Samsung's falling profits: a smartphone tipping point?

The unexpectedly weak quarterly profit forecast made by Samsung yesterday could represent an "ominous omen" for the smartphone market as a whole, analysts have said.

Samsung's operating income fell by approximately 24 per cent to 7.2 trillion won (£4.2bn) in the April-to-June period, the company said – its third straight quarterly drop.

The forecast puts the South Korean electronics company on track for its worst results in two years, and comes as a warning to the sector's other major players including Apple, Huawei and Sony.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Some experts said that the poor earnings were a by-product of strategic missteps by Samsung, including its overly high price points. "The earnings deliver a harsh reality check to Samsung that it is not Apple, but Samsung," Lee Seung-woo, a technology analyst at IBK Securities, told Reuters. "Its strategy of selling phones at expensive prices will not work anymore, as Chinese rivals also offer good enough phones at much cheaper prices. Samsung needs to review its smartphone strategy."

But other analysts saw it differently, suggesting that the problems are not down to the company's strategic approach, but to the contraction of the smartphone and tablet markets as a whole.

In both China and Europe, "the smartphone market is slowing down, even as more competitors enter into the market," says Quartz's Adam Pasick. "Samsung, which has a 40 per cent market share in Europe, said weaker demand there led to increased inventory".

Samsung took the unusual step of attempting to explain its poor second-quarter results in a statement that highlighted "sluggish" demand for tablets and a strong Korean currency.

But the company painted an optimistic picture for the coming quarter: "The company cautiously expects a more positive outlook in the third quarter with the coming release of its new smartphone line-up".

Claire Kim, a Seoul-based analyst at Daishin Securities told Business Week that Samsung's positive projections seem realistic. "Samsung earnings will rebound in the third quarter, largely driven by explosive demand for 4G smartphones in China," she said.

"If Samsung can maintain at least 20 per cent market share in that segment, it will see higher smartphone sales during the quarter when the significant impact from Apple's new devices isn't yet expected".