Samsung To Cut One-Third Of Smartphone Models As Profit Continues To Plunge

Samsung plans to cut up to one-third of its smartphone models starting next year, an adjustment the company sees as essential to turning around its plunging profit.

The largest smartphone vendor in the world reported an almost 50 percent drop in profit during its third-quarter earnings call last month, after reporting a 20 percent drop three months earlier.

Robert Yi, head of investor relations for Samsung, revealed the decision to slash the number of smartphone models at a presentation to investors in New York Monday. He said the South Korean company needs to share its components across fewer entry- and midlevel phones to cut costs.

Related: Partners Say BlackBerry 'On The Right Path' With Samsung Partnership

"Samsung previously had a lot of success versus its competition by doing what I like to call, 'the spray and prey method' of sending out models," said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a leading tech analyst firm based in Austin, Texas. "If you wanted any size, waterproof, standard, one with a pen, one without a pen, they offered pretty much every type of model everywhere. That is actually a really good move when you are the giant of the industry. You don’t have to determine what people on the whole want because you are offering everything. But what's happening is the industry is maturing and people are getting a better idea of what they want, so now that strategy isn’t as profitable for Samsung."

At this time last year, Samsung held almost 33 percent of worldwide smartphone market share, according to research firm IDC, but now that share has dropped down below 24 percent while the market itself has grown by more than 25 percent.

"They are slashing the number of models down because they have too many choices out there," said Steven Kantorowitz, president of CelPro Associates, a Samsung partner based in New York. "It causes a lot of problems. They need less choices. With Samsung you've got the Galaxy Note 4, Note Edge, the Galaxy S5, and this and that. With Apple you got the iPhone 6 or 6 Plus. It's simple."

Samsung is still the leader in the space, but in the past year has struggled to maintain its prominence in both mature and developing smartphone markets. In mature markets such as the U.S., Samsung revealed during its second-quarter earnings that sales of its Galaxy S5 smartphone were disappointing despite Apple's iPhone 6 not hitting the market until months later. Since then, Samsung has launched three more high-end phones in the Galaxy Alpha, Galaxy Note 4 and Galaxy Note Edge. Around that same time, Apple launched the iPhone 6 and iPhone 6 Plus.

Samsung did not reply to a request for comment from CRN.

NEXT: What The Future Holds For Samsung

"It's distracting to people that each Samsung phone offers something different," said CelPro Associates' Kantorowitz. "People can't make a decision when they have too many choices, including myself. It's like going into an ice cream store and there are 50 flavors when in reality I'd just be happy with chocolate. It would make things simpler. Henry Ford said, 'You can have any car you want as long as it's black.' That's the way to master something and get it done the right way. It's not like the good old days when just BlackBerry ruled the market. There are too many good competitors out there."

Samsung once dominated the emerging and international markets with its entry- and midlevel phones, but now the company is struggling to compete with Chinese vendors such as Lenovo, Huawei and Xiaomi.

"They need to cut costs," said Moor Insights & Strategy's Moorhead. "There is a lot of cost in having different models. Ultimately, you are supply constrained on some models and have too much of another model. Stop selling certain phones in countries that don’t make any sense. I hate to say this, but learn to do your business a little more like Apple does with minimal models, a lot of common parts and common suppliers."

Going forward, Moorhead said it's only going to get worse before it gets better for Samsung. Cutting down on spending and the number of models offered will stop the bleeding, but any shot of a turnaround won't come until the next product cycle from all major vendors, he said.

"What this means is the next round of Samsung phones is of paramount importance for its level of success in the future," Moorhead said. "We're going to see continued bad news from their camp from a revenue and market-share perspective until they launch their new phones around Mobile World Congress next March. They're already loaded for the holidays as they've got all these models out there now. Next quarter will be a repeat of this quarter with low market share and decreased profitability. The quarter after that you'll see profit because they won't be making so many phones, but still a drop in market share. Only after that you'll see a shot at Samsung turning around, but even then they will have to overcome the brand-name battle with Apple and the value proposition against Chinese vendors."

PUBLISHED NOV. 18, 2014