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http://tech.fo rtune.cnn.co m/2013/01/22/samsung-apple-smartpho ne/?iid=F_F500M

Samsung's road to global domination

By Michal Lev-Ram, writer

South Korea's Samsung is trampling rivals and gunning f or Apple. Can its hot
streak last?
FORT UNE -- To understand how Samsung -- yes, Samsung -became America's No. 1 mobile phonemaker and thorn in Apple's
side, it's helpf ul to rewind to last f all. On a mid-September
morning, Apple (AAPL) CEO Tim Cook stepped onto a stage in
San Francisco to unveil the iPhone 5. Several hundred miles
away, in a Wolf gang Puck restaurant in Los Angeles, a group of
marketing executives f rom Samsung Electronics f ollowed realtime reactions to Cook's remarks. T hey huddled around tables
mounted with laptops and T V screens, caref ully tracking each
new f eature and monitoring the gush of online comments on the
new device via blogs and social media sites. As the data f lowed
in, writers f rom the company's advertising agency, who were also
camped out in the restaurant turned war room, scrambled to
craf t a response.
Two hours later, when Cook stepped of f the stage, the
Samsung group was already draf ting a series of print, digital,
and T V ads. T he f ollowing week -- as the iPhone 5 went on sale
-- the company aired a T V ad mocking Apple "f anboys" queuing
up f or the new phone. ("T he headphone jack is going to be on the bottom!") T he 90-second commercial
went on to become the most popular tech ad of 2012, garnering more than 70 million views online. More
important, in the weeks f ollowing the launch of Apple's iPhone 5, Samsung sold a record-breaking
number of its own signature smartphone, the Galaxy S III. "We knew this was going to be a big moment in
time, when consumers are really paying attention," says Todd Pendleton, chief marketing of f icer of
Samsung's U.S.-based mobile division. "We wanted to take that opportunity and all that energy and make
it Samsung's moment."
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No doubt about it, Samsung is having a moment. In recent years the South Korean company has taken
the mobile world -- the U.S. included -- by storm. Last year it overtook longtime leader Nokia to become
the No. 1 player in cellphones, with 29% market share worldwide. In smartphones, those high-end devices
with advanced computing power, Samsung is also No. 1 globally and in a dead heat with Apple in the U.S.:
Most analysts show Apple with a slight edge in smartphone sales, while one outf it, ABI Research, says
Samsung's share of smartphone shipments topped 33%, compared with Apple's 30%. (To be sure, Apple
sells one device, the iPhone, while Samsung of f ers 25 unique smartphones in the U.S.) "Samsung is on
f ire," says John Legere, CEO of mobile operator T-Mobile USA.
Chalk up Samsung's success to a combination of marketing swagger, innovation, operational prowess,
and a marketplace hungry f or an alternative to the iPhone. Although Samsung wasn't the f irst to develop
a phone that runs on Google's Android operating system, it quickly moved ahead of the pack by
introducing one with a strikingly thin, bright, and large screen, and by rapidly rolling out cutting-edge
f eatures like the ability to "beam" photos by pressing together the backs of two phones. T hanks to tight
control over an extensive supply chain (Samsung makes everything f rom screens to memory chips), it's
been able to move quickly to meet the rising demand f or its mobile devices, churning out more than 215

