Samsung's road to global domination By Michal Lev-Ram, writer January 22, 2013: 5:00 AM ET South Korea's Samsung is trampling rivals and gunning for Apple. Can its hot streak last? FORTUNE -- To understand how Samsung -- yes, Samsung -- became America's No. 1 mobile phonemaker and thorn in Apple's side, it's helpful to rewind to last fall. 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 Wolfgang Puck restaurant in Los Angeles, a group of marketing executives from Samsung Electronics followed real-time reactions to Cook's remarks. They huddled around tables mounted with laptops and TV screens, carefully tracking each new feature and monitoring the gush of online comments on the new device via blogs and social media sites. As the data flowed in, writers from the company's advertising agency, who were also camped out in the restaurant turned war room, scrambled to craft a response. Two hours later, when Cook stepped off the stage, the Samsung group was already drafting a series of print, digital, and TV ads. The following week -- as the iPhone 5 went on sale -- the company aired a TV ad mocking Apple "fanboys" queuing up for the new phone. ("The headphone jack is going to be on the bottom!") The 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 following 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 officer of Samsung's U.S.-based mobile division. "We wanted to take that opportunity and all that energy and make it Samsung's moment." 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 outfit, 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 offers 25 unique smartphones in the U.S.) "Samsung is on fire," 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 for an alternative to the iPhone. Although Samsung wasn't the first to develop a phone that runs on Google's Android operating system, it quickly moved ahead of the .

1. Samsung's road to global domination
By Michal Lev-Ram, writer January 22, 2013: 5:00 AM ET
South Korea's Samsung is trampling rivals and gunning for
Apple. Can its hot streak last?
FORTUNE -- To understand how Samsung -- yes, Samsung --
became America's No. 1 mobile
phonemaker and thorn in Apple's side, it's helpful to rewind to
last fall. 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 Wolfgang Puck
restaurant in Los Angeles, a group of
marketing executives from Samsung Electronics followed real-
time reactions to Cook's remarks.
They huddled around tables mounted with laptops and TV
screens, carefully tracking each new
feature and monitoring the gush of online comments on the new
device via blogs and social
media sites. As the data flowed in, writers from the company's
advertising agency, who were

2. also camped out in the restaurant turned war room, scrambled to
craft a response.
Two hours later, when Cook stepped off the stage, the Samsung
group was already drafting a
series of print, digital, and TV ads. The following week -- as
the iPhone 5 went on sale -- the
company aired a TV ad mocking Apple "fanboys" queuing up
for the new phone. ("The
headphone jack is going to be on the bottom!") The 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 following 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
officer of Samsung's U.S.-based mobile division. "We wanted to
take that opportunity and all
that energy and make it Samsung's moment."
No doubt about it, Samsung is having a moment. In recent years
the South Korean company has

3. 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 outfit, 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 offers 25 unique smartphones in the
U.S.) "Samsung is on fire," 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 for an alternative to the
iPhone. Although Samsung wasn't
the first 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
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rapidly rolling out cutting-edge features like the ability to
"beam" photos by pressing together the
backs of two phones. Thanks to tight control over an extensive
supply chain (Samsung makes
everything from screens to memory chips), it's been able to
move quickly to meet the rising
demand for 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

5. major coup for Samsung.
Inside the Galaxy S III: Samsung is its own best customer. The
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 for patent
infringement, and the phonemakers will probably be embroiled
in litigation for 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 software services that have helped
make smartphones so popular.
Indeed, some of the same forces that contributed to Samsung's
growth -- the Android platform

6. and app catalogue, consumers' desire for the next shiny new toy
-- also leave the handset maker
vulnerable to a raft of Android-based rivals, all gunning for the
new No. 1. And don't expect
Apple to rely solely on the courts to fend off 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
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small supplier of dried fish and noodles in the city of Daegu
back in 1938. Eventually the
company's ambitious founder, Byung-Chull Lee, moved the
company headquarters to the
country's capital, Seoul, and expanded into new businesses.

