Samsung’s Smartphone Gravy Train Is Losing Steam

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Kim Hong-Ji / Reuters

Tech giant Samsung has quickly risen to the top of the mobile ranks thanks to the success of its Galaxy line of smartphones and tablets. However, an increasingly saturated phone market coupled with declining consumer interest in television purchases mean the South Korean company could have a difficult 2014.

Samsung announced this week that it expects to post an operating profit between 8.1 trillion and 8.5 trillion won ($7.6 billion to $8 billion) for the fourth quarter of 2013. That’s a drop of between 16 percent and 20 percent from the previous quarter, and only the second time the company’s quarterly profit has decreased since the start of 2011. The figures come in well below analyst estimates, which had pegged operating profits for the quarter at 9.65 trillion won, according to the Wall Street Journal.

The greater-than-expected dip slams the brakes on a successful run battling and eventually besting Apple in the smartphone space. Samsung has been the leading seller of mobile phones globally for two years, according to Gartner, shipping more than 80 million units in the third quarter of 2013. The company’s Galaxy S III outsold the iPhone 4S for a period during 2012, becoming the single best-selling phone in the world (that title now belongs to the iPhone 5S). Samsung’s mobile division, which is primarily driven by phone sales, now generates more than half of its operating profit.

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But the industry that Samsung has ridden to renewed success this decade will inevitably hit a wall. Smartphone penetration is expected to reach a saturation point in the U.S. in the next two to three years, with eMarketer projecting that 80 percent of mobile phone users will have smartphones by 2017. New features for the devices have become iterative rather than game-changing, sparking less passionate clamoring for upgrades. And wireless carriers like T-Mobile are getting rid of phone subsidies, which may eventually make consumers more price-conscious when choosing a new device. Analysts predict that the profits of Samsung’s mobile division will grow by just a few percentage points or possibly even shrink slightly in 2014, according to Reuters.

“Smartphones are now in the mainstream,” says Wayne Lam, a senior analyst for mobile handsets at research firm IHS.  “In terms of growth opportunity, long-term, that rate of high growth is behind them.”

While there are still plenty of phones to be sold in developing markets, Samsung is facing increased pressure in that arena from competitors. Last month Apple reached a multiyear deal with China Mobile, a massive wireless carrier with 706 million subscribers. Apple’s presence will make it tougher for Samsung to sell high-end devices like the Galaxy in the world’s most populous country, especially if the iPhone 6 has a Galaxy-like giant screen as is currently rumored to be in the works.  On the low-end, the company is already competing with domestic Chinese phone manufacturers like Huawei who are quickly driving down the retail price of cheaper phones and reducing their profit margins.

As smartphone sales slow, Samsung will target other sectors. The company has become the second-largest tablet maker behind Apple, shipping almost ten million such devices in the third quarter of 2013, according to the research firm IDC. Samsung is also hoping that its early foray into wearable tech with the Galaxy Gear smartwatch will payoff. The device sold 800,000 units in first two months on sale but was met with many negative reviews. On the television front, where Samsung leads in sales, the company is trying to spark the stagnant market with a range of new features. “Smart TVs” that connect to the Internet, 4K TVs that offer sharper image quality and even curved TVs that allow for broader viewing angles were all on display at the Consumer Electronics Show this week. But past efforts to get viewers to upgrade from LCD flat-screens, like 3D televisions, haven’t succeeded.

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To be sure, Samsung is still an incredibly profitable company. Unlike former peers like Nokia and Motorola, they ably transitioned into the smartphone era and then dominated it. Still, it will be almost impossible for any of their upcoming products to strike the magic formula that has made smartphones so profitable. The phones are often wildly expensive (the Samsung Galaxy S4 cost more than $500 on Amazon without a contract) but have become ubiquitous faster than any technology before them. And unlike PCs, televisions, or other expensive purchases that are expected to last at least five years, consumers are conditioned to buy new expensive handsets every two years because wireless carriers bear the brunt of the cost.

“It’s very hard to replicate that with any other category,” says Chetan Sharma, a mobile industry analyst. “New markets will be able to help at the margins, but they cannot be a substitute for any decline in smartphone or phone sales.”