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The Note 7 is dead: What Samsung must do now

The Note 7 is dead: What Samsung must do now

Be transparent about what caused overheating, fires, analysts advise

Samsung formally stopped production, sales and exchanges of its Note7 smartphones early Tuesday, after several weeks of reports that the devices -- and even their replacements -- overheated, smoked and caught fire.

The death of the Note7 will be costly, according to many analysts.

Patrick Moorhead of Moor Insights & Strategy has pegged the overall cost to Samsung at $5 billion to $7.5 billion, not including the hard-to-estimate impact on the Samsung brand. Some analysts, including Credit Suisse, said the lost sales on up to 19 million Note7 phones is about $17 billion.

The life of the Note7 was short. Sales first began in the U.S. on Aug. 19. Samsung recalled 2.5 million Note7s globally on Sept. 2, with a formal U.S Consumer Product Safety Commission recall on Sept. 15.

Then, on Oct. 5, an apparently recalled Note7 began billowing smoke aboard a parked Southwest Airlines jet. The plane was evacuated; no one was injured. When more reports came in of recalled Note7s in recent days, several U.S. carriers decided to halt sales and exchanges.

Samsung finally pulled the plug early Tuesday with a succinct statement: "For the benefit of consumers' safety, we stopped sales and exchanges of the Galaxy Note7 and have consequently decided to stop production."

Never in the history of smartphones -- and possibly any other technology device -- has a model been recalled as well as production stopped on its replacement device.

Without that decision to stop in production, it was entirely possible the U.S. CPSC would have issued a recall for the replacement devices, said Moorhead.

Even though what has happened to the Note7 is unprecedented and potentially severe to Samsung's bottom line, there are a several analysts who believe that Samsung and the Samsung brand can survive the Note7's collapse. It all depends on how Samsung proceeds from here.

"Consumers are very forgiving," Moorhead added. "Every major auto manufacturer has had car defects that killed people, but you've never seen a car company go out of business over a recall. It's not the recall that kills you, but how you deal with it."

Analysts advised Samsung to take several steps in coming days.

Be transparent about the cause

Moorhead speculated that a faulty charging system was damaging the lithium ion batteries in the Note7s, leading to overheating and smoke and fires, both in the original and replacement units. Samsung hasn't explained, but must do so, several analysts said.

"Samsung needs to be very transparent about the issue and communicate what it was and how they [tried] to rectify it," said Carolina Milanesi, an analyst at Creative Strategies.

"When cars have a recall, we don't all stop driving. However, Samsung needs to make sure they talk about the issue, so there's no doubt that the same problem might occur to other phones. This is absolutely key for them in order to the limit the damage," Milenesi said.

"This thing isn't done yet and if Samsung is completely transparent and if it doesn't happen again, then there's minimal long-term loss to the brand," Moorhead added. "If they don't do that, then the sky's the limit" about the loss to the brand.

Jack Narcotta, an analyst at Technology Business Research, speculated that Samsung itself doesn't know specifically what has gone wrong with replacement Note7s. "Until Samsung more clearly identifies the cause or causes, or literally has a smoking gun of a battery, it's going to be mum on telling the public exactly what's going on."

Moorhead said it is unlikely that the actual batteries were bad since two manufacturers' batteries have apparently overheated. One was Samsung SDI, which made the batteries for the U.S. original version and the other was Amperex Technology of China, which made the batteries for the original Note7s sold in China. When the Note7 replacement units were announced, the Amperex battery was used for the U.S., and yet some replacement units still smoked and caught fire.

Consider carefully the future of the Note line

Moorhead said he believes Samsung will actually come out with a Note8 in January or March. It will have the signature digital stylus that allows users to draw and take handwritten notes on the big 5.7-in. display.

Of course, it must be safe, and how Samsung communicates it will be safe is going to be tough. But no other phone maker will be able to create a relevant replacement of the Note device that quickly, Moorhead said.

Milanesi disagreed and said Samsung needs to come up with another name, since calling the next one a Note8 would just be a bad reminder of a smartphone that can catch fire in your pants.

Jack Gold, an analyst at J. Gold Associates, said Samsung shouldn't eliminate the Note form factor.

"It's a unique form factor with very limited competition," Gold added. "There's no reason a newly designed Note won't do well for them in the future. Apple doesn't have an equivalent device."

Moorhead conceded that the Note8 must have an obvious physical difference from the Note7, maybe a color change. "The Note brand is not destroyed if they handle it right," he added.

Even if Samsung rebrands the Note with another name, its larger screen and stylus will give it away, added Kevin Burden, an analyst at 451 Research.

Absorb any losses and move on

While the Note stylus is important to many users, it has still been a niche product. The last Note5 (there was no Note6) generated only 5% of all of Samsung's sales, Moorhead said. The Galaxy line of phones, including the Galaxy S7 and S7 Edge are from two to three times more popular, according to various accounts.

"The Note line has been very small for Samsung," he said. He and other analysts said it would be hard to see problems from the Note line affecting other lines.

"Samsung has many smartphone models globally and none have experienced the same problem," Burden said.

As to whether Apple or Huawei would benefit from the Note7 disaster, analysts were uniformly convinced there will be little boost to competitors.

Part of the reason is that Samsung already controls the largest share of the smartphone market globally, at 22% in the second quarter, according to IDC. Apple had 12% and Huawei had 9%.

"No way will Samsung lose its ranking over this problem," Moorhead said. "They are just so large."

Huawei also makes Android phones, but hasn't invested heavily in a U.S. presence, which will limit it more than the Note7 disaster could help it, he added.

"Other brands will benefit over the short run, no doubt, but no other brand is likely to try and capitalize by calling attention to its superior battery technology or quality control efforts," Burden added.

"Battery technology constrains every consumer technology company in a similar way . . . since no new elements are showing up in the periodic table," Burden explained. "This means that every manufacturer of lithium-ion batteries has already put in years towards squeezing more capacity and life out of the same chemistry in its batteries -- and they are only as good as their manufacturing process."

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