korean leadership at Samsung wanted to pick off the competition one at a time, starting with HTC, then Motorola, then BlackBerry, and finally, Apple. But the US team decided on a different approach. It was going to start a war with Apple, kicking off the smartphone world's equivalent of Coke versus Pepsi.
It was a gamble. By attacking Apple directly, Samsung risked looking petty and desperate.
But "The Next Big Thing" campaign, which was developed by the ad agency 72 And Sunny, was a massive hit. For the first time since the launch of the iPhone, someone had created the believable perception that there was something better out there.
With the launch of "The Next Big Thing" campaign came a lot of glowing press coverage for Samsung. There was a company out there willing to take swipes at the king of smartphones, and consumers were responding.
And for all the criticism Samsung got along the way for copying Apple, it did prove that the world was hungry for something the iPhone didn't have yet - smartphones with giant screens.
In the fall of 2011, Samsung announced the Galaxy Note, the first so-called phablet with a 5.3-inch display. (The iPhone 4S only had a 3.5-inch screen.) Compared to most phones at the time, the Galaxy Note appeared absolutely massive. When it launched in February 2013, critics blasted the Note for being too large. The Wall Street Journal's Walt Mossberg, one of the most famous tech reviewers in the world, compared using the Note to holding a piece of toast against your ear.
The initial reception was so bad at first, sources say some US carriers almost didn't want to sell the Galaxy Note II the following year.
But the phone sold well outside the US, especially in Asia, and eventually Samsung was able to prove there was a market for phablets. Samsung's phones kept getting bigger and better screens, while iPhone users were stuck with tiny devices.
A real narrative began to emerge in the press: Apple was in trouble if it didn't catch up with Samsung and start offering phones with bigger screens. Many asked if Apple had lost its knack for innovation following the death of Steve Jobs, and Samsung was doing a really good job at making that theory seem plausible. Apple's stock dropped as low as about $380 from its all-time high of about $705, largely on fears that Apple didn't have a revolutionary new product up its sleeves.
Meanwhile, Samsung continued to climb. Sources familiar with Samsung's sales at the time said its marketing of the Galaxy S line of phones had residual effects and boosted sales of Samsung's other products like washing machines and refrigerators. In fact, the US team was outperforming Samsung's headquarters in Sourh Korea, and other international offices were itching to adopt "The Next Big Thing" in their respective countries.
"The Next Big Thing" campaign was clearly a success.
Unfortunately, not everyone at Samsung saw it that way.
The success of Samsung's Mobile in the US began a rift with the Korean headquarters. Sources say the more successful Samsung was in the US, the more complicated the relationship with headquarters got. Instead of getting credit, the US team felt they were being chastised for doing their jobs well. (Samsung declined to comment on this story.)
It got so bad, a source told us, that Samsung flew a plane full of executives to the mobile division's office in Dallas for an unannounced audit that lasted three weeks in 2012. The Dallas-based employees had to go through all materials they used to sell and market Samsung's mobile products. They were accused of falsifying sales, bribing the media, and a bunch of other damaging actions that hurt morale in the office. The same US-based office that helped turn Samsung into a brand as recognizable as Apple was suddenly being punished for its work.
After three weeks, the Korean auditors found nothing wrong with the way the US office had been operating and went home. But the damage had been done, and the perception remained at the Korean headquarters that despite its success, the US team was up to no good.
In fact, during one meeting with the global teams at Samsung's headquarters in Korea, executives made the US team stand up in front of several hundred of their peers in an auditorium. The executives told the employees to clap for the US team as encouragement since they were the only group failing the company, even though it was clear to everyone the opposite was true.
That all but killed any hope of translating what the US team pulled off to other regions. They were able to continue in North America, but Samsung's global messaging remained disjointed.
It all culminated in 2013 when Samsung introduced the Galaxy S4 at an over-the-top event at Radio City Music Hall in New York. Instead of the traditional product announcement, Samsung put on a Broadway-style musical that incorporated features of the new phone.
