Samsung hunts next hit with internet push as phone profits fade

Yoon C. Lee, a Samsung Electronics Co. executive, is giving a tour of his U.S. home in Oakland. He shows off his living room and foyer, then takes a look outside to check the garden. He considers turning on the sprinkler system before deciding the plants have enough water.

The thing is, he's not actually in California. He's 8,000 miles away with a reporter in a Seoul conference room. Lee, a tall, 49-year-old, is at a huge table fiddling with a Galaxy S5 phone that's streaming live video from the U.S.

This is Samsung's next big bet as it works to build a future beyond mobile phones, where earnings are tumbling. Lee and his colleagues are trying to create another hit from what's known as the Internet of things, technology that stitches together phones, cameras, sprinklers and roads. If they succeed, the effort could propel sales of the company's electronics, appliances and chips for a generation; if they fail, the troubles will likely deepen.

"Imagine if all the dumb things around you can be connected," said Lee. "For Samsung, this is a big new opportunity, a huge paradigm shift. It will benefit us across all businesses."

Samsung's Internet push comes just as Apple Inc., Google Inc. and dozens of others are sizing up the same opportunity. Tech's giants are all vying for leadership and collaborating where necessary. The market for the Internet of things is projected to hit $7.1 trillion by 2020, according to the research firm IDC.

Moving Engineers

In a sign of how seriously Samsung is taking the effort, the company is transferring about 500 engineers from its mobile- phone division and allocating them largely to the Internet initiative, according to people familiar with the matter. The shift also reflects recognition that the Suwon, South Korea- based company needs another hit after smartphones, they said, asking not to be identified discussing internal matters.

"This is a must-have market for Samsung," said Neil Mawston, executive director of the research firm Strategy Analytics. "The Internet of things will be too big to ignore."

The mobile-phone unit is faltering as Apple offers bigger screen iPhones similar to Samsung's marquee Galaxy range and Chinese newcomer Xiaomi sells stylish phones at low prices. In the most recent quarter, Samsung's mobile profit tumbled 74 percent, dragging net income down by 49 percent from a year earlier.

Shares of Samsung rose 0.9 percent to 1,205,000 won at the close of trade in Seoul. The stock has dropped 12 percent this year compared with a 3.4 percent decline in the benchmark Kospi index.

Samsung's Scale

The Internet of things represents the third revolution in information technology, after the PC and the Internet, Michael Porter and James E. Heppelman wrote in this month's edition of the Harvard Business Review. Its implications go beyond the increasing number of smart, connected products in the world and are much more than simply a way to transmit information, they wrote.

With more everyday things connected to the Internet, products will have expanded capabilities and the data they generate may change how companies compete and the boundaries of competition, Porter and Heppelman said.

The Internet push is one of the first major initiatives under Lee Jae Yong, who has taken more of a leadership role since his father, Chairman Lee Kun Hee, was hospitalized in May. The heir apparent, 46, has to calm investor concerns over the business outlook and his leadership skills.

Though Samsung Electronics is best known for its mobile phones, the Suwon, South Korea-based company makes everything from televisions and computers to washers, dryers and ultrasound machines. It's part of Samsung Group, South Korea's biggest conglomerate, that sells insurance, builds ships, makes howitzers and operates a theme park too.

Software Weakness

Samsung Electronics' latest push is designed to capitalize on its scope and strengths. Software engineers from the mobile unit are able to work directly with the development teams for TVs, vacuum cleaners and other appliances.

"Samsung, Apple and Google are all envisioning a world where things such as mobile devices and household goods surrounding us will speak to each other," said Ko Seung Hee, a Seoul-based analyst at SK Securities Co. "Unlike the others, Samsung can offer a complete line-up of devices and appliances and that's Samsung's biggest strength."

Samsung's weakness has been software, which is important because it binds together the Internet of things. Google's Android operating system, given away to phonemakers including Samsung, Xiaomi and Lenovo Group Ltd., is the most widely used on mobile devices. Apple's operating system, which it doesn't share, has most of the rest of the mobile market.

Tizen Development

Samsung has been working with Intel Corp. to develop its own operating system, Tizen, though the effort has gained little traction. The Korean company is using Tizen in its smartwatches and cameras as it seeks to reduce its reliance on Google.

"Samsung could divorce Google at some point, but considering their own respective interests, they need to sustain the marriage for a while," said Claire Kim, a Seoul-based analyst at Daishin Securities Co.

Samsung has also joined Thread Group, led by Google's Nest Labs, which builds new home automation standards. It also signed a global patent-licensing agreement in February with Cisco Systems Inc., which holds one of the biggest pools of patents in connected devices, to share technologies over the next 10 years.

Samsung has no illusions about the challenges ahead. Rivals have tried cracking the market for the Internet of things for more than a decade.

The Korean company also has an advantage that may help it avoid getting dragged down by falling mobile profits. It's always been run like an investment company, allocating capital to promising ventures so it can build replacement new businesses for the old ones. It's managed business cycles for eight decades, picking out the next opportunity as existing businesses fade. Now it sees its mobile-phone fortunes waning and is shifting to the Internet of things.

Acquisitions, new plants and a push to integrate manufacturing are the core of the plan. In August, the company bought SmartThings, a startup that makes mobile applications to remotely control household devices. In October, it also announced plans for a $15 billion chip plant in South Korea to make more advanced chips for wearable and connected devices.

Innovation Museum

To demonstrate the Internet of things, the company is using its Samsung Innovation Museum, a glass-walled building across from its headquarters, about 30 miles south of Seoul. The five- story, 11,000 square-meter structure looks a bit like New York's Guggenheim museum, painted almost entirely in white with words carved into the walls: 'smart living' and 'inspiring others.'

In an open space on the second floor, booths stand side by side. Each is decorated with different interiors to show off connected life in hotels, planes, shopping malls or living rooms.

In the hotel booth, you can check in by pressing a key- patterned button on an Android smartphone without having to wait in line. Upon entering the room, the window blinds automatically roll up and the television turns on.

In the booth for home technology, lights, appliances and a robot vacuum cleaner are all connected online to mobile phone app. The idea is you can flick on the lights, warm the oven or even clean your living room from your phone before you come home. Samsung has started offering a rudimentary version of the service in Korea and will expand it globally.

"Our first mission is to bring your home to your connected life," said Lee at Samsung. "At least, you will never have to drive back home for two hours wondering if you have forgotten to lock your door or turning off your gas stove."