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Samsung Smartphones Take On iPhones, BlackBerrys

has emerged as a power providing credible challenges to the mobile-phone king Nokia. But when it comes to , the South Korean giant is a minnow. While Apple ( (AAPL)) and BlackBerry maker Research In Motion ( (RIMM)) are setting new trends in the fast-growing segment of the global handset market, has had a hard time trying to grab consumer attention. Now, executives at the company seek to shoulder their way into the smartphone big leagues. Samsung last week introduced five new models sporting features comparable to Apple's . "Our business focus this year is to establish a strong presence and lay a foundation for further growth in the smartphone area," says Hong Won Pyo, executive vice-president in charge of product strategy at Samsung's mobile communication division. The rush to bolster its standing in the highest end of the handset market is understandable given Samsung's disappointing presence there. Although the Korean company overtook troubled Motorola ( (MOT)) as the world's second-largest mobile-phone maker in 2007, and increased its share in the overall handset market to more than 18% in the first quarter of this year from around 12% two years earlier, its smartphone share stood at only 3.5%, according to researcher . That's a big problem since the research firm forecasts global sales of smartphones will rise 31% this year, almost five times faster than the total handset industry. More Than 20 Smartphone Models Due Samsung's approach is starkly different from . While the real beauty of the iPhone and its latest successor, the iPhone 3G S, lies in the creative use of the iTunes Store to inspire a myriad of third-party developers to write applications for the phones, Samsung's emphasis is more on hardware. To expand its presence, Samsung plans to keep rolling out new lineups of smartphones—more than 20 different models this year alone—to cater to different consumer segments. Samsung isn't following Apple's initiative to set business direction in partnership with mobile carriers, either. Instead, Samsung lets service providers call the shots as a way to increase its handset market share. "We will continue strengthening our relationship with key operators and work closely with them to develop smartphones meeting their specific needs and to help their business," says Hong. Such tactics have started to pay off in the U.S., where Samsung has steadily increased its presence. In the first three months of this year, Samsung was the No. 1 handset brand in North America with a market share of 26.3%, vs. Motorola's 18% and Nokia's 7.9%, according to Strategy Analytics data. The Korean company is also offering all sorts of operating systems, except for Apple's. Four of the five smartphones released last week are the successors to its Omnia, and all run on Microsoft's ( (MSFT)) Windows Mobile software. But they come in different shapes and varying focus on functionalities. The other is a mass-market phone called the Jet that runs on an operating system developed in-house by Samsung; the Jet has smartphone features but Samsung doesn't allow outside software vendors to develop new applications for it. In April, Samsung also introduced its first smartphone using the Android operating system backed by Google ( (GOOG)). Expensive Strategy The problem is the Samsung way will be costly. "I'm sure this aggressive volume-based push will increase Samsung's market share, but it's an expensive strategy to pursue," says senior analyst Thomas Kang at Strategy Analytics. "I don't think this business model is sustainable in the long term in view of high development and manufacturing costs." Already, smartphone makers are under pressure to lower prices to compete with Apple. On June 8, AT&T ( (T)) began selling the previous-generation iPhone for as little as $99 with a two-year contract. With U.S. carriers trying to match what AT&T offers, handset manufacturers will likely be asked to cut their margin. Samsung officials say their new lineup of smartphones—which boast ultra-fast data processing speed, a 5-megapixel camera with quality video recording, and next-generation AM-OLED (active-matrix, organic light-emitting diode) touchscreens that use less power and project sharper images than traditional liquid-crystal displays—won't compete with the old iPhone. Industry analysts believe Samsung is betting on its knack for developing models quickly until it strengthens its own software capability. "Smartphone is such an important segment that Samsung just can't let others grab share even if it is not fully prepared to meet all software needs," says Chun Seong Hoon, electronics analyst at brokerage in Seoul. To Samsung's credit, it has steadily posted decent profits in recent years although it is offering some 150 models annually—more than any other rival. In the first three months of this year, the Korean company earned $833 million on sales of $7.26 billion in its telecom business. That's a respectable margin of 11.5%, beating the 8.9% margin reported by Nokia for the quarter. The good performance was partly due to a weak Korean currency, which lost nearly a quarter of its value against the dollar in the past 18 months or so. The currency advantage isn't likely to last forever, and as smartphones take on greater importance in handset markets, so will the software capability for industry players. "I've no doubt Samsung will report handsome results this year," says Kang at Strategy Analytics. "But its long-term profitability will be in question unless it addresses its software weakness."
Moon is BusinessWeek's Seoul bureau chief.

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