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The next electronics giant?

Samsung has big ambitions in consumer electronics, and it's up to Eric Kim to make it happen.

With some $50 billion in annual revenue, Samsung Electronics has big ambitions to emulate Sony's consumer electronics success.

The Korean conglomerate already possesses formidable technology prowess. It's a leading global supplier of memory, liquid-crystal displays (LCDs) and cell phones. Samsung also provides components to many of its rivals. Now, the company is trying to spiff up its dowdy image in the consumer electronics market, a task that falls to Eric Kim, its executive vice president of global marketing.

The facelift seems to be working because the company's brand value has leaped up the charts, according to brand research firm Interbrand. Still, the move has not come cheaply. Samsung has spent hundreds of millions of dollars to change its image--and the effort comes at a particularly tricky juncture.

The consumer electronics market is sagging, and even an established giant like Sony is smarting as margins decline and consumers pare back their spending. What's more, American computer makers Dell and Gateway are stepping up their presence in the consumer electronics market with crossover products designed for the very consumers Samsung is targeting. CNET News.com recently caught up with Kim to talk about his plans and what sorts of changes he sees on the technology horizon.

Q: It seems the market you're trying to get into is consumer electronics. But look at Sony, which is known as being a consumer electronics company: Its latest earnings report said that business is doing rather poorly. Why go there--especially when you have assets like LCDs, memory and cell phones?
A: Last year, our revenue was about $50 billion worldwide. Our profit after taxes was close to $7 billion. In terms of profit generation, we were second only to Microsoft. That's higher than IBM and higher than any other high-tech company. Our latest earnings report had very strong results. I agree that consumer electronics is a tough business, but we're winning--

--but you're winning partly on the basis of your scale. Even DVD players, which were a tremendous hit, have waned in terms of generating higher revenue.
Well, DVD is an example where it was on a very-fast-declining price curve.

We believe TV will become another digital center for the home.
Right, and that speaks to contract manufacturing, which can help drive prices down.
DVD prices have come down a lot, but we're leading the charge in LCD TVs, which are premium-priced. Who would have guessed a few years ago that people would pay thousands of dollars for a TV? The fact is, we invested heavily prior to that in flat-panel technologies which gave us leadership in monitors and then took that technology to TVs.

For the first time in many, many decades, consumers have a reason to switch their TVs. TV was something that you bought and held onto for 20 years. Now, when they see a flat-panel TV, whether it's plasma or LCD, it's very compelling, and people are willing to pay a premium price. So as DVDs come down in price, we'll have products elsewhere.

In terms of LCDs and flat panels, what are the margins from an industry perspective, and are they high enough to provide a buffer against their inevitable decline?
The LCDs follow Moore's Law. The winners of this game will be those who can drive the cost-reduction curve rather than follow. We have the world's largest scale in terms of capacity, the world's most advanced technology, and we're one of the top brands. So we're leading this charge.

Now prices will fall. This is the game. The ones who not able to lead the price curve are the ones who end up the losers. The same thing happened with wireless phones. Why do you think some of the best companies, like Ericsson, Sony and Panasonic, have essentially gotten out of the wireless phone business?

In the U.S. you see both Gateway and Dell expanding into the television business. Does it make sense for Samsung to come at it from the other side--that is, enter the PC market or partner with a PC OEM (original equipment manufacturer) on a contract basis?
PC growth is nothing like it used to be. It's definitely in the single digits--less than 5 percent growth. So most of the IT players have been very desperate to look for new growth areas...Now, Dell and Gateway are getting into the consumer electronics space. It's a very predictable move, but the fact is that they are newcomers (to consumer electronics), while we know this game.

Can't they also play the entire convergence card? That is, can't they claim that with CE (consumer electronics) and computing coming together they have the expertise to put it together--unlike a Samsung, which doesn't have a presence in the U.S. PC business?
My basic point is that CE is a different business. You can't simply extrapolate that because Dell is a powerhouse in PCs, they will automatically be one in consumer electronics. They may or may not be.

Samsung has very deep pockets, so does it make sense for the company to make an acquisition to give it a presence in the PC business?
There's always the possibility, but the history of acquisitions shows a low success rate. You probably have a 90 percent rate of failure, so we tend to look at this with a very cautious eye. We believe TV will become another digital center for the home. Until now, the digital center was the computer, but while the digital experience of the PC is great for certain things, it's limited.

