Can Samsung Hold Off A Resurgent Motorola?

UPDATE: Can Samsung Hold Off A Resurgent Motorola?
[Source: http://money.cnn.com/news/newsfeeds/articles/djf500/200709100822DOWJONESDJONLINE000211_FORTUNE5.htm
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LONDON (Dow Jones) -- None of its phones have triggered the excitement of Apple's iPhone or the mass buying of Motorola's RAZR, yet South Korea's Samsung Electronics over the summer quietly became the world's No. 2 seller of mobile phones behind Nokia Corp.
The wireless industry, momentarily thrown into a tizzy by the arrival of the iPhone, paid little attention as the Asian titan surpassed Motorola (MOT) in terms of market share.
Yet the move invites an important question: Was it a fluke, or does Samsung have what it takes to hold off a resurgent Motorola in the longer term?
The U.S. vendor's woes over the last quarters -- from the lack of a convincing successor to the RAZR to a somewhat haphazard strategy and inventory gluts-- no doubt played an important part in Samsung's surge ahead.
Yet the group's (SSNGY) ascent can't be dismissed solely as the result of its nearest competitor's mistakes. Industry observers say it may be sowing the seeds of a longer-lived domination.
Samsung, which has built a reputation for churning out attractive phones quickly, but is sometimes criticized for copying its competitors' designs, is skillfully tweaking its strategy.
In the last two quarters, it has departed slightly from an exclusive focus on the high end to launch less sophisticated models aimed at helping it gain share in the mid-market, where its ever-thinner phones hold great appeal. It's also looking to new territory, with plans to expand into the entry-level segment.
"Samsung is marketing and pricing aggressively to expand its entry-tier product line and to take share from a downbeat Motorola in mid- and higher- tiers," said Neil Mawston, associate director in the global wireless practice of research firm Strategy Analytics.
Those tactics are clearly paying off. It had 15% of the global market in the second quarter compared to 14% for Motorola and 39% for Nokia (NOK) , according to Strategy Analytics.
Motorola: the comeback kid?
Despite two restructuring initiatives announced so far this year and a management shakeup within the mobile-devices unit, industry observers don't expect a recovery anytime soon at Motorola.
"I don't see their situation improving for the next two quarters at least," said Shaleindra Pandey, a telecoms analyst at ABI Research. "They're going to need to come up with something better than yet another RAZR."
Motorola's shares have fallen 29% over the past 12 months. Samsung shares have lost 13% over the same period.
A strategy presentation last Friday did little to reassure investors that the company has gotten its magic back.
Richard Windsor, an analyst with Nomura International, said he believes just stabilizing the business will be much harder than management suggests.
"We think the difficulties that the mobile devices division faces have been underplayed," Windsor said, adding that big market share gains are unlikely in the short term.
Blaine Carroll, an analyst for FTN Midwest, is similarly cautious. He said in a note last month that he expects Motorola to continue to lose market share in the third quarter to the four other major vendors -- Nokia, Samsung, Sony Ericsson (SNE) (ERICY) and LG. He also said handset estimates could be revised lower in the fourth quarter.
Credit Suisse analysts were even more pessimistic, cautioning in a note last week that Motorola is likely to remain on the back foot until the second half of 2008. In Western Europe, where Motorola has a historically weaker position, particularly relative to Nokia, the recovery could take even longer, they warned, because of the need to introduce brand new lines.
The Credit Suisse analysts said that while they believe Motorola will eventually return to being a robust player, the recovery will only happen once it has stopped oozing market share, revamped its portfolio, particularly in 3G, and is achieving operating margins close to double-digits again.
Geoff Blaber, a senior analyst at research firm CCS Insight, explained that Motorola's product roadmap in the mid-range and high-end segments was substantially affected by software problems when the company transitioned its software from a proprietary platform to a Java Linux system. As a result, the vendor wasn't able to develop new handsets as quickly as its competitors.
"It is crucial for Motorola to demonstrate that they're over these software problems and that the new Linux-Java platform is up and running," he said.
"Then we need them to start rolling out new products much more often, particularly in 3G," he added.
For now, unfortunately, there seems to be little enthusiasm for Motorola's latest products.
Initial sales of the RIZR Z8, a new high-end "kick slider" device, appear to have gotten off to a slow start, Oppenheimer analysts told clients at the end of July. According to Mobile Today's Mobile Tracker service in the U.K., the RIZR Z8 ranked as the twentieth best-selling contract handset in the weeks ending July 20 and July 27. It then dropped even further down.
"The Z8 'media monster' hasn't really shaken people up," said Carolina Milanesi, research director in the mobile and consumer device practice of Gartner.
"They made a big splash at the 3GSM telecoms trade show because of the ergonomics, but it doesn't have any must-have feature. And it's still focused on video, which is a hard sell," she said.
During the summer Motorola also introduced the W series, targeted at the mass market, and its new RAZR, simply called the RAZR2, which many analysts said may have been the first mistake.
"If you're going to upgrade from your current phone, you want the new phone to sound like something new and exciting," Milanesi said.
She added that while many consumers were persuaded to buy the original RAZR because of its hot looks and despite its poor functionality, they may not show the same enthusiasm for the RAZR2 in the absence of a similar design edge.
Motorola management itself concedes the company will need more than a new bestseller to turn its fortunes around. In an investor presentation last week, Chief Financial Officer Tom Meredith said that while a new hit product would be great, it's not absolutely necessary for the company to return to profitability or regain market share. What the group really needs, he said is to be "boringly consistent" and improve its cost structure.
Samsung
So it looks as though Samsung will get another few quarters to endear itself to consumers and operators.
"They're in a very, very strong position at the moment," said CCS Insight's Blaber. "I would expect them to maintain their No. 2 position in the next few months at least," he added.
Devices such as the ultra thin U600 are doing extremely well in several European markets, and the U.K. in particular. Samsung is also introducing a new phone equipped with a 5 megapixel camera, albeit at a much lower price than rival models from the likes of Sony Ericsson and LG.
Blaber said the device is likely to gain a lot of attention and exemplifies Samsung's strategy of using "halo" products to attract new customers.
The Korean maker is able to offer the phone at a cut-throat price because it's only 2.5G, Blaber said. The vendor's strong manufacturing capabilities and vertically integrated business model, with many of the components produced in- house, are another bonus.
But despite all its recent success, Samsung is not without weaknesses.
The most blatant one until recently, according to some industry observers, has been a lack of true design innovation, with the company relying instead on its ability to quickly imitate what worked for its competitors. For instance, shortly after Nokia launched its L'Amour collection of phones in soft colors targeted at women, Samsung debuted its La Fleur range, using similar hues and flowery prints.
"They're happy to just basically copy what's working for the other vendors," said Gartner's Milanesi.
She is also concerned about the lack of a clear long-term strategy, stressing that the vendor only seem to be focused on getting thinner at the moment.
Blaber, however, pointed out that Samsung's designs are becoming more and more revolutionary with models such as the "flipper" F300, with one side for playing music and videos and the other featuring a regular phone and keypad.
With the help of such attraction-grabbing phones, Credit Suisse analysts expect Samsung's market share to continue to increase.
"Recent market share data show that Samsung is well on track with its expansion strategy as it benefited from Motorola's loss, especially in China, with a handsome contribution from the low-end segment," the broker said. (END) Dow Jones Newswires
09-10-07 0822ET
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