Software key risk for Korean smartphone push

SEOUL/BARCELONA: Software could become a stumbling block for the ambitious plans of Korean mobile phone heavyweights Samsung and LG Electronics to win a bigger share of the booming and lucrative smartphone market.

Samsung Electronics' and LG's new smartphone models will hit the shelves over the next few months, boosting their volumes.

But few believe they will have a dramatic impact on a market turning toward software, the key operating engine within a device which can have a dramatic impact on driving extra cash flow from consumers and boost marketing opportunities.

"I don't have expectations for their software," said Daiwa analyst Jae H. Lee. "Samsung and LG are hardware companies. They can't change that overnight."

The entire cellphone industry has started to focus increasingly on services and software since Apple and Google entered the higher end of the market -- a major challenge for Samsung and LG.

The world's No. 2 and No. 3 handset makers have seen those consumers seeking Web and other PC-like functions increasingly turn away from their feature-heavy phones to more advanced smartphones from top vendors Nokia, Apple and Research In Motion (RIM).

LG saw its phone business profit margins falling close to zero in the December quarter as the firm had to spend heavily on marketing of its simpler models. Samsung's margins held up better, but they are still far behind those of RIM.

Shares in Samsung and LG trade at 13 and 8 times of their estimate earnings, respectively. The multiples compare with 13 of Nokia, 17 of Apple and 15 for RIM.

Even Nokia, the world's biggest cell phone maker, has found the shift in focus to software challenging. Its heavy investments to beef up service and content offerings over last three years are still at an early stage.

Samsung this month unveiled plans to treble smartphone shipments in 2010 and promote its own bada software platform.

Analysts, however, are doubtful of Samsung's efforts to belatedly build a new open platform. With limited volumes, phones using bada will have difficulty attracting application developers or operator support.

"It's going to be an uphill struggle to get the developer community on board," said Ben Wood, research director at CCS Insight.

Samsung's application store had 649 applications as of Friday, compared with more than 140,000 on Apple's App Store.

"For four guys in a garage it's easy to build applications for Apple or Android, but it gets difficult to build for others, and that's critical for innovation," said Shane Lennon, senior vice president for mobile social networking firm Geosentric.

Many believe bada will become a platform for mid-range Samsung phones, with limited flexibility in applications.

"Samsung can't make its platform hot among North American developers, but it can offer merits to mobile carriers who want to have a say in mobile software," said Oh In-bum, an analyst at Dongbu Securities.

JK Shin, the head of Samsung's mobile operations, told Reuters in an interview that with the help of bada the company would also benefit from surging demand for new smartphones in emerging markets.

"I believe that the smartphone market will grow more than 20-30 percent every year for a three-year time frame. And the growth rate in emerging markets is much higher than that of advanced countries," he said.

FOLLOWING WINNING SOFTWARE

LG plans to roll out about 20 smartphone models this year and set an ambitious target to claim a double-digit share of the global smartphone market by 2012. Nokia, RIM and Apple together control 75 percent of that market.

With software LG is taking a different route to Samsung, focusing on delivering models for the most promising operating system for now, Google's Android.

It would be the safest bet for LG, which lags Nokia and Samsung in economies of scale, and has fewer resources to gamble. U.S. phone maker Motorola is also placing a make-or-break bet on Android phones after years of struggle.

"For now the best strategy is riding on successful operating systems such as Android," said Kim Woon-ho, an analyst at Prudential Investment & Securities.

Analysts expect Android phones to also account for half of Samsung's about 40 smartphone offering in 2010.

Despite the lingering weakness with software, Samsung and LG will be able to achieve some market share gains using their strength as hardware specialists.

Mobile carriers trying to beef up their smartphone line-ups to fight AT&T's Apple glitz could also work in favor of independent device makers.

"Once a direction becomes clear, Korean companies do a great job in catching up," said Kim.

(Editing by David Cowell)