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Samsung Adds $600 of S5 Freebies to Fend Off Apple

By Jungah Lee
April 11, 2014 2:31 AM EDT 43 Comments
A customer looks at Samsung's Galaxy S5 smartphone at a mobile phone shop in Seoul on March 27, 2014.
Photographer: Jung Yeon-Je/AFP via Getty Images
A customer looks at Samsung's Galaxy S5 smartphone at a mobile phone shop in Seoul on March 27, 2014.

Samsung Electronics Co., facing more competition from Apple Inc. and Xiaomi Corp., is cranking up incentives for its Galaxy S5 to as much as $600 in freebies to defend its place as the world’s largest smartphone maker.

With the marquee device from the Suwon, South Korea-based company making its debut in 125 countries today, customers will be offered PayPal vouchers, a LinkedIn Corp. premium account and at least four fitness-related apps. It’s the first time Samsung has offered incentives for its top-selling S series of devices.

Samsung is fighting to make its phones stand out in the market against new iPhones and up-and-comers such as China’s Xiaomi and Coolpad Group Ltd. The strategy may force rivals to lift incentives or lower prices, meaning a potential profit squeeze throughout an industry that has seen the fall of once-dominant producers Motorola Mobility and Nokia Oyj. Already, Samsung’s operating profit has fallen for two straight quarters.

“Samsung must do whatever it takes to maintain its global consumer electronics leadership,” said Neil Mawston, director of global wireless practice for researcher Strategy Analytics. “Previous failures like Motorola have shown in the past that once you lose your grip on top spot, it is a very long and painful process to get it back.”

Xiaomi, Coolpad

Shares of Samsung fell 1.1 percent to 1,365,000 won at the close of trade in Seoul. The benchmark Kospi index dropped 0.6 percent.

The S5 features a 5.1-inch screen with a fingerprint reader, 16-megapixel camera, heart-rate sensor, water-resistant coating that can withstand 30 minutes at the bottom of a meter-deep (3-foot deep) pond, and a back resembling dimpled leather. Today’s offering in 125 countries is the largest number of nations for a single Samsung mobile phone release, the company said in a e-mailed statement.

The display is full high definition on an active-matrix organic light-emitting diode, or AMOLED, screen. That 5.1-inch screen is bigger than the current S4 model, and the battery will last 20 percent longer than its predecessor, Samsung said.

The new device enters a smartphone market where global growth is expected to slow to 6.2 percent in 2018 from 19 percent this year, research firm IDC said in February.

Samsung expects S5 sales to reach 10 million units within 25 days based on pre-orders from global wireless operators, Seoul Economic Daily reported today, citing an unidentified Samsung official. Jini Park, a Samsung spokeswoman, declined to comment on the report.

Declining Profit

While Samsung sold about one of every three smartphones globally last year, Chinese competitors Xiaomi, Coolpad, Huawei Technologies Co. and Lenovo Group Ltd. gained traction and stalled some of Samsung’s annual sales growth. Xiaomi expects its sales to grow fivefold to 100 million phones in 2015.

Samsung, Asia’s biggest technology company, rode almost a 10-fold increase in shipments from 2010 to 2012 to overtake Apple as the world’s biggest smartphone vendor, according to data compiled by Bloomberg. Last year, growth slowed to 44 percent as the S4 sold less than analysts estimated.

This week, the company posted a 4.3 percent drop in earnings, with operating income falling to 8.4 trillion won ($8.1 billion) in the three months ended March, as stalling demand lowers prices for Galaxy devices and components.

Samsung shipped 63.5 million units of the S4 through February, according to the median of three analyst estimates. That compares with 65.6 million for the 4.8-inch S3.

S5 Freebies

Samsung doesn’t disclose unit sales for its mobile phones.

The S5’s formal global debut is scheduled for today, yet consumers in South Korea were able to buy the device starting March 27 after wireless carriers there defied Samsung so they could work around penalties imposed by the government stemming from illegal discounts.

The S5’s pre-paid and discounted subscriptions include six months’ access to the Wall Street Journal, fitness apps, games and social networking. Twelve months’ access to Bloomberg Businessweek, a publication from Bloomberg LP, the parent of Bloomberg News, is part of the incentive package.

“The Galaxy S5 was designed to offer consumers the most advanced tool to help improve their everyday lives,” Shin Jong Kyun, chief executive officer of the mobile division, said in a statement. “These new partnerships perfectly compliment this mission with a comprehensive offering of some of the world’s best mobile resources to suit people’s active lives.”

Gear Smartwatch

Sticker prices for the Galaxy S smartphones also have dropped for successive models, as the S5 model with LTE capabilities will sell for 866,800 won, or about $833. The comparable S4 sold for 899,800 won and the S3 for 994,400 won.

Samsung is finding it harder to separate from the rest of the pack as hardware innovations become harder to include and the high-end market reaches saturation, said Warren Lau, an analyst at Kim Eng Securities Ltd. in Hong Kong.

Technical specifications such as near-field communications, high definition screens and faster processors were once only offered by luxury makers. Now producers including Xiaomi and Lenovo pack them into smartphones costing as little as $100.

While the 5-inch Galaxy S4 had new software such as eye scrolling and gesture recognition, it failed to match sales of the predecessor.

“All of the vendors who focus on the high-end segment have the same reason to worry about the stagnant outlook,” Lau said. “The pace of innovation has slowed down significantly.”

Apple, Huawei

While Samsung’s S series remains the key product in its mobile phone unit, which accounts for two-thirds of earnings, the company has spread its focus to products including the Galaxy Gear smartwatch, a broader range of tablet computers and its first wearable device using the Tizen operating system.

Samsung’s Gear 2 and Gear 2 Neo smartwatches are available in 125 countries starting from today, the company said.

Offering devices from under $150 to more than $900 has been key to Samsung’s rise to the top of the global smartphone market in 2011, a position it has held since. Samsung shipped 316.4 million smartphones in 2013, more than double the 153.4 million of second-place Apple, according to data compiled by Bloomberg from IDC. Huawei was third with 49 million units shipped.

Samsung’s innovations include large-screen smartphones such as the 5.7-inch Galaxy Note. That success sparked imitation, with HTC Corp. and Coolpad targeting large-screen sales in China, the world’s biggest market.

Apple also may head in the same direction. The Cupertino, California-based company is developing new iPhone designs including bigger screens, a person familiar with the plans said last year. In January, Apple also started selling its iPhones through China Mobile Ltd., the world’s biggest carrier with more than 770 million subscribers.

“Samsung needs to offer something more to boost its sales of mobile devices to at least maintain growth and profit,” said Park Kang Ho, an analyst at Daishin Securities Co. “Consumers’ interest for new flagship phones these days isn’t as hot as it used to be.”

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Robert Fenner

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