Samsung Cranks Up the Volume

It's back in the audio market with a host of music players. Can it bite into Apple?

It was the spring of 1998, and South Korea was in the depths of Asia's financial crisis. Things were so bad at Samsung Electronics Co. that it was forced to launch a major restructuring. One of the victims of the shake-up was its money-losing audio division, which made radios and tape and CD players. The operation was spun off as a subsidiary and moved to Huizhou, China. That, of course, was when development of the digital music player -- the revolutionary machine whose star today is Apple Computer Inc.'s (AAPL ) iPod -- was in its infancy.

Today, Samsung is back in the audio market with a vengeance. Because it got a late start, it doesn't sell many music players -- just 1.7 million last year, compared with Apple's 8.26 million. Samsung isn't even No. 1 in Korea, where rival Reigncom Ltd. sells more players under the iRiver brand. But Samsung has big plans. It's designing new players by the half dozen at a variety of prices. It says it will triple sales this year, to 5 million. And Ahn Tai Ho, chief executive of Samsung's audio division, has set an audacious goal: to be No. 1 in players globally by 2007. "This is a market growing at an explosive rate, and the digital music player is often the first IT product teenagers buy," Ahn says. "We've got to appeal to them and become a digital audio leader."

What makes Samsung think it can challenge mighty iPod? The strategy is to use its engineering and marketing muscle to flood the world with its Yepp brand of player. Samsung execs note that while Apple dominates in the U.S. with well over half the market, other markets are wide open. Besides going up against Apple in the U.S., Samsung plans to concentrate its sales effort on Korea, China, and Europe.

Samsung is also betting that future buyers of music players will want their machines to perform multiple entertainment tasks. The eight basic Yepp models that Samsung now produces all have built-in FM radios and other extras. Over the next two months the company will launch six new players, two of which will match iPod's ability to store your entire music collection. Another, the $350 YP-D1, will double as a digital camera, while the $400 YH-J70 will play music videos and movies.

The Korean giant's strategy is straight out of its mobile-phone playbook: to crank out multifunctioning devices that grab customer attention. Analysts and competitors are skeptical, however, that the approach can unseat iPod. After all, it's the overall design, the ease of use, and the surpassing cool of the Apple product that has won over U.S. customers. "Samsung's global network and its brand power are respectable, but excellent hardware alone won't do it," says Henry Kim, a vice-president at Reigncom. A recent report from consumer electronics researcher iSuppli sums up this position: "Simple, elegant products that perform a few functions with easy-to-use interfaces have sold well, while the do-everything approach has failed."

Samsung execs don't agree. "We believe consumers will look for products meeting their other needs as long as good music quality is satisfied," says Kim Suh Kyum, Samsung chief of marketing for audio. Samsung's target is to boost its U.S. market share to 10% this year from 2% last year. Even Samsung admits that the Yepp is unlikely to unseat iPod anytime soon. But no one doubts that the Korean behemoth will make a serious bid for its piece of the audio space.

By Moon Ihlwan in Seoul, with Peter Burrows and Cliff Edwards in San Mateo, Calif.

— With assistance by Peter Burrows, and Cliff Edwards

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