It was weird, one of those things you had to see to believe. And a lot of people criticized Samsung for putting on a show that seemed to objectify women. CNET's Molly Wood called the event "tone-deaf and shockingly sexist."
But 2014 was going to be a wakeup call.
The rough year
At the Mobile World Congress in Barcelona last year, Samsung boasted that it had sold over 100 million units from its Galaxy S line over the last four years, a sales figure for a flagship series that only Apple could beat.
Then it unveiled the Galaxy S5, a phone that toned down a lot of the superfluous features of the Galaxy S4 while including some useful new stuff like an improved camera and water-resistant body. Like previous Galaxy S phones, the S5 had a plastic body and sold for about $650 unlocked. Based on the success of the Galaxy S4, the company had no reason to believe it had a dud on its hands.
It was wrong.
There are a lot of factors for Samsung's major slip in 2014, but the biggest culprit appears to be Chinese smartphone manufacturers. Chinese companies like the startups OnePlus and Xiaomi appeared to have perfected the magic formula for making beautiful, high-quality smartphones that cost at least half as much as the iPhone or Samsung's Galaxy S series.
Xiaomi was the biggest success story of the year. By some estimates, it was the top smartphone vendor in China, the next big market where millions of people are making the transition to smartphones. Xiaomi's phones are made out of premium materials like metal, so they look better than Samsung's phones. They also have similar specs like fast processors, sharp screens, and high-quality cameras.
But Xiaomi is just one factor. A lot of Samsung's success came because it was able to get a head start and distribute its phones on a broader scale before the rest of the non-iPhone competition could, according to tech analyst Ben Thompson, the author of the Stratechery blog.
For example, the iPhone was only available on about a third as many carriers as Samsung phones were. In the US, Samsung phones were one of your best options unless you were an AT&T customer and had access to the iPhone.
It was the same story on China Mobile, the largest wireless carrier in the world with over 700 million subscribers. Apple finally brought the iPhone to China Mobile early last year. Ever since, China has been one of Apple's biggest growth areas for the iPhone business. Everyone else seemed to be choosing Xiaomi, Lenovo, or another cheaper rival to Samsung.
"I think it's always dangerous when you don't know why you've won," Thompson said in an interview. "One of the reasons Samsung succeeded is they pivoted in ways Nokia and others didn't. They were able to leverage everything they already had, but weren't able to sustain it because there wasn't anything special about their phones. Samsung got crushed on the high end by Apple and the low end by Xiaomi in China."
Thompson continued, "At the end of the day, there's nothing to differentiate a Samsung phone, so they'll have to compete on price."
However, that doesn't seem to be Samsung's plan.
The new strategy
On March 1, Samsung will unveil two new versions of its next flagship phone, the Galaxy S6. According to sources familiar with Samsung's plans, one version will have a metal body, a departure from the plasticky phones the company has made in the past. The second version will have a curved screen, similar to the Galaxy Note Edge that launched last fall.
But both models are still going to priced as premium products. According to one leak, the "Edge" version of the Galaxy S6 could cost over $1,000 without a contract, at least three times the cost of a Xiaomi phone.
Unless Samsung has a special trick up its sleeve on the software side, it's unlikely that its new phones will be enough to justify the extra cost over similar Android devices. And if that happens, Samsung is almost certainly up for another messy year. The glow surrounding Samsung's smartphone business has almost certainly faded for good. Time to find something new.
Plus, its chip business is already very profitable, and is due to get a nice boost thanks to a reported agreement with Samsung to make processors for the next iPhone due to launch later this year.
One key area Samsung is focusing on in the near term is the "internet of things" (IoT) trend, which means connecting everyday objects like light switches and toasters to the internet for a deeper level of control. At the Consumer Electronics Show in January of this year, Samsung announced that every product it makes will connect to the internet within a few years. In theory, this will build a valuable ecosystem connecting everything in your home and create a whole new category of Samsung customers.
But in the meantime, Samsung's core mobile business is struggling.
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