The numbers: Grim, as expected. Samsung Electronics’ second-quarter profit was its worst in two years, as it warned earlier this month. Operating profit plummeted 24.6% (pdf) from the same period last year to 7.2 trillion won ($7.1 billion), and profit from the flagship mobile unit fell 29.6% to 4.42 trillion won. The company also kept its dividend flat, an unpleasant surprise to those who had hoped it might be boosted to reward the company’s beleaguered investors. Samsung shares fell 3.9% in midday trading, one of their biggest drops of the year.
The takeaway: The company was frank about the dilemma it is facing. “Prospects for growth remain unclear as competition over global market share intensifies in the mobile industry.” Translation: Samsung is getting crushed between low-margin Chinese competitors at the bottom and Apple’s iPhone at the top, and it will be forced to cut prices and squeeze its profit margins if it is to have any chance of slowing the steady erosion of its smartphone market share.
What’s interesting: The company’s prospects for innovation seem limited in the short term. It is experimenting with wearable computing, new smartphone case materials, and gee-whiz features like a “three-sided display” that shows messages from an angle. But Samsung, unlike Apple, does not control the overall software experience on its phones—it ceded that to Google when it opted to use the Android operating system. And it’s in the apps and software that most of the true smartphone differentiation is happening.
So with few other options, Samsung is turning back to its usual playbook—high-profile device launches, expensive marketing, and devices crammed full of features that users may or may not want. The company does has the advantage of a robust supply chain and huge efficiencies of scale. But if that playbook was working like it used to, Samsung wouldn’t have turned in such an ugly quarter.