Will Samsung's Smartphone Strategy Work for Tablets?

Can Samsung flood the market and increase its tablet sales the same way it did with smartphones?

Jan 7, 2014 at 1:45PM

Samsung (NASDAQOTH:SSNLF) unveiled four new devices in three different sizes ranging from 8.4 inches to 12.2 inches at CES this week. The Korean electronics maker is also rumored to be working on a low-end 7-inch tablet. The strategy is similar to that of Samsung's smartphone strategy, which took significant market share from Apple (NASDAQ:AAPL) over the last two years.

The new high-end tablets will run Google's (NASDAQ:GOOGL) Android OS and compete with Microsoft's (NASDAQ:MSFT) Surface line as well as a potential entrant from Apple in 2014.

Can Samsung find the same success in tablets as it did with smartphones? Last year, the company sold less than half the number of tablets Apple sold.

Expanding the market
The new line of tablets that Saumsung unveiled at CES carries the Pro moniker -- for professional. The line is aimed to replace corporate laptop purchases. Samsung found that its tablets are mostly used for watching videos and playing games, not office work. If it can expand its tablets' uses, the business model goes, it should sell more.

Microsoft, however, has been targeting this productivity audience since 2012 with its Surface Pro tablet. Its first iteration didn't sell as well as expected, and in August the company decreased the price.

The Surface Pro 2, and its RT sister, have had trouble staying on shelves. Best Buy, one of Microsoft's biggest partners, indicated that the bare shelves are likely due to supply shortages, not overwhelming demand. This is understandable after Microsoft took a $900 million inventory writedown last year when its tablets didn't sell as well as expected.

Apple, too, is expected to enter this professional-level tablet market in 2014 with a new larger iPad. Perhaps the new entries will legitimize tablets as a replacement device for laptops and create a new market for high-end tablets. If so, all three companies could benefit.

Meanwhile, Google's Chromebooks have been very popular in the commercial channel, and have been carving out a niche in businesses as a replacement for Windows laptops. Sales growth could slow if executives begin choosing tablets over laptops.

A low-end play
The tablet market is growing faster than smartphones and still has room to grow on the high-end, but there's even more room for growth on the low-end -- where Samsung won't face competition from Microsoft or Apple. Samsung's rumored "Lite" line of tablets will capitalize on the company's in-house production capabilities, which will allow it to create a better product at a better price.

The low-end may be the perfect opportunity for Samsung to test its Tizen OS. The Galaxy Tab 3 Lite is rumored to go on sale for just $129 according to DigiTimes, which implies very little room for profit margin. The tablet market is experiencing downward price pressure -- Hewlett-Packard just released an $89 tablet -- so profits will require high volume.

Samsung could extract additional value out of its low-end customers with its own OS and app store. That's revenue that, for the most part, goes to Google.

Google has voiced concerns about the dominance of Samsung as an Android device maker in the past. If Tizen proves popular on the low-end, it could be a real thorn in the side of Google should Samsung expand its Tizen line and cannibalize its Android devices. This potential threat is likely why Google has become more aggressive with its hardware line -- Nexus -- and its subsidiary Motorola's phones.

Flood the market
Samsung has had success with this strategy before -- it's now the world's largest smartphone manufacturer. As it releases multiple tablets at different sizes and price-points it will face varying competition throughout. It might be more difficult to succeed in the same way in tablets, but it's not impossible. I think its best bet to increase sales is on the low-end, but its best bet to increase profits is on the high-end.

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