Samsung’s Galaxy Note 7 double-recall hasn’t just been an embarrassment for the company. It could cause a catastrophic drop in revenue over the next few quarters. The cost of the recall itself has been estimated at up to $2 billion, while the complete disappearance of the Note 7 from Samsung’s product lineup could hit revenue by as much as $17 billion.
That’s the word from Reuters on the estimated losses from the Note 7’s cancellation, and Samsung is trying to defray some of that loss with a push to discount other Samsung devices. Disaffected Note 7 customers are being offered a $100 coupon to buy a different Samsung product. Anyone who bought either the original Note 7 or one of the replacements is eligible for a $100 bill credit on a different Samsung product, or a $25 credit if you want to buy a device from a different manufacturer.
On the face of it, this kind of move can seem like a cynical attempt to replace a broken product with another (presumably also inferior) product — but in Samsung’s case, that’s probably not a fair way to read the situation. While the company is obviously trying to pick up some revenue for its S7 and S7 Edge hardware, there’s every reason to think that this specific problem with the Note 7 was just that — confined to a particular make and model of device. There have been no verified reports of problems with the S7 or S7 Edge, and those devices have been on the market for significantly longer than the Note 7 was.
The tricky thing for Samsung is that many of its customers may not be able to easily switch to other devices. Several of you have spoken up in comment threads on the Galaxy Note 7 to say that the S7 and S7 Edge aren’t useful replacements because they lack support for Samsung’s S-Pen. These customers are stuck either using older Note hardware, like last year’s Note 5, or trying hardware from a different manufacturer.
The yearly refresh cycle that the smartphone industry has stuck to for years now has its own downside — if hardware isn’t refreshed quickly, it is seen as outdated. While we suspect the smartphone business will go through its own re-evaluation of this business cycle (you don’t see many people calling two year-old PCs outdated anymore, after all), it hasn’t done so yet, and this leaves some customers without an appropriate replacement.
The damage to Samsung’s long-term brand, if any, is still unclear. Reports from the New York Times have now suggested that Samsung never actually diagnosed the problem with the Note 7 to start with. Put simply, it didn’t have enough time. It wasn’t able to recreate the flaw in any of its laboratories, so it took a gamble that the problem lay in one of the batteries it had built at its own subsidiary. That gamble didn’t pay off — the replacement devices with different batteries began igniting too.
For years, we’ve talked about how tight the engineering tolerances are in smartphones, and how difficult it can be to iterate on a yearly design while incorporating new technologies and standards. Apple, Samsung, and other companies paint a picture of a device that appears once a year, seemingly out of nowhere. But in reality, these are tightly choreographed displays. Manufacturers map out the technologies and leading capabilities they intend to introduce years in advance. While they may make changes throughout the design process, they don’t wait to pull out markers and draw up the first plans for the next-generation device the day after the newest model ships. If Samsung can’t isolate what made the Note 7 fail, it could have knock-on effects on the Note 8, and pose a much larger problem than a major revenue miss over a single fiscal year.
If I were Samsung, I’d look to boost sales of the Note 5, and I’d tell affected customers they’ll all receive a discount on the Note 8, when it appears, in addition to the $100 discount I’m currently offering. Customers who feel like Samsung has treated them fairly are a lot more likely to investigate the future of the Note lineup when new hardware is eventually available.