With Its Hardware Called Into Question, How Will Samsung Differentiate Itself?

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics‘ (OTC:SSNLF) smartphone business faced significant setbacks over the last month, on account of the Note 7 fire crisis and the double-recall and eventual discontinuation of the device. The financial impact of the crisis will be large, with Samsung slashing its Q3 2016 operating profit guidance to 5.2 trillion won ($4.63 billion) from roughly 7.8 trillion won. There could be significant long-term repercussions as well, as the negative news cycle surrounding the Note 7 hurts Samsung’s reputation as a vendor of high-end hardware.

We have a $1,350 price estimate for Samsung Electronics, which is slightly below the current market price.

See our complete analysis for Samsung

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Pace Of Hardware Innovation Could Slow Down

Smartphone manufacturers rely on different competitive strategies. While Apple has focused on the integration of hardware and software to differentiate its devices, most Android-based vendors count on value pricing and Google’s Android ecosystem to drive sales. Samsung, on the other hand, has relied on the Android platform for software, while pushing the envelope in terms of hardware design to command a premium for its devices. The Note 7, for instance, packed a larger and higher resolution display and bigger battery capacity compared to the iPhone 7 Plus into a form factor that was notably smaller. Samsung’s development cycles are also typically quicker compared to its rivals and the firm is reported to have accelerated production of the Note 7 to beat the iPhone 7 to market. However, with the Note crisis, Samsung’s biggest strength has been converted into a weakness, as customer perception of the safety and reliability of the firm’s hardware takes a beating. Moreover, from a technical standpoint, the firm may need to become more conservative with the pace of its hardware innovation, since its radical designs are at least partly responsible for the Note 7 fiasco.

Samsung Needs To Double Down On its Software Strategy, But It Wont Be Easy

Samsung will also need to improve its competitiveness in the software and cloud-based services front. The firm has been taking small steps into the services space, primarily by acquiring start-ups. For instance, Samsung Pay, Samsung’s take on the rapidly growing mobile wallet space launched a little over a year ago, leveraging technology it acquired from a start-up called LoopPay. Samsung is also betting on artificial intelligence, acquiring Viv, which offers a digital assistant, created by the same team that developed Apple’s Siri. However, the firm does face significant challenges.

Samsung’s smartphone business is still underpinned by Google’s Android operating system (its homegrown Tizen OS accounts for under 1% of its mobile shipments) and there could be some conflict of interest, as Google’s primary goal with its OS has been to drive users to its online services and advertising. Additionally, unlike its U.S. peers such as Amazon and Google, Samsung lacks the rich customer data sets that are required to provide robust online services. Moreover, Google is taking its hardware ambitions much more seriously, unveiling the high-end Pixel smartphone earlier this month. (related: What does Google Aim To Accomplish With The Pixel?) There is a possibility that the Pixel, which employs the Apple model of offering tightly integrated hardware and software, could win over many high-end customers from Samsung.

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