Samsung success story: More about marketing than innovation?

Samsung Electronics is spending more on marketing than R&D for the first time in at least three years, prompting some pundits to warn that the IT giant is sacrificing innovation at a time when the market is teeming with ever smarter gadgets.

The South Korean firm, which warned on Friday it will not post record quarterly earnings for the first time since 2011, looks set to spend big bucks on marketing upcoming mobile devices, including the Galaxy S4 smartphone, to convert more iPhone and iPad users loyal to arch rival Apple Inc.

While the new Galaxy smartphone, unveiled to much fanfare in New York last month, will boast a motion-detecting technology that stops and starts videos depending on whether someone is looking at the screen, and flip between songs and photos at the wave of a hand, industry watchers say the device would not overturn an industry that lives and dies by innovation.

"(Samsung) lagged behind in creating a new category. Apple created a new category with tablets. We are waiting to see something like that happen from Samsung," said Rachel Lashford, an analyst at research firm Canalys in Singapore.

Samsung spent a record 13 trillion won on marketing last year. That was $1.3 billion more than what it poured into research and development.

The firm does not provide marketing and R&D spending forecasts. Some analysts said they expect Samsung to continue spending more on its marketing campaigns than on R&D this year as it fights the next wave of products from Apple.

Smartphone makers are increasingly just tweaking existing specifications such as increasing screen sizes. Every gadget launch by a major global tech giant has so far underwhelmed, lacking the 'wow' factor of old and subsequently pushing their share prices lower, some analysts said.

Apple has tumbled nearly 40 percent since the stock soared to more than $700 in September.

Shares of Samsung hit a record in early January but have since fallen nearly 3 percent. A lack of product lineup in the longer term is also capping their upside, analysts said.

"There is not that much visibility on products next year, but we expect Galaxy Note 3 later this year," said Mark Newman, a senior analyst at Stanford Bernstein in Hong Kong, referring to the phablet that is closer in size to a tablet than a phone.

The smartphone-tablet hybrid, a surprise hit in 2012, appeals to users who prefer larger screens to better access visual content.

Samsung estimated its January-March overall operating profit rose 53 percent to $7.7 billion as mid-tier smartphones and sales in emerging markets helped it tide over the off-peak season.

That marks the end of five straight quarters of record profits for the world's biggest technology firm by revenue.

"We'll keep boosting our R&D spending, while marketing will be executed flexibly according to market conditions," a Samsung spokesman said on Friday.

Ahead of Apple
Apple ramped up its R&D expenditure to $3.38 billion in the year to September 2012, from just $712 million in 2006. Yet that is still far less than what Samsung spends.

"Samsung keeps investing in R&D. They've boosted their smartphone R&D workforce to 25,000 or so from less than 20,000, and I think they have an exciting product lineup ready, probably in the second half, to upend the market," said Lee Do-hoon, an analyst at RBS.

That is a significant departure for a company which used to tear apart a Sony television in 1970s to reverse engineer rivals' products.

Samsung finally overtook Sony to become the world's top TV maker in 2006, largely aided by slim designs and super-thin displays produced as a result of aggressive capital investment.

By contrast, Samsung's mobile devices business now generates 70 percent of its total revenue.

"The Note 3, which I expect to be available in the fourth quarter, will be quite innovative. It'll have a bended display and the screen size will be bigger without having a bigger phone," said RBS's Lee.

"I think it'll be pretty cool."

© Thomson Reuters 2013