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Samsung's not done: Tech giant looks to new phones, materials to rally

The South Korean company warned that its third-quarter operating profit would tumble 60 percent but said it would introduce new smartphones to attract customers in new segments. Will it be enough?

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The Galaxy Alpha features a plastic back but metal framing -- one of the first times Samsung has used metal in its smartphone line. CNET

Pretty soon, Samsung may need to look to a return to profit growth as its "Next Big Thing."

Three months after warning that the second half of 2014 would Samsung said Monday that it expects a decline of nearly 60 percent in its operating profit for the third quarter.

The anticipated fourth consecutive quarterly drop in operating profit underscores the continued pressures facing smartphone king Samsung, which has been hit hard by saturation in the high-end market and intensifying pressure on the low end. The South Korean tech conglomerate believes "new smartphone lineups featuring new materials and innovative designs, as well as a series of new mid- to low-end smartphones with strong competitive positioning on both hardware specifications and price," can help boost its results. But for Samsung, things may get worse before they get better.

"There's nothing they can quickly do to get out of this," Jackdaw Research analyst Jan Dawson said. "In some ways this is just the inevitable catching up to Samsung."

Samsung has long counted on its marketing and hardware prowess to attract customers seeking an alternative to Apple's iPhone. Its bigger displays and sleek designs set it apart from all the other Android vendors on the market. Samsung and Apple are the only two companies making any significant profit from the mobile market, largely because people were willing to pay a lot of money for their smartphones.

But Samsung is now facing new competition from low-cost phone vendors such as China's Xiaomi and India's Micromax, which offer cheap devices with high-end specs in their local markets. Apple also has become a bigger threat with its larger screen devices, the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus. Simply wanting a bigger display is no longer a reason to buy Samsung's devices, and its smartphones can't reach the low prices of those from Chinese and Indian vendors.

At the same time, the overall handset market has changed. Almost everyone who wants a smartphone, and can afford the device, has one. Updates often aren't drastic enough to compel users to upgrade -- this year's Galaxy S5 looks a lot like 2012's Galaxy S3, for instance -- and many new buyers are opting for cheaper devices.

"They're still doing better than anybody else [besides Apple], and obviously they continue to lead the Android ecosystem," said Carolina Milanesi, chief of research at Kantar Worldpanel. "But it is a tougher market."

Standing out through hardware

When Samsung needs to churn out a hit, it turns to what it's always done best: hardware. Samsung has long been at the forefront of the mobile market when it comes to the technology crammed into the devices. Its phones tend to use the fastest processors and brightest screens, as well as incorporate novel, high-tech features such as curved displays.

But Samsung also has long faced calls to use different materials in its devices. Its smartphones typically use plastic, which is criticized for being, well, too plasticky. In the past, Samsung stuck with plastic because it was easier and cheaper to manufacture, was more durable, and allowed for a removable back for an easy battery swap.

Pledging to try different materials -- whether it's metal, wood, or something else no one has used yet -- is a big step for Samsung and surely will attract interest. The Galaxy Alpha, which contains a plastic back but adds a metal frame, captured the market's attention, and it would be foolish to underestimate Samsung's marketing heft.

But the company also has to decide how much it's willing to spend on advertising to gain those customers and how much profit it's willing to give up to create novel devices. It's unlikely customers would want to pay an extra $100 for an all-metal Galaxy device, but keeping pricing the same would hurt Samsung's profitability.

And it's not just metal that customers want. HTC has used premium materials similar to those found in the iPhone for many years, yet it continues to struggle. It didn't even rank among the top five vendors in the second quarter while Chinese vendors Huawei and Lenovo did.

"If it was about materials, HTC would be beating everyone," Dawson said.

Yes, customers buy Apple's devices for their sleek, aluminum and glass designs, but they also buy them for the software and services Apple provides and how seamlessly they work together. Even Motorola has won over some customers with the software additions it has made to its devices, such as the Moto X. The features include a digital and search assistant, Moto Voice, which can be activated without touching the device, and Moto Assist, which adjusts the device's settings depending on where the user is.

Software has never really been Samsung's strong suit. With its most recent devices, it has relied more on partners for software and services instead of building them on its own. Samsung scrapped its Media Hub service and stopped preloading many of its own apps on its devices. But as hardware becomes more commoditized, software and services will become even more important. Even Apple has recognized that fact; it will launch a mobile payments service, called Apple Pay, this month.

In the near term, Samsung should benefit from the introduction of its Note 4, slated to hit the US on Oct. 17. It undoubtedly will follow the product with its next Galaxy S device in early 2015 and various other gadgets.

Ultimately for consumers, Samsung's move to use new materials and designs could mean some really innovative products. But it also could mean more gimmicks. The jury is still out on whether the Note Edge -- Samsung's new phablet with the screen the curves around the side -- is really useful or just a novelty.

And while Samsung plans to step up the material it uses on its smartphones, the company will need something stronger than metal to turn itself around.