For Samsung, a moment of truth — at a cost of billions

Samsung Corp.’s decision on Tuesday to abandon its troubled Galaxy Note 7 smartphone, after dozens exploded or caught fire, will cost the company billions of dollars. That may be the price Samsung has to pay to rescue its good name — and to keep competitors from undermining its position as the world’s largest seller of smartphones.

Samsung probably needed to do something that dramatic to head off what had become the worst advertising imaginable.

“It’s simply damaging the Samsung brand,” said Thomas Husson, a research analyst for Forrester Research who’s based in Paris.

The embarrassing fallout from the exploding phones was threatening to damage the reputation of every other Samsung product. Husson called it “the halo effect” — the way a single bad product can undermine
the good name of an entire company.

When Samsung released the Note 7, in mid-August, it was expecting a very different sort of halo. Samsung was determined to be not just the biggest maker of smartphones, but the best, with a product that could exceed the excellence of Apple Inc.’s beloved iPhones.

Indeed, early reviews of the phone raved about its elegant design, powerful processor, and stylus for writing notes on the screen.

According to published reports, Samsung executives earlier this year rushed the Note 7 into production after surmising that Apple’s new iPhone 7 would lack any dramatic new features. Hoping to steal market share with a more technically sophisticated phone, Samsung beat Apple to store shelves by a month.

Now all that has literally gone up in flames.

Willy Shih, a professor at the Harvard Business School, said that in trying to make the new phone thinner, lighter, and more powerful than the one before it, while retaining long battery life, Samsung pushed its technology too far.

“To me, it illustrates those trade-offs that designers and engineers make as we get closer and closer to the edge,” Shih said.

The South Korean company has received 26 reports of burns and 55 reports of property damage, according to The New York Times. Plane travelers were being told to turn off Galaxy Note 7s during their flight.

The company has yet to disclose what, exactly, caused the malfunction.

Samsung tried to rescue the Note 7 through a worldwide recall of some 2.5 million phones last month, after numerous reports of exploding phones. It also issued replacement phones with different batteries. Still, those new phones showed an alarming tendency to catch fire. So Samsung threw in the towel and permanently discontinued the Note 7.

Michael A. Cusumano, a professor at the MIT Sloan School of Management, said the decision to kill the phone suggests its problems go deeper than the battery, into the electronics. “Clearly, it’s a combination of things,” he said. “It’s not a battery problem. It’s a system problem.”

Analysts at Nomura Securities have estimated that killing the Note 7 will cost Samsung $9.5 billion in lost sales. But they and other analysts warned of longer-lasting damage.

“This is going to be a specter that hangs over Samsung,” said Ramon Llamas, a cellphone industry analyst at IDC Corp. in Framingham.

For Apple, Samsung’s debacle came at an ideal moment. Surely enough, the iPhone 7 met with a cool reception from critics who said it offered few improvements. And for the first time since the iPhone was introduced in 2007, sales have fallen for two straight quarters.

Now, Apple doesn’t have to worry about a hot new product from its toughest rival. Indeed, Apple’s stock has soared, as investors bet that consumers will switch to iPhones in a “flight to quality.” Samsung’s stock has seesawed throughout the travails of the Note 7, plunging after the company’s announcement to end the product.

But industry analysts question whether, long-term, Samsung’s loss is Apple’s gain.

Simon Blanchard, assistant professor of marketing at Georgetown University, said Samsung’s Galaxy Note phones have developed an “incredibly loyal following,” comparable to hardcore fans of the iPhone. These users love the writing stylus of the Note 7, which iPhones lack, and favor its Android operating system, which is easier to modify and customize than Apple’s iOS software.

There’s also a line of thought that the Note 7’s collapse opens the door to Google Inc., which is making another run at the smartphone market after previous tries met with little success.

On Oct. 20, Google will begin shipping a high-end Android phone called Pixel. It’s also releasing virtual reality goggles, a Wi-Fi network router, and a voice-activated speaker similar to Amazon.com’s popular Echo. It’s possible that unhappy Note 7 fanciers might give Pixel a look.

Husson doesn’t expect a stampede. “When it comes to Google, it can only help them. Having said that, Google is still suffering from the lack of a clear retail and service approach,” he said.

Google is an Internet company, Husson said, and unprepared to support millions of phone users. He said unhappy Note 7 customers are more likely to switch to other Android brands, like Huawei or HTC — or even leap to Apple — rather than sign on with Google Pixel.

Cusumano said there may be a saving grace for Samsung: short memories. He notes travelers have largely forgotten the lithium-ion battery fires that grounded Boeing Co.’s 787 jets in 2013. “I don’t think the Samsung brand is permanently damaged,” he said. “Five years from now, it won’t make a difference.”

Hiawatha Bray can be reached at hiawatha.bray@globe.com.