Why Samsung attributes its smartphone success to its marketing

Samsung claims that its smartphone success was due to its own marketing efforts

A few day back, Market Realist published an article on the patent infringement case between Apple (AAPL) and Samsung (SSNLF), Why Apple seeks $2.2 billion from Samsung in a patent trial. We discussed how Apple claimed $2.2 billion in damages for lost profits and royalty fees on infringed patents for more than 37 million smartphones and tablets that Samsung sold in the U.S. from August 2011 to the end of 2013. However, in the first courtroom appearance by a Samsung executive, the company attributed its success in the smartphone industry to its own marketing efforts and denied copying Apple’s design, as reported by the New York Times.

Samsung’s marketing expenses increase, leading to reduced operating profits

It’s true that Samsung’s marketing expenses continue to go up over the last few quarters. The company’s spending on marketing activities increased from 45.4 trillion won in fiscal year 2012 to 54.2 trillion won in fiscal year 2013—an increase of about 20%. The increase in revenues didn’t keep the same pace as the company’s marketing expenses, due to which its operating margins declined from 16.6% in Q1 2013 to 14.0% in Q4 2013, as the above chart shows. Moreover, Samsung recently announced its earnings guidance for the first quarter of 2014. It mentioned that its operating profits will decline 4.3%, from 8.78 trillion won in Q1 2013 to 8.4 trillion won in Q1 2014.

Samsung’s unable to keep up its revenue pace due to increasing competition

As we’ve seen, Samsung hasn’t been able to keep up the pace of its revenue increases with its marketing expenses increases. The primary reason for this is the decline in average prices for Samsung’s smartphones due to increasing competition from Apple, Lenovo (LNVGY), and HTC (HTCKF). Apple is the largest player in the U.S. smartphone market and the second largest in the world, after Samsung. Samsung is also the largest player on Google’s (GOOG) Android operating system. Apple poses a big challenge to Samsung in developed markets, while Lenovo is increasing its presence in emerging markets.