Why Samsung's surprise hit led to lower-than-expected profits

Samsung bet big on the Galaxy S6, but the S6 Edge turned out to be the real winner.

Samsung warned Tuesday that its sales would slip below expectations, leading to what will likely be its seventh straight quarter of declining profits.

New estimates still place this quarter as Samsung's strongest in the past year, coming in at 6.9 trillion won ($6 billion) compared to 7.1 trillion this time last year. But Samsung was supposed to bounce back this summer. After a year and a half of slipping sales, the Korean company released two well-reviewed flagship phones, the Galaxy S6 and S6 Edge. Samsung prepared for record-breaking sales, maybe even reclaiming the crown as the world's biggest smart phone vendor.

However, a few misplaced bets seem to have undone what should have been a victory lap for Samsung – and these missteps reveal several challenges shaking up the current smart phone industry.

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Samsung launched the Galaxy S6 and S6 Edge in April to much fanfare. Reviewers praised their speed, camera, and sleek hardware design, which looked rather familiar. The Galaxy S6, in particular, borrowed a number of ideas from Apple. (Engadget chuckled that, "One of Samsung's spokespeople picked up my iPhone 6 during our hands-on time in February and it seemed to take him a few moments to realize what he was actually holding.") This Apple-izing included removing several features that once distinguished the Galaxy line from the iPhone, such as ditching the removable battery and microSD card slot.

The Galaxy S6 Edge, on the other hand, experimented more with design. The titular Edge describes how the screen curves over the side of the phone, opening up new possibilities for apps and notifications. Playing with unconventional designs led to much of Samsung's success. For example, Apple's decision to increase the size of its iPhones from 4 inches to 4.7 and 5.5 inches came largely because Samsung's bigger phones sold so well.

And, in fact, the innovative S6 Edge has been a huge success for Samsung. Unfortunately, though, Samsung bet the other way. The company assumed the S6 would outsell the S6 Edge four-to-one, according to the Wall Street Journal. Sale figures actually place it closer to one-to-one. Samsung overproduced the safer, more-Apple-like device. Now stores are stuck with a hefty backstock of S6 phones, while the S6 Edge flies off shelves.

“The initial response to S6 smartphones wasn’t all that bad, but Samsung failed to fully address the market demand,” wrote analysts at the Korean firm KB Investment & Securities in a July 3 report.

During a conference call with analysts in April, Samsung executives promised to ramp up production of the S6 Edge by late June.

While Apple battles Samsung for the attention of high-end shoppers, Samsung's lower-end sales have taken a beating from Huawei and Xiaomi. The two Chinese phonemakers often keep it safe in terms of design, but innovate through prices and marketing plans. Xiaomi, for example, has essentially zero traditional advertising budget, opting instead for social media buzz and flash sales.

Samsung's official earnings report is due next month.

 
 
 

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