IPhone 5 Fever? Don't Count Samsung Out - New York Times

By many measures, Samsung Electronics should be on the ropes. Last month, it lost an important patent battle with its rival after a jury in the United States ruled that Samsung had illegally copied aspects of Apple’s groundbreaking . Apple introduced its newest model, the iPhone 5, to enthusiastic reviews and a worldwide consumer frenzy, with customers lining up to buy the new model days before it arrived in stores on Friday. This week, Apple shares hit a record high and cracked the $700 threshold.

So why is Samsung not only holding its own, but thriving?

Even as the Apple juggernaut has rolled over Research in Motion, which makes BlackBerry handsets, and Nokia, Samsung reported record earnings for its latest quarter, which ended June 30. Its handset profits, fueled by the introduction of its high-end Galaxy S III model in May, leapt 75 percent over the previous year. Samsung’s stock has gained over 65 percent in the last year and was trading this week on the Korea Exchange at more than 1.3 million won, also close to a record.

Samsung can’t claim the intense media coverage, the passionate fan base or the cult of personality that grew up around Steve Jobs. But the giant South Korean manufacturer has built an impressive lead in global mobile phone sales. The research firm IDC reported that Samsung had 24.1 percent of the global handset market compared with Apple’s 6.4 percent at the end of the last quarter. Samsung also had a commanding lead in the lucrative smartphone market: 32.6 percent compared with Apple’s 16.9 percent, although the gap is likely to narrow because of the iPhone 5’s introduction.

By contrast, Nokia’s share of the smartphone market withered to 6.6 percent and Research in Motion, whose BlackBerry devices once accounted for nearly 20 percent of global smartphone sales, was no longer ranked among the top five producers.

These results didn’t come as a complete surprise to me. As I reported a little over a year ago, after testing the latest handsets from Apple, Samsung and RIM, I ended up buying the Samsung Charge, a decision that surprised me, since I thought I wanted the same iPhone 4 all my cool friends had. The BlackBerry was sadly lacking, and the iPhone was a strong contender. What won me over was Samsung’s large screen. Despite my large hands, I could type on the virtual keyboard with a fair degree of accuracy. (Try correcting typos when you’re frantically searching for information on a Web browser or entering passwords.) Photos also looked better, and Samsung’s 4G was faster, although I often found myself stuck in a 3G backwater. And it still fit in my pocket.

I can’t say my subsequent experience has been flawless. At one point the Charge stopped functioning, a failure that stumped the technicians at a Verizon service center. But they replaced the phone at no charge to me, and thanks to Google, all my contact information was backed up and easily migrated to the new device. Since then, I’ve been comfortably embedded in a seamless world of e-mail, maps, directions, search and Web browsing even while continuing to use other Apple products.

But the competitive landscape has changed in just a year, with Samsung’s introduction of the Galaxy S III and now Apple’s release of the iPhone 5. My Charge already seems obsolete. Apple appears to have addressed all the issues that bothered me about the iPhone 4: the screen is bigger (though still not as big as the Charge’s or the Galaxy’s) and it offers 4G. It’s also lighter and, in my view, looks better than my Charge. But Samsung is so confident that its Galaxy S III holds up favorably to the iPhone 5 that it started an aggressive national advertising campaign with a head-to-head comparison between the two handsets, highlighting a list of features the iPhone lacks. And Samsung said it has a more sophisticated Galaxy handset waiting in the wings that will offer an even bigger screen.

Several experts and analysts I spoke to this week said that Samsung was a formidable competitor that had moved ahead of Apple in some aspects. Samsung “has come out with really attractive phones,” Toni Sacconaghi, senior technology analyst at Sanford C. Bernstein & Company, said. “They have large screens, great display, faster processors than Apple. Apple hasn’t been at the front edge of hardware design for a couple of years.”

Tero Kuittinen, an analyst at the mobile communications consulting firm Alekstra, agreed. “The iPhone has remained pretty much static now for three generations,” he said. “The first iPhone was a revelation, in a class of its own.” With Apple holding on to the same interface for five years, “you can still claim the interface is better, but the difference has been shrinking every year,” he said. “On display, you can argue Samsung has taken the lead. Maybe you can slam Samsung for being an imitator, but when they imitate, they do it right.”

