Clock is ticking for 'radical' move from Samsung
The key takeaway from Samsung Electronics' latest earnings report, which confirmed its first annual earnings decline in three years in 2014, is the South Korean technology giant needs to do something "radical" to turn around its fortunes, say analysts.
Samsung's profit slumped 36 percent from a year earlier in the fourth quarter to 5.3 trillion won ($4.88 billion) as smartphone sales continued to come under pressure amid fierce competition from Apple and low-cost Chinese handset makers.
The contribution of its mobile division to operating profit fell to around 58 percent last year from about 70 percent in 2013, according to Reuters.
Perceptions around Samsung have shifted over the past year, reflected in the lackluster performance of its stock. Samsung's stock has risen 5 percent over the past year, far underperforming Apple's near 50 percent gain over the same period.
Once regarded as an unstoppable force in the smartphone industry, Samsung is now seen by some as "just another Android smartphone maker."
A reason for this is the commoditization of the smartphone industry, which has enabled low-cost smartphone makers to enter the market and produce compelling devices at competitive costs, say analysts.
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"Samsung's earnings reflect a very interesting transition: companies that aren't able to add significant value are getting hit," Bob O'Donnell, chief analyst at Technalysis Research told CNBC. "The question is can they differentiate and provide value?"
This is not a Samsung-specific issue, said O'Donnell, however it is under more pressure than rival Apple for example, which bought itself extra time with its new iPhones – which have been a hit among consumers.
'Soul searching'
Since there's limited room for innovation smartphone hardware, Samsung needs to do something "radical" to remain competitive, O'Donnell said.
"They are a very hardware focused company – they require some serious soul searching at the top. They may need to think about making some really big purchases, something like a Netflix perhaps to provide unique value in service or content," he said.
Neil Shah, director and Counterpoint Research agreed Samsung needs a change. In order for Samsung to survive the next decade, the company needs to step up its focus on developing software, services and content, he said.
"Samsung is great with hardware integration, but its biggest drawback is that it's not as strong as Apple in software and services," he said. "If they want to be called a 'next generation company', I would suggest they set up a subsidiary - which focuses on applications, software and services – that they can leverage."
"Samsung needs to be the next SoftBank," he said, referring to the Japanese telecom giant, which grew its business to include e-commerce, internet and technology services.
While creating a subsidiary is more of a longer-term story for Samsung, to improve prospects in the near term, the company needs to reassess the way it runs is smartphone business, said Shah, particularly in terms of how many models it rolls out.
"Successful players like Xiaomi and Apple have just a handful of models and manage to generate so much scale," he said.
"Samsung, on the other hand, has around 400 models – with its spaghetti-on-the-wall approach - which means that it can't focus on head turning devices. Cutting down on its portfolio is key."