Apple’s iPhone Launching Alerts Korean Firms
By Cho Jin-seo
Staff Reporter
The launching of the iPhone in the United States last month surprised South Koreans, too. Koreans were amused to see hundreds of Americans queuing outside of Apple stores _ some were there to become the first ones to own the new sleek touch-screen phone while others, such as Apple co-founder Steve Wozniak, simply joined the queue to enjoy the festive mood along with fellow Apple followers. Even a shopping bag that contained an iPhone was sold at $305 on ebay.com.
That was such fandom that Samsung Electronics and LG Electronics have always wanted but never had.
The two Korean phone makers rather casually responded to the iPhone mania at least on the surface. Apple may sell 10 million units by the end of next year but that is still only about 1 percent of the global market, a Samsung spokesperson said. Samsung and LG respectively have around 14 percent and 7 percent of the pie.
As for the domestic phone market, Apple is not likely to pose even a minor threat to Samsung, LG and Pantech in the near future. The iPhone is designed exclusively for the GSM network, while South Korea's telecom network is built on the CDMA platform. The two standards are not compatible with each other and there is no plan of a CDMA iPhone, yet.
``It is not likely to happen for Apple to sell its handsets in Korea. Also, none of the telecom service providers will want to sell it,'' an SK Telecom strategist said.
The mobile phone industry, however, is a global business and the iPhone means more than just a number, he said.
``The most important message iPhone is giving to the industry is that it is reestablishing the relationship between the phone makers and telecom companies. It is not just a phone. It is a new type of gadget,'' the SK official said. ``It is built on what consumers want, not on what the telecom firms want.''
In the United States, the sales of iPhone are faster than expected. Investment bank Goldman Sachs estimates that as many as 700,000 units were sold in its debut weekend, which is double its initial projection. Reflecting investors' high expectations, Apple's shares have shot up by almost 20 percent since the iPhone launching on June 29.
Happy When Apple's Not Here
So far, the iPhone effect hasn't seriously damaged traditional phone makers' earnings because it has been on the market for just a month. Nokia is solidly the No. 1 player, and both Samsung and LG showed a significant leap in their phone sales in the second quarter of the year. Motorola was the only major handset seller who suffered a loss in the quarter as it failed to market new phones after the massive success of the Razr series.
Samsung surged to the world's second largest phone maker thanks to the increase of sales of inexpensive phones in the emerging economies and on the loss of former No. 2 Motorola. It has set the record sales of 37.4 million units for a single quarter, about two million more than Motorola's. The robust performance led the company to increase its annual sales target to more than 150 million units.
LG also posted a record profit of 253.6 billion won in the second quarter, beating analysts' estimates. Sales at the phone business rose 11 percent to 2.25 trillion won after the firm shipped 19.1 million phones.
For Samsung, however, the situation is not as healthy as it seems. Its profit margin has been fluctuating quarter after quarter depending on the marketing expense. The operating profit plummeted from 600 billion won to 350 billion won despite gains in sales volume. The operating profit rate also diminished to 8 percent from 13 percent of the previous quarter. And there is no guarantee of bouncing back for the moment.
``Samsung managed to produce a minimum performance in the first half, thanks to Motorola's sluggishness and lack of mega-hit products from other companies,'' said Shinyoung Securities analyst Lee Seung-woo. ``But it looks not so easy in the second half when iPhone, a high-end blockbuster, will join the competition as well as other new models from other makers.''
Chu Woo-sik, chief of Samsung's investors relations team, says that the firm's phone division needs a reform to remain profitable because it will release more low-margin budget phones in the second half of the year, meaning that the average sales price will drop even further down from the current level.
``The increase in sales volume is meaningless when the profit rate goes down,'' Chu said at a meeting with the press on July 13. ``We believe that the restructuring in the division is successfully reaching the final stage.''
LG is a bit more upbeat. The company is betting on more expensive phones such as the Chocolate, Shine and Prada models to revive profit growth at its handset division. It posted a margin of 11.3 percent in the second quarter, the highest ever. It is particularly proud that it rolled out a touch-screen _ the Prada Phone _ before iPhone's maker Apple. It is also selling a high-end music phone named MuziQ in the United States to ride on the coattails of the iPhone boom.
Lessons From Apple: Software and Brand Power
Samsung is also planning to release a touch screen phone later this year. According to revealed information on the Internet, the Ultra F700 model can become an iPhone killer, not just another clone. The front screen is just as big as iPhone's but it will have a 5-megapixel camera and a slide-out QWERTY keyboard, things iPhone does not provide.
Like LG's Prada Phone, Samsung is also trying to sell a similar luxury touch-screen phone in joint partnership with Armani, an Italian fashion brand.
However, expectations from gadget fans in Korea are not so high. What makes an Apple incomparably attractive than a Samsung is its user-friendly software system, its brand power and its design, pundits say.
``Stay away. Software is Samsung's Achilles heal,'' one said on Gizmodo.com, a popular gathering place of electronics gurus. ``Their phones are not so smart. They all have very poor software that is not intuitive: poor compatibility and interoperability with computer hardware, databases and file transfers are the norm.''
Though the comment looks rather harsh, Samsung itself admits that its weakness is the inside.
``What makes a high-tech product distinguish from others is its software. Consumers now want a total solution of hardware and software, and contents and service,'' Yun Jong-yong, the chief executive, in his message to employees in April. ``
Industry watchers say that it will take long time for Samsung and LG to catch up with foreign makers in the software field because of the closed nature of their organizations. The two firms were initiated as makers of household appliances such as refrigerators and washing machines. On the contrary, Apple was originally an innovator of computer hardware and software with a knack in finding out the hidden needs of consumers that even the consumers themselves were unaware of.
Branding power is another reason that Apple has so many loyal fans, marketers and advertisers say. It has won numerous brand awards by marketers in the United States. Last year, the Business Week magazine ranked Samsung as the 20th best brand in the world while Apple was far below at 39th place. But the intensity of Apple's brand power is concentrated on PCs, music players and mobile phone, while the Samsung brand is being used in numerous industry sectors from electronics to shipbuilding and from insurance to construction.
Samsung and LG have reshuffled their marketing teams recently and have invited experts from P&G, a firm known as the royal academy of marketing gurus in Korea. LG has Han Sung-hun as chief of its global marketing team. Han's counterpart at Samsung is Sue Shim, who moved from P&G to Samsung earlier this year.
Shim said that the firm is trying to rebuild its image as an iconic brand just like Apple, and to make consumers feel an emotional connection with it.
One of the things she did at Samsung was to pick the right media. She published a short video advertisement for Internet video-sharing sites such as YouTube. The video clip filmed minuscule objects and bugs to put emphasis on how thin its ``Ultra'' series handsets are.
Shim said the firm is encouraged by the reactions on the Web.
``In only nine days, 1.5 million have watched it on the Internet,'' Shim said. ``It was not an easy decision to put an ad on a new medium. But in the end, it received favorable responses, that it catered to the taste of the young generation.''
If her tricks continue to win over the young minds of the world, the day may come when a Samsung shopping bag is auctioned on ebay.