Can you elaborate on that?
Sure. With a PC, basically you are sitting in front of a system, interacting by leaning forward in a very intense way. With a TV, you're leaning back, very relaxed. You may have friends or family with you. It's a very different experience.

Until recently, the only thing you could do with the TV was look at predefined broadcast programs. But with improved broadband and interactivity, you, as the user, will have the power to decide what you want to watch, how you want to watch it and what kind of experience you want to get out of it.

We're the world leader in memory, and memory's like oil.

Providing a full video-based experience is a much bigger challenge than a more static or text-based experience the PC provided. But the time is coming when we'll see a shift from a PC-centric orientation to a TV-centric orientation. That's our bet, and we're investing a lot of money behind it.

There's also a school of thought that says if the components inside a device are all becoming digitized, then a company like Dell, with its distribution muscle, has an edge as products inevitably become undifferentiated commodities.
Yes and no. In consumer electronics devices--especially with display-heavy devices like TVs--roughly 70 percent of the cost is the display panel. The rest of the electronics is probably 10 or 15 percent of the cost. More and more, that kind of consumer device will have intelligence. It will have processing power. It will have memory--solid-state memory as well as hard-disk type--and it will have connectivity. So the core components are becoming more critical.

Companies like Dell have no position in core components. They get them from third parties. Dell has a low-cost structure where they essentially invest no money in R&D. It's basically a distribution company. We're the world leader in memory, and memory's like oil. For the digital device, the appetite for memory is growing.

It used to be that someone would be quite happy with 24K of memory. Nowadays, half a gigabyte is barely enough. Also, we're the world leader in displays. Flat panel is the standard; nobody wants CRTs (cathode-ray tubes) anymore.

Do you view Dell as a competitor, and would that affect your decisions as a big memory supplier?
We are a competitor and a partner. Most of our core components--about 50 percent of that capacity--gets sold on an open-market basis. The other half is consumed by our vertical integrated businesses. We're one of the top suppliers to Nokia, Motorola, Sony--you name it and we're there. Those companies are very important customers and, at the same time, we compete against them. It's a classic case of competition.

Samsung's a big player in LCDs, and Sony's a big player in televisions. Their CRT business is going downhill, and there have been reports about the two of you hooking up in a joint venture. The LCD business is capital-intensive, and it sure would help to have some funding from a partner--especially one that's a big buyer of panels.
Money's not the issue. We have no debt. Our ability to access capital is very great, but the key competitive advantage in such a highly capital-intensive business is that you have to be a step ahead of the competition in technology. What technology gives you is superior performance and lower cost.

Achieving that requires huge capital investments...in order to do that it's very important to have strong sources of demand, and Sony's one of (those sources). That's why it makes sense for us to have Sony as one of the core customers for our panels. From a Sony standpoint, I would think that we probably represent the best technology as well as being a reliable supplier.

What do you envision as the hot technology coming to market over the next six to 12 months?
Wireless devices are becoming a must-have device for everybody, and now that personal wireless devices are going beyond voice, they're on a growth trajectory to become much more widespread. You'll also see multimedia with greater interactivity. In Korea and Japan, they're using stuff there that will be in this country two years from now.

They're already at 3G, and they're already got ubiquitous wireless...In Korea, 75 percent of the households have broadband. And for less than $20 a month, it's all-you-can-eat usage, including streaming movies and audios.

Another big area is going to be the digitization of content. The first big push was with DVDs. Nowadays, we think digital TV is a big driver. But people are replacing analog CRT's with digital--either projection or flat-panel (monitors). That's happening right now and will be a very big market.

When you think about the size of the TV-installed base--it's huge, far bigger than for PCs. Within the next 10 years there's going to be a substantial replacement of the CRT/analog TV to the digital TV of some sort and we intend to be the leaders.

The time is coming when we'll see a shift from a PC-centric orientation to a TV-centric orientation
And what about price? A flat-panel, 40-inch LCD today costs about $3000. What will it cost 12 months from now?
I hesitate to predict but looking at the past six to 12 months, the actual price drop was more than we expected...That's good for the consumers, and because we're the leaders in cost structure, it's also good for us.

Are all these toys destined to become commodities?
As with any technology, sooner or later it becomes a commodity. But then there's a new thing coming up. It's always that way. One of the biggest dilemmas for a consumer of technology is whether you should wait six more months and get something better or cheaper--which is always true. But that's Moore's Law. That's what's driving this industry.  

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