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Galaxy S5 Release Is Moment of Truth for Samsung Story

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The importance of next week's Galaxy S5 event isn't the smartphone itself, but rather what it might tell us about Samsung's approach going forward.

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Samsung Electronics (OTCMKTS:SSNLF) is widely expected to debut its new Galaxy smartphone on Monday, February 24, and so far the buzz has been kept to a minimum. The Galaxy S4 failed to live up to its hype, and even before its release the S5 has become something of a disappointment. Features that were once rumored for inclusion -- a 64-bit processor, full-screen fingerprint recognition, and an eye scanner -- are now rumored to have been cut. It's even being suggested that Samsung may cut prices in order to move the new model.

Perhaps wisely, the company has chosen a more subdued venue for this year's Galaxy S announcement, trading Radio City Music Hall for an industry convention in Spain. The event has been teased, phone details have been leaked, and the whole affair should be pleasantly (or at least harmlessly) boring.

And yet next week's event is important; in fact, it may be the most significant Galaxy S unveiling yet, coming as it does at a moment of crisis. Samsung's success story is in doubt. The Korean multinational gave up market share in smartphones last quarter, according to data from IDC and Strategy Analytics. Making gains were Huawei (SHE:002502), Lenovo (OTCMKTS:LNVGY), and LG Electronics (KRX:066570), three competitors with low costs and lean profits.

The loss of market share was small, but the damage carried over to Samsung's earnings sheet. Operating margins in mobile fell by a tenth despite the fact that smartphones accounted for 73% of total shipments, up from 59% a year ago -- a development that should have boosted earnings. Samsung blamed one-off expenses like an employee bonus and seasonally higher marketing, but the real elephants in the room were heightened competition and a commoditizing smartphone market.

At face value, the Galaxy S5 seems like part of the problem: another incremental update at a time when the rest of the industry is catching up. Samsung has turned to software in an attempt to differentiate itself, but its efforts have not always been well-received. The Galaxy S4 came preloaded with homemade apps that many reviewers criticized as "bloatware," and the TouchWiz user interface has earned similar epithets; Samsung has itself admitted that software is not its strength, saying, "...even though we're doing the software business, we're not as good as we are in hardware." The dilemma is that, while an alternative operating system like Tizen would offer Samsung greater control and a chance to stand out, the phone maker may not have the software chops to make it stick.

However, a new door was opened by last month's rapprochement with Google (NASDAQ:GOOG). The two companies reportedly came to an understanding during meetings at January's Consumer Electronics Show. Samsung agreed to stick closer to Google's vision for Android, and Google promised to... actually, it's not clear what Google promised to do, if anything. The search giant did divest itself of Motorola, which was no doubt a good first step towards restoring friendly relations.

The two companies stand to gain by working together. Google has been trying to assert its control over Android, threatening to withhold the Google Play store from manufacturers unless they use the latest version of the OS, and preload it with other Google apps. (Google's tactics have also come under scrutiny; last week, the Wall Street Journal reported that European antitrust authorities are concerned.) However, many OEMs (original equipment manufacturers) are now leaving the Google camp altogether, choosing instead the open-source version of Android -- which, according to ABI Research, has grown to account for nearly a third of all Android devices shipped.

An alliance with Samsung would go further, and raise fewer eyebrows. As it happens, Samsung would love to have a software suite that sets it apart from the competition -- and that users actually like. The irony is that few people have ever seen an up-to-date and untampered version of Android, and Samsung could stand out simply by being one of the few OEMs to really buy into Google's so-called "Nexus Experience."

Since Chinese competitors like Huawei tend to be the worst offenders in terms of removing Google's software -- the Chinese market prefers its own alternatives -- one could even imagine Google offering Samsung certain advantages, like early access to new versions of Android, and greater input on features. But of course Google has promised neutrality, so to say that such a thing would never happen is to say that we would never hear about it.

The importance of next week's event isn't the Galaxy S5 itself -- yawn -- but rather what it might tell us about Samsung's approach going forward. Will the talks with Google develop into a more constructive relationship? Last year, Samsung didn't mention its partner at all. The phone maker's humility this time around may hint at a change of heart.

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