7. In the late 1960s Samsung officially entered the electronics
business. In the early years the
company was known for cheap televisions and air conditioners.
That 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 factory 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 horrified when word
came back that they didn't work. Later, at Gumi, he made a
giant heap of the factory's entire
inventory and had it set on fire.
After the incineration at Gumi, spending on R&D increased,
and Samsung started churning out
top-notch products, like the world's first MP3 phone, the
highest-megapixel camera phones, and
other high-end devices that could run on South Korea's
superfast 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.

8. By 2010, some three years after 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 figure out a
way for 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 shift."
In June 2011, Sohn hired Pendleton, the former global brand
communications director at Nike
(NKE). By then Samsung had already launched its second-
generation Galaxy smartphone, the S
II. The 4 1/3-inch device came with built-in near-field
communication capabilities and a cool
function that mutes incoming calls when the phone is placed
face-down. "We had a product that
was better that was already in the market, but nobody knew
about it," says Pendleton.

9. http://money.cnn.com/galleries/2011/news/international/1104/ga
llery.asia_most_powerful.fortune/5.html
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Pendleton moved fast (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
from scratch. Ketrina Dunagan,
his new VP of retail and channel marketing, opened Galaxy
Studios -- facilities 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 efforts. 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
for a marketing gig at Google's
Motorola unit; Networked Insights is still working with

10. Samsung.)
Just a few 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
fighting for the No. 2 spot," says John Boiler, 72andSunny's co-
founder and CEO.
Boiler had worked with Pendleton on several Nike campaigns. It
was his team that came up with
the now-famous fanboys campaign, a series of ads that poke fun
at diehard Apple fans. Over the
past year 72andSunny has worked with Samsung on ads for four
different products, including the
Galaxy S III. In the most popular of the anti-Apple commercials
-- the one that aired during the
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buy-from-extinction/
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iPhone 5 launch, it turns out that one of the hipsters waiting in
line for an Apple phone is actually
holding a spot for his parents. Ouch.
All that buzz doesn't come cheap. Samsung spent $349 million
on marketing in the U.S. in the

11. first three quarters of 2012, compared with $191 million a year
earlier, according to Kantar
Media, a research firm. But CMO Pendleton is quick to point
out that without a great product, all
those dollars wouldn't have much effect. Samsung spent $8.7
billion on R&D efforts in 2011.
One in four 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 future versions of its
smartphones.
Indeed, part of Samsung's secret sauce is that it controls and
manufactures many of the building
blocks of its phones. It has capacity to ramp up production of
those parts quickly, which also
makes Samsung a favorite 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 firm IHS iSuppli.

12. "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 first Android smartphone, the
Galaxy S, in 2010, well after HTC
came out with the first so-called Google phone. Once Samsung
embraced Android, though, it
became the platform's No. 1 performer: 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 platform 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
offering 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

13. their own look and feel, Samsung ultimately does not own
Android. In fact, the operating system
is freely available to all other phonemakers, including up-and-
coming Chinese manufacturers
that are developing cheaper phones. Then there's the fact that
Android's parent, Google, now
owns Motorola Mobility. It remains to be seen if Samsung will
enjoy the same friendly
partnership with Android if Google decides it wants Motorola to
grab market share.
Samsung claims that being "open" gives it the flexibility to shift
gears if a particular operating
system falls out of favor. The 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 (INTC) -- later this
year.
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"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 for the
consumer."
Still, Samsung is working hard to build up its own content and
services on top of Android, like
its Music Hub offering, which allows users to purchase and
download songs or store them in the
cloud for streaming. To help beef up its software know-how, the
company is expanding its
footprint in Silicon Valley. In December, Samsung announced it
would soon open a new startup
incubator in Palo Alto. The company is also building out a 1.1-
million-square-foot R&D center
in San Jose.

15. Samsung's executives won't say if they intend to develop their
own operating system. Industry
observers say that without full control over all the pieces --
hardware and software -- 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 TVs to talk
to Samsung-made phones and even washing machines.
Applications and content could easily be
shared among the different 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 focused 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 factor the Galaxy devices are

16. enjoying in the marketplace, they
recognize that success can be fleeting in consumer electronics.
If Samsung doesn't keep
innovating and creating experiences that customers love, it may
find itself on the outs -- and
maybe even the subject of a cheeky ad campaign. "Thanks for
holding our spot at the Samsung
store"? Ouch.
This story is from the February 4, 2013 issue of Fortune.