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The Note 7 Aftermath

by Juha Winter | Oct 14, 2016

In terms of news, this week has probably been the worst in memory for Samsung. The disaster that befell the company resulting from the ill-fated Galaxy Note 7 took a turn for the worse when it was reported that even replaced Note 7 devices were prone to the same grave issues as the earlier ones. The problem of the device catching fire or exploding, particularly when being charged, was earlier thought to be related to the battery, a 3500mAh lithium polymer battery that had two suppliers, one of which was thought to be the culprit. Switching suppliers clearly didn't help remove the problem, however. With no clear solution in view and additional fallout from the case imminent, Samsung halted the production of the Note 7 indefinitely and asked its channel partners to stop selling the device as well.

While Samsung hasn't previously used LiPo batteries in its devices, with e.g. the Galaxy S7 using a more traditional Li-ion battery, the technology in itself is not new and has been used in a multitude of consumer electronics products. Besides the battery type, what makes the Note 7 different from other Samsung phablets and smartphones is its screen, a flexible OLED display that is both larger and brighter (in terms of nits) that the display used in the Galaxy S7 edge which also has a curved OLED display. The larger and brighter display in the Note 7 is capable of drawing more electric current, resulting in the device heating up more, potentially reaching its thermal limits. In just about any device, there is control circuitry in place to prevent this from happening, but even a minor flaw in this circuitry could cause the problems of overheating and, in the worst case, fire and explosion. Could it be that the combination of a new battery type, a fast charging algorithm, and a new, more power-hungry display panel was just too much to handle at the same time, in the same device? Undoubtedly, Samsung will work tirelessly to uncover the root cause of the problem and take measures to prevent it from occurring again.

According to Samsung's updated financial guidance, the total cost of pulling the Galaxy Note 7 smartphones off the market will be at least $5.4bn (£4.4bn). In Q3 2016 alone, the negative impact on the company's EBIT would be $2.3bn (£1.9bn). Indirect effects which are more difficult to estimate relate to the damage done to Samsung's brand image and consumer's confidence in buying smartphones and other devices from the company. While Samsung is hoping to limit the damage to its valued Galaxy sub-brand because of the continued strong performance of the Galaxy S7 / S7 edge and J-Series models, the Note sub-brand may well be on its way out, and there's a good chance that we'll never see a "Note 8".

Looking at competitors, Apple stands to gain a lot from the demise of the Note 7, with its recently launched iPhone 7 Plus being a prime contender in the premium phablet race. Despite reports of a somewhat tepid sales start in certain countries, it would appear that Apple could expect at least a few percents' bump in its sales in the next couple of quarters due to the Note 7 dropping out of the game. Huawei, with its current Mate 8 and the upcoming Mate 9 due in early November, also looks to be among the main beneficiaries. Finally, Google with the 5.5 inch Pixel XL and its unlimited cloud storage for photos and videos taken with the device, a major advantage in my book, looks to be well positioned to gain from the incident, despite the Pixel's hefty price tag.

Strategy Analytics' Smartphone Model Tracker (SMT) service keeps track of individual smartphone model shipments and market share across six regions and 88 countries in total. Be sure to check it out here.
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