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Samsung bets on smart homes to revive growth
At the display store underneath Samsung Electronics’ headquarters in Seoul stand a refrigerator and washing machine that draw scant attention from most of the curious visitors inspecting the group’s gadgets.
Such basic household appliances may lack the glamour of Samsung’s premium smartphones and ultra-high-resolution televisions, but they lie at the heart of a strategic push by the company: the smart home.
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This week Samsung cited its ambitions to build a “smart home business” when it announced the purchase, for an undisclosed sum, of Quietside, a US air conditioning distributor. A few days before, in a deal rumoured to be worth about $200m, it agreed to buy SmartThings, the Washington DC-based creator of a platform enabling a home’s appliances, utilities and security to be controlled using a smartphone.
The announcements underscore Samsung’s determination to build on its huge suite of electronic products to become a leader in the increasingly fashionable “internet of things”. Samsung and its rivals Google and Apple are battling to build and expand software systems that allow users to control a vast range of devices, including baby monitors and thermostats, with a few taps of their smartphones.
This month’s deals help fulfil public promises that Samsung executives made last year to chase growth through acquisition more aggressively. They also come at a time of acute nervousness about the company’s growth prospects.
Samsung’s mobile handset business drove galloping profit growth over the past three years, gaining and then consolidating a position as the world’s leading smartphone maker by unit sales. But that business’s profits have been sliding, due in part to competition from cheaper Chinese competitors, with a sharp impact on group earnings. Samsung’s operating profit fell 24 per cent in the second quarter of this year, the third consecutive quarterly decline.
A successful dive into the internet of things could reignite the performance of Samsung’s household appliances division, long seen as a dull, low-growth and low-margin business. While Samsung is the world leader by sales in TVs, the global market in many other household electronic devices remains fragmented between a large number of regional companies, notes CW Chung, an analyst at Nomura.
“But if people know Samsung products can be networked, they might be willing to pay a premium,” he says, adding that the “networking effect” could encourage customers to buy a suite of Samsung home appliances.
Apple has already exploited a similar dynamic – many of its customers are attracted by the ability to “sync” between their MacBook computer, iPad and iPhone – and the US group may prove a strong competitor for Samsung in the smart home space. It has launched a platform, HomeKit, that software developers can use to pair household devices with the iPhone, and has been developing a “hub” to co-ordinate these devices, say people familiar with the company’s plans.
Google is also investing aggressively in this field, having spent $3.7bn over the past eight months on Nest Labs, which produces “smart” home thermostats and smoke detectors, and DropCam, which makes household security cameras.
“They’re all different plays,” says Mark Newman, an analyst at Bernstein. “Samsung has all the important pieces of hardware, while Google is coming from the operating system side, and Apple has a much more integrated model.”
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Unlike Apple, which has allowed only a few companies to work with HomeKit, Samsung is opting for an open platform model where different groups work together. Last month, it formed a partnership with Intel and Dell to develop standard technologies that will make smart appliances made by the different companies compatible. Days later it announced a similar tie-up with Nest and chip designer Arm Holdings.
Yet while the smart home concept is receiving heavy attention, it has already been pursued for years with little success, warns Daniel Kim, an analyst at Macquarie. “It sounds great conceptually, but adoption of these devices has been very slow,” he says. “Home appliances are so fragmented by region . . . and it’s a very slow-moving industry.”
Yet Mr Kim sees the sector’s attraction. “I don’t think any other sector is big enough to offset the slowdown in Samsung’s smartphone business,” he adds, noting the company’s slow progress in developing other targeted long-term growth businesses such as solar power and LED lighting.
A report last year by the consultancy Berg Insight suggested that adoption of smart home technology is close to gaining meaningful momentum, predicting that nearly 50m homes in the US and Europe would install smart home systems by 2017, when annual sales of such systems would reach more than $12bn.
But such estimates are tough to make with confidence, Mr Newman warns. “It’s the next big area of growth after smartphones, but . . . how it’s going to be monetised is not very clear.”
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