Year in Review: Samsung struggles to recover from Galaxy Note 7 catastrophe

FierceWireless is wrapping up an eventful 2016 by taking a hard look at five of the most important trends and developments that emerged in the market this year. Today we analyze how costly Samsung’s Galaxy Note 7 disaster was in a competitive worldwide smartphone market.

The news: The Galaxy Note 7 looked to be another effective salvo in Samsung’s bid to remain the dominant vendor of top-of-the-line Android handsets. The gadget included compelling features such as a water-resistant body, Samsung’s Knox security software and a curved, 5.7-inch screen, making it the follow-up flagship to the wildly successful Galaxy S7 Edge.

Indeed, sales of the phone were up an estimated 25 percent over last year’s model out of the gate. But then the wheels fell off: The South Korean electronics giant was forced to halt shipments of the gadget less than two weeks after its launch due to dozens of reports of batteries catching fire or exploding, which knocked nearly $7 billion from its market cap. Samsung issued a worldwide recall of the Galaxy Note 7 a few days later and produced a wave of replacement devices, but those phones were recalled for the same battery problems before the company finally ended production of the phone altogether.

What it means: It’s difficult to assess just how costly the Note 7 was for the world’s top smartphone vendor – indeed, an accurate evaluation may not be possible until well after the holidays – but the botched handset appears to be a debacle on an unprecedented scale in the smartphone industry. Samsung slashed its third-quarter profit estimates by $2.3 billion due to the Note 7, and the company suffered its worst decline in global smartphone sales in its history during the period, as sales plunged 14.2 percent year over year and the company’s market share dropped to 19.2 percent from 23.6 percent.

The calamity also dampened expectations in the smartphone industry during the typically active fourth quarter, leaving a notable void in the market of high-end devices. Apple appeared well positioned to capitalize on that void with its iPhone 7 and 7 Plus, although retail stocks have sometimes been depleted, and the Galaxy S7 and S7 Edge continue to sell well, analysts say. And while Google’s Pixel has received rave reviews, Verizon’s exclusive grip on the phone has constrained overall sales.

Analysts will surely examine fourth-quarter sales closely to better gauge how much damage the Note 7 did to Samsung’s smartphone business. And as the holiday shopping frenzy fades into the background, all eyes in the smartphone market will be on Samsung’s upcoming launch of the Galaxy S8.

"The longer term impact on the Samsung brand remains to be seen,” wrote Melissa Chau, IDC associate research director for mobile devices, in a recent press release. “If the first recall was a stumble for Samsung, the second recall of replacement devices face-planted the Note series.”

The Galaxy S8 will reportedly include an artificial intelligence assistant, and recent images suggest the phone will sport a dual-curved display. Meanwhile, Samsung is said to be in talks with LG to supply batteries as it works to diversify its supply chain. Samsung’s smartphone brand remains strong, and consumers are likely to forgive the Note 7 fumble if the Galaxy S8 is both safe and compelling. If it fails on either count, though, Samsung risks losing its crown in the worldwide smartphone market.