Whether Samsung was innovating, imitating or illegally copying was at the heart of the complex patent suit. Samsung has appealed the jury’s verdict and has its own claims against Apple. But nearly everyone I spoke to shrugged off the longer-term implications, saying technology is developing so quickly that the lawsuits may soon be irrelevant.

One group that Samsung clearly hasn’t won over is design purists. “Samsung is second to none in manufacturing and technology capabilities, but from a design perspective, it’s soulless compared to Apple,” Gadi Amit, a founder of NewDealDesign in San Francisco, told me. “You hold the new iPhone, and you see and feel the difference immediately. The iPhone uses aluminum and glass, and both materials are considered noble from a design perspective. Samsung sticks to a lot of plastic, which is lower cost, not to say cheap. Worse, they use a surface finish to make it look like aluminum. It’s fake. That’s a big no-no in design circles. It’s very uncool. The era of faux materials went out a long time ago.”

Robert Cihra, a managing director and technology specialist at the investment bank Evercore Partners, agreed that “it’s a tall order to compete with Apple on the coolness factor, at least for now.” He added: “There’s no technology product that even comes close from a loyal fan base and cool factor perspective. The Apple stores are more beautiful than Louis Vuitton stores. It all goes hand-in-hand: branding, messaging, stores, advertising, the product, the mythology. It’s amazing. But that could change.”

Samsung made two major decisions that enabled it to vault over RIM and Nokia, and then challenge and surpass Apple in market share. It wholeheartedly embraced Google’s Android operating system, which leveraged Google’s software research and development prowess and let Samsung focus exclusively on hardware, where it has long excelled. RIM and Nokia, by contrast, continued to struggle with their own aging and costly software systems as Android and Apple’s iOS all but established a global duopoly.

“To my mind, the competition comes down to the software platforms,” Mr. Cihra said. “Pre-iPhone, cellphones competed on size, weight, battery life, camera. Those things are still important, but what Apple really did was change the game away from small hardware tweaks to the software platform. The strength of the iPhone is the operating system.” He noted that once consumers were happily embedded in an operating ecosystem, seamlessly connected to other services and devices, they were hard to pry loose. “That cohesiveness is a big part of what they’re competing on,” he said.

At this juncture, Android has emerged as the most popular operating system (68 percent of the smartphone market, compared with Apple’s 17 percent, according to IDC), in large part because Apple doesn’t compete at the lower end. Samsung took the opposite approach by making handsets that cater to every part of the market. Its huge economies of scale and global reach have given it advantages over other Android competitors like HTC of Taiwan and Motorola Mobility, now owned by Google, Mr. Sacconaghi said.

Mr. Kuittinen noted that “Samsung’s low-end strategy has been incredibly effective.” He added, “There are big long-term benefits from building a low-end foundation,” because customers stay with the brand when they trade up. “The Galaxy III became a huge success because of Samsung’s strong portfolio in Brazil, India, Indonesia and China. What’s fascinating about Apple is its refusal to get aggressive in emerging markets. They basically ceded the crown to Samsung. You can understand that they don’t want to dilute their margins by competing on price. But at some point, they may have to accept lower growth or go after Samsung.”

By concentrating on the high end, Apple remains far more profitable than Samsung, accounting for more than two-thirds of the profits from smartphones, according to Canaccord Genuity, an investment bank, while Samsung accounted for about a third. The two companies, in fact, accounted for all of the profits from smartphones because other makers, like Nokia and Research in Motion, are losing money, the bank said.

The good news for consumers is that competition has produced better and cheaper mobile phones at an astonishing rate. No one I talked to thought either Apple or Samsung could rest on its laurels or market share. With its purchase of Motorola’s operations, Google looms large as a new competitive threat, and there’s intense speculation about what it will come up with. If anything, the competition is heating up.

“Samsung has done the best job of leveraging Android to its advantage,” Mr. Cihra said. “Over the last year, it’s come down to Apple, Samsung and everyone else. But it’s deeper than Apple vs. Samsung. Samsung is the flag bearer for the Android system. It’s Apple vs. Android. That’s where the real competition is going to be.”

This article has been revised to reflect the following correction:

Correction: September 21, 2012

An earlier version of this column included a quotation from an analyst misstating how long Apple has retained its iPhone interface. It has been five years, not seven.