Samsung’s exploding phone debacle just keeps getting worse.
The South Korean firm has warned customers to stop using all versions of its Galaxy Note 7 smartphone just weeks after promising it was safe. The stock plummeted 8% Tuesday in response, wiping about $17 billion off the company’s market value.
The high-end phone was supposed to do battle with Apple’s iPhone 7, but it has instead ended up doing serious damage to Samsung’s reputation.
Now analysts say Samsung may have to cut its losses and ditch the Note 7 entirely. That could put a $9.5 billion dent in sales and erase $5 billion in profits, according to one estimate. Other reports have put the potential losses even higher.
“It’s a big embarrassment for Samsung,” said Bryan Ma, vice president of devices research at IDC. “It’s one nightmare after another.”
Samsung’s credibility is on the line after a series of missteps. It was forced to recall about 2.5 million Note 7s in early September, just two weeks after the phone was launched, saying faulty batteries were causing some to burst into flames. It then started to issue replacement phones but a number of customers have reported that those devices also caught fire, including one aboard a passenger jet.
The electronics giant has now halted production and sales of the Note 7 phones, telling customers to turn them off immediately while it investigates the latest explosions.
What can Samsung do to limit the fallout from one of the biggest smartphone recalls ever?
Act swiftly
“They need to act swiftly and move on to protect their brand image,” said Mark Newman, a Bernstein analyst who covers Samsung. “And be completely upfront and honest with what has gone wrong. The previous explanation that it is the battery’s fault doesn’t add up. There appears to be something else at play.”
Samsung is racing to figure out what’s causing the continued problems with the Note 7. But the firestorm of negative press is in danger of hurting sales of other Samsung phones and products.
“Users are scared to use Samsung at all,” Ma said. “Samsung said they fixed it, but the problems keep happening.”
Ditch the entire product line?
The most drastic option would be to ditch the Note 7 altogether.
“Samsung needs to quickly put an end to the Note 7 line so as not to get deeper into trouble with recalls and faulty devices which will tarnish its brand,” said TuanAnh Nguyen, a research analyst at Canalys.
The company would be better off shifting its focus to the release of its next Galaxy S series model, which is expected early next year, and using it to “rebuild its brand image,” he said.
A costly move
Giving up on the Note 7 would be extremely costly. Analysts at Nomura estimate the total hit could reach $9.5 billion in lost sales and wipe out $5.1 billion of profit.
But Samsung, which has a market value of about $194 billion and annual sales of $179 billion, should be big and profitable enough to weather the loss of one model.
“The majority of Samsung’s profits are now generated outside of phones, predominantly from their strong component divisions,” Newman said. “And within the handset division, the Note line is not the main driver of profit.”