Selling an $800-plus smartphone that can't be trusted not to catch fire is bad enough. Bungling that phone's recall to the point where usage of the potentially-flammable devices hardly changes spells an especially bad PR and branding disaster -- one that could sting the smartphone maker and its chip suppliers, and benefit several of its rivals.
That's the situation Samsung (SSNLF) finds itself in with the Galaxy Note 7, a month after the high-end "phablet" launched to good reviews that now feel like a distant memory. Though 15 days have passed since the first reports emerged of the Note 7's battery catching fire, and 13 days have passed since Samsung officially recalled the phone and retailers halted sales, data from mobile analytics firm Apteligent indicates Note 7 usage is down just 13% from the recall date, and close to where it was on August 29.
One culprit: While Samsung said it would "voluntarily replace [a user's] current device with a new one over the coming weeks," it didn't formally tell existing Note 7 users to stop using their phones until a week later. Also, while Samsung promised customers would be able to exchange their phones for non-flammable Note 7 units, it added this would only happen following approval by the U.S. Consumer Product Safety Commission (CPSC).
Until then, those consumers needing a working phone that isn't a fire hazard have to either exchange a Note 7 for a Galaxy S7 or S7 Edge (with Samsung refunding the price difference) or get a "loaner phone" until a safe, CPSC-approved Note 7 can be provided. It looks as if many buyers have opted not to do this and take their chances.
As another stop-gap measure, Samsung announced a software update that would prevent the Note 7's battery from charging to more than 60% of its capacity. The only problem: The update won't be available until September 20, and even then only in South Korea. Samsung says it's talking with carriers in other countries to provide them with the update.
On top of all this, it looks as if Samsung failed to alert the CPSC when its recall was first announced, as is the norm. On Thursday afternoon, the CPSC and Samsung finally announced they're formally recalling about a million Note 7 phones, while promising to provide either a replacement or a refund. A source who spoke to The Wall Street Journal says the delay stemmed from "questions over the precise problem with the phones and how best to correct it."
The missteps, along with the non-stop media coverage of them, could do meaningful damage to Samsung's brand, which Forbes valued at $36.1 billion (No. 11 worldwide) earlier this year. A loss of consumer trust could also ding Samsung's smartphone share in the quarters to come. Research firm IDC estimates Samsung had a 22.4% smartphone unit share (No. 1 worldwide) in the second quarter, via 77 million shipments.
Some chip suppliers could also be in the crosshairs, should their exposure to Samsung be disproportionately high. Names that could fit the bill include RF chip supplier Qorvo (QRVO) - Get Report, which is believed to have gained share with Samsung via the S7 and Note 7, and analog/mixed-signal chipmaker Maxim Integrated (MXIM) - Get Report, which has long counted Samsung as its largest mobile client.
Synaptics (SYNA) - Get Report, a developer of touch controller, display driver and fingerprint sensor chips, could also be hurt, given it receives about a fifth of its sale from Samsung. However, as far as Samsung's high-end phone sales go, this is tempered by the fact Synaptics supplies LCD driver chips for iPhones. Qorvo also has a measure of iPhone exposure.
The big issue for Samsung, as it has been for Chipotle amid its recent health scares, is that it's selling products for which many substitutes exist at similar or lower prices. Under normal conditions, the products are differentiated enough to sell well at premium prices. But the moment consumers start to fear using the product might put their health or safety at risk, those substitutes quickly look quite alluring.
In the case of the Note 7, these substitutes include not only Apple's (AAPL) - Get Report iPhone 7-Plus, which sports a dual-lens camera and has seen initial quantities sell out since pre-orders launched last week, but also quality high-end Android phablets such as the OnePlus 3, Huawei's Nexus 6P and LG's recently-launched V20.
Many phablet buyers willing to forego the Note 7's differentiating features, such as its S Pen stylus and curved OLED display, are likely to take a look.