million smartphones globally last year. And phone companies are so eager to stock Samsung devices that
they've abandoned their practice of demanding exclusive deals on new phones; last summer Verizon
Wireless (VZ ), T-Mobile, Sprint (S), and AT &T (T ) agreed to launch the Galaxy S III phone simultaneously
-- a major coup f or Samsung.
Inside the Galaxy S III: Samsung is its own best
customer. T he company's components division makes
many of the Galaxy S III's most critical -- and priciest -parts. Samsung-made elements include (1) a 4.8-inch,
ultrathin "super AMOLED" display that enables rich, vivid
color, (2) a 1.4GHz Exynos 4 Quad processor that
consumes 20% less power than its predecessor, and
(3) an image processor and sensor that help power the
phone's eight-megapixel camera.
Of course, not everyone loves the new Samsung. Apple
has sued the company f or patent inf ringement, and the
phonemakers will probably be embroiled in litigation f or
years to come. And while Samsung has done a
phenomenal job of building itself into a cool brand in a
short time, it doesn't wield much control over the
wireless ecosystem -- the mobile operating system,
application store, and other sof tware services that
have helped make smartphones so popular. Indeed,
some of the same f orces that contributed to Samsung's growth -- the Android platf orm and app
catalogue, consumers' desire f or the next shiny new toy -- also leave the handset maker vulnerable to a
raf t of Android-based rivals, all gunning f or the new No. 1. And don't expect Apple to rely solely on the
courts to f end of f Samsung. Says T-Mobile's Legere of the South Korean juggernaut: "I think they got
the other guy's attention."
Samsung Electronics, No. 20 on last year's Fortune Global 500 ranking, with $149 billion in revenue, has
humble beginnings. Samsung, which means "three stars" in Korean, started out as a small supplier of
dried f ish and noodles in the city of Daegu back in 1938. Eventually the company's ambitious f ounder,
Byung-Chull Lee, moved the company headquarters to the country's capital, Seoul, and expanded into
new businesses.
In the late 1960s Samsung of f icially entered the electronics business. In the early years the company was
known f or cheap televisions and air conditioners. T hat all changed in 1995, when its chairman (and the
elder Lee's son), Kun-Hee Lee, paid a momentous visit to the company's plant in Gumi, a f actory town in
south-central Korea. Legend has it that the younger Lee had sent out the company's newest mobile
phones as New Year's presents and was horrif ied when word came back that they didn't work. Later, at
Gumi, he made a giant heap of the f actory's entire inventory and had it set on f ire.
Af ter the incineration at Gumi, spending on R&D increased, and Samsung started churning out top-notch
products, like the world's f irst MP3 phone, the highest-megapixel camera phones, and other high-end
devices that could run on South Korea's superf ast cellular networks. But much of the world, especially
the U.S., didn't associate the Samsung brand with mobile, in part because the company let the telcos take
the lead in marketing the devices.
By 2010, some three years af ter the launch of the iPhone, Samsung decided that its low-key approach
wasn't working, especially in the U.S. Dale Sohn, president of Samsung's U.S. mobile operations,
assembled his local leadership team to f igure out a way f or Samsung to control its own destiny, instead
of relying on partners to tell its story to consumers. Sohn says he is in constant communication with his
bosses in Seoul but also has a degree of independence to do what's best in his home market. As a
result, he adds, it wasn't hard getting headquarters onboard with his plan, which later became known
internally as the "paradigm shif t."

In June 2011, Sohn hired Pendleton, the f ormer global brand communications director at Nike (NKE). By
then Samsung had already launched its second-generation Galaxy smartphone, the S II. T he 4 1/3-inch
device came with built-in near-f ield communication capabilities and a cool f unction that mutes incoming
calls when the phone is placed f ace-down. "We had a product that was better that was already in the
market, but nobody knew about it," says Pendleton.
Pendleton moved f ast (the longtime Nike exec
has a collection of some 600 pairs of sneakers).
In just a year and a half he put together an entire
marketing team f rom scratch. Ketrina Dunagan,
his new VP of retail and channel marketing,
opened Galaxy Studios -- f acilities where
consumers can test Samsung phones instead of
going to Best Buy (BBY) or a phone-company
store. Another exec, Brian Wallace, was brought
in to handle digital marketing ef f orts. Wallace, in
turn, brought in a data-analytics company called
Networked Insights to help Samsung tap into and
utilize the conversations across social media, a
key part of its strategy to connect better with
consumers. (In December Wallace said he would
leave Samsung f or a marketing gig at Google's
Motorola unit; Networked Insights is still working
with Samsung.)
Just a f ew months into the job, Pendleton also
enlisted 72andSunny, an ad agency owned by
Toronto-based MDC Partners. "At that point the
main guys were Apple, and everyone else was
f ighting f or the No. 2 spot," says John Boiler,
72andSunny's co-f ounder and CEO.
Boiler had worked with Pendleton on several Nike
campaigns. It was his team that came up with the
now-f amous f anboys campaign, a series of ads that poke f un at diehard Apple f ans. Over the past year
72andSunny has worked with Samsung on ads f or f our dif f erent products, including the Galaxy S III. In
the most popular of the anti-Apple commercials -- the one that aired during the iPhone 5 launch, it turns
out that one of the hipsters waiting in line f or an Apple phone is actually holding a spot f or his parents.
Ouch.
All that buzz doesn't come cheap. Samsung spent $349 million on marketing in the U.S. in the f irst three
quarters of 2012, compared with $191 million a year earlier, according to Kantar Media, a research f irm.
But CMO Pendleton is quick to point out that without a great product, all those dollars wouldn't have
much ef f ect. Samsung spent $8.7 billion on R&D ef f orts in 2011. One in f our of the company's 220,000
employees works in research and development. Much of the phone technology is developed and
produced by groups in Asia, then tweaked and packaged locally. Researchers are currently experimenting
with innovations like bendable screens and new memory technologies -- all of which are expected to be
incorporated in f uture versions of its smartphones.
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Indeed, part of Samsung's secret sauce is that it controls and manuf actures many of the building blocks
of its phones. It has capacity to ramp up production of those parts quickly, which also makes Samsung a
f avorite among other phonemakers. One of its largest components customers? Apple. "All of their
competitors must use third parties to accomplish the same tasks," says Len Jelinek, a semiconductor
analyst at research f irm IHS iSuppli. "One could estimate that there would be at least a quarter's
advantage due to internal control of all operations."

