There's no avoiding the pain now. Samsung's momentous decision to discontinue all Galaxy Note 7 handsets because of their tendency to catch fire is going to hurt the company on so many levels.
The financial losses will have investors poring over their spreadsheets. With at least 2.5 million units being recalled at a retail price of $850, we're looking at a hit of at least $2.1 billion to start with. And as we argued recently, Samsung would do well to quickly write off as much of that figure as it can.
Damage to the brand is incalculable, but that won't stop marketing experts from trying to put a figure on it. Just last week, the Samsung brand was ranked as seventh-best in the world by Omnicom's Interbrand, making it worth about $52 billion, up 14 percent from a year ago. How far that value and rank falls in the next couple of surveys will be telling.
The biggest cost to Samsung, beyond the incredible loss of face, is the loss of faith. When the crisis started developing, it seemed like Samsung's response was relatively fast. They initiated a recall and started shipping a replacement that supposedly fixed the problem. It seemed a forgivable episode. Until one of those replacements caught fire on an airplane.
What's worrying is the fact that one of the world's biggest and most-respected technology brands can't work out what the heck is happening to its own devices. Consumers, and regulators, may have been able to forgive problems with the first batch. But the fact that even the replacement phones had problems shows Samsung executives don't even know the cause, let alone have the ability to fix it. Killing a product line is an act Samsung will have wanted to avoid at almost any cost, so it serves as an admission that they remain confounded.
A few weeks ago we talked about Samsung's incredible ability to extract more money per unit than the market average, and that's thanks in large part to the fact that consumers simply trust(ed) the brand.
Over the past few years, Samsung has done a masterful job of navigating a crowded market where Apple extracts the lion's share of profits at the the top, and a slew of Chinese brands are slicing away at prices and margins at the bottom. A huge marketing budget has been critical to this success, but in an era of social media and online product reviews, Samsung's market share wouldn't have stayed so solid if it was producing junk.
But charging a price premium becomes pretty untenable when your phones turn into hand grenades and you can't explain why. Even more so when a step behind is a slew of hungry and competent top-end Chinese names such as Huawei, ZTE and Lenovo.
These are companies that go beyond cookie-cutter Android designs to invest money on building their own technology. Back in August, Gadfly even had a heated debate over the notion that half of all Americans will have bought a Chinese smartphone in the next five years.
Right now only Samsung and Apple combined are keeping the Chinese below 50 percent share of the U.S. market. With Samsung's reputation in flames, the ascendancy of Chinese names is starting to look inevitable. Samsung losing out to hungry upstarts is something it won't easily get over. Just ask Nokia and Blackberry.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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