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Samsung looks to smart home as Q4 disappoints

At CES, Korean vendor reshapes its connected home platform around the TV, as smartphone woes continue to hit results

The importance of the heavily smart home-oriented strategy Samsung showcased at last week’s Consumer Electronics Show (CES) was underlined by the release of its preliminary results just after the event’s close.

Although profits for the fourth quarter of 2015 were up 15% on the previous year, they fell short of analyst expectations and were hit, like the whole outlook for 2016, by continuing decline in smartphone growth and market share. Another cause for deep concern is that the components business, on which Samsung has been pinning many of its hopes for turnaround this year, also looked sluggish. That means the Korean giant urgently needs to generate new revenue and profit streams in areas such as the smart home – where, tellingly, it is creating a platform that is centered on its TVs more than its handsets.

As usual, Samsung announced unaudited headline figures and will follow up with full details in a few weeks’ time. It expects those official numbers to show fourth quarter revenues around KRW53 trillion ($44.1bn), flat compared with Q414, and an operating profit up 15% year-on-year to KRW6.1 trillion ($5.1bn). The latter figure was short of the KRW6.64 trillion which analysts had, on average, expected.

This shows Samsung underperforming against predictions which were already cautious, shaped by a year of warnings from the company that the smartphone market was tough, beset by lower average selling prices, saturation at the premium end and rising competition from low cost vendors, particularly from China. All the major handset makers have been hit by the gloom – Apple’s share price fell below $100 on Thursday for the first time in more than a year amid analyst reports that fewer iPhones would be produced than expected this year.

Of course, this has a knock-on effect on Samsung’s businesses in chips and displays, which had provided most of the upside in its 2015 quarters. These are heavily focused on smartphones themselves, both Samsung’s own products and those of third parties, and they are, in turn, facing rising competition from low cost Chinese manufacturers of screens, processors and memory. Samsung’s chip volumes are rising, especially in memory, but prices are falling, though the semiconductor division remains the most profitable in the group (smartphones are still the largest revenue generator, contributing more than half of the total). Analysts expect operating income growth at the chip division to have slowed in Q415, but still to have stood at about 20%, delivering KRW3.3 trillion on sales of KRW12.7 trillion.

“I see no signs of a recovery in demand for electronics products which only means the component businesses will remain pressured,” Song Myung Sup, an analyst at HI Investment & Securities, told Bloomberg. “The situation is only getting worse and the first quarter earnings will likely be even lower than the fourth quarter.” The same analyst survey suggested that mobile operating profit would be about KRW2.18 trillion.

All this places Samsung’s CES announcements in a bright spotlight. Along with its compatriot and rival LG, it showed a smart home vision in Las Vegas in which the TV was acting as the command center for all the connected devices in the household – allowing users to check security and monitoring cameras, adjust HVAC settings, control lighting, or simply see who is at the front door.

While people are watching more video on smaller screens like smartphones and tablets, and consequently less on the biggest screens in the house, the TV still plays a central part in the lifestyle of the average home – acting as a focal point for socializing, and usually placed prominently in one or more rooms.

So consumer electronics manufacturers like Samsung and LG – which need to differentiate their TVs as urgently as their handsets – will want to ensure that their devices slot into an ecosystem that provides a rewarding consumer experience. This is a view of the smart home in which only a few vendors provide the central device, and Samsung’s claim of offering the first ‘IoT-ready’ TV sets will, it will hope, create the next wave of upgrades after the success of ‘HD-ready’ and failure of 3D.

Using the TVs, the two Korean manufacturers aim to sell their smart home wares based on the merits of the user experience, and will consequently force ‘smart home as a service’ (SHaaS) providers into playing ball with this walled garden approach – opting to live within these walls rather than those of Android or Apple TV.

For pay-TV operators and ISPs, the home gateway or set-top box is the piece of customer premises equipment (CPE) which forms the heart of a SHaaS platform, but Samsung wants those operators to be able to bypass CPE entirely and leverage the TV (via partnerships) to provide the same service without the CPE expense.

LG and Samsung’s home portfolios used to be very comparable, ranging from refrigerators to washing machines, to industrial air conditioners and displays. But last year, Samsung went out and massively expanded its offerings by acquiring SmartThings – an extensive DIY smart home platform, for around $200m.

As such, Samsung has the upper hand here, as it can sell an entire platform of connected devices to consumers, which should then be controllable via its new 2016 TVs and mobile devices via applications.

For consumers however, this means signing up for a single platform of smart home and IoT devices. Although Samsung’s SmartThings is perhaps the most expansive platform, with a lot of third-party integrations, some consumers will be reluctant to go all-in on one option so early in the game.

Similarly, it’s hard to see the likes of Nest, WeMo, Hue, Iris and Insteon all deciding to break down the walls to their gardens, and even harder to see iOS and Android settle on a cross-platform API implementation that would make the smart home ecosystem hardware-agnostic. In these early days, there are lots of players, but there will be considerable consolidation in the next few years.

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