Samsung's relationship with Google (GOOG), maker of the Android operating system, has also evolved.
Samsung launched its f irst Android smartphone, the Galaxy S, in 2010, well af ter HT C came out with the
f irst so-called Google phone. Once Samsung embraced Android, though, it became the platf orm's No. 1
perf ormer: Today it makes 45% of all Android-based phones. Samsung also collaborates with Google on
chip technology, says Andy Rubin, senior vice president of mobile at Google. "We worked together on
several Nexus products, and the partnership has also prepared the platf orm to take advantage of the
advances in embedded processors," Rubin writes in an e-mail.
Samsung's reliance on Android unquestionably accelerated its growth in handset sales by of f ering it a
"turnkey" mobile ecosystem. But Android could also turn out to be its Achilles' heel. While it builds some
services on top of the operating system and tries to give its Galaxy phones their own look and f eel,
Samsung ultimately does not own Android. In f act, the operating system is f reely available to all other
phonemakers, including up-and-coming Chinese manuf acturers that are developing cheaper phones.
T hen there's the f act that Android's parent, Google, now owns Motorola Mobility. It remains to be seen if
Samsung will enjoy the same f riendly partnership with Android if Google decides it wants Motorola to
grab market share.
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Samsung claims that being "open" gives it the f lexibility to shif t gears if a particular operating system
f alls out of f avor. T he company has already announced a Windows Phone 8 device, the Ativ Odyssey,
which will launch in the U.S. in the coming weeks. It also said it will make a phone that runs on Tizen -- an
open-source operating system backed by Intel (INT C) -- later this year.
"We don't own the ecosystem because we've chosen up to this point not to innovate in that direction,"
says Justin Denison, VP of strategy and market intelligence at Samsung. "Where we choose to innovate
is creating the best package possible f or the consumer."
Still, Samsung is working hard to build up its own content and services on top of Android, like its Music
Hub of f ering, which allows users to purchase and download songs or store them in the cloud f or
streaming. To help beef up its sof tware know-how, the company is expanding its f ootprint in Silicon
Valley. In December, Samsung announced it would soon open a new startup incubator in Palo Alto. T he
company is also building out a 1.1-million-square-f oot R&D center in San Jose.
Samsung's executives won't say if they intend to develop their own operating system. Industry observers
say that without f ull control over all the pieces -- hardware and sof tware -- Samsung could be missing
out on a huge opportunity: getting all its consumer-electronics products to work together seamlessly.
With a proprietary operating system, Samsung could enable its T Vs to talk to Samsung-made phones
and even washing machines. Applications and content could easily be shared among the dif f erent
devices, making Samsung's entire line of consumer electronics much, much stickier with consumers.
But gadget makers and Internet companies have been talking up such convergence since the 1990s, and
many analysts aren't holding their breath. "I don't yet see that they're moving into the next phase," says
Asymco analyst and Apple commentator Horace Dediu.
For now the Samsung U.S. team remains f ocused on developing and marketing the next hot device. While
Sohn, the U.S. mobile president, and marketing chief Pendleton are pleased with the positive reviews and
cool f actor the Galaxy devices are enjoying in the marketplace, they recognize that success can be
f leeting in consumer electronics. If Samsung doesn't keep innovating and creating experiences that
customers love, it may f ind itself on the outs -- and maybe even the subject of a cheeky ad campaign.
"T hanks f or holding our spot at the Samsung store"? Ouch.
This story is from the February 4, 2013 issue of Fortune.