Market Insight

Analyzing who will benefit from the demise of Samsung's Galaxy Note 7

October 11, 2016

Ian Fogg Ian Fogg Senior Director, Mobile & Telecoms
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- In August 2016, Samsung unveiled their latest flagship, the Note 7, due to ship at the end of the month. Read our analysis at the time:- Galaxy Note 7: Samsung looks for continued momentum.
- In September, Samsung announced a global recall of the Note 7 after problems with Note 7 units heating up and catching fire, blaming one of two battery suppliers. But the problems persisted with replacement units.
- On October 11, Samsung issued a second recall, and permanently ceased production of the Note 7. The true cause of the problem is currently unclear.

 

Our analysis

Samsung’s competition has been caught by surprise by the Note 7 recall.

Most smartphone makers had chosen not to launch large screen smartphone models (5.5” and greater) at this time of year because they would go head to head with Samsung’s Note and the iPhone 7 & 7 Plus. As a result, they are poorly placed to raise sales quickly in reaction to the Note 7 recall.

Google’s new premium Pixel smartphone may look to be arriving at the ideal time. But IHS estimates Pixel production is under one quarter of Samsung’s original planned Note 7 volume which limits Google’s ability to replace the Note’s market position. 

Additionally, Google’s mobile operator exclusives – EE in the UK, Verizon in the US, Telstra in Australia – mean many Note 7 buyers using other networks will not be able to easily switch to Pixel because they are tied into existing operator contracts on operators that do not sell the Pixel.

Other Android OEMs have few phablet smartphones on offer globally: In the US, LG is launching the V20, but it also has low planned production volumes and it has extremely limited availability in Europe. Huawei may choose to accelerate the launch of its upcoming Mate smartphone but its P9 flagship has a modest 5.2” display much smaller than the Note 7’s 5.7” screen. Sony, HTC, and ZTE have no recent large screen premium smartphone to offer.

Samsung will seek to counter its rivals by marketing the S7 and S7 Edge, most likely by reviving Gear VR headset bundles with new S7 sales. But the degree of success Samsung will enjoy will depend on the extent of damage to the Samsung brand and how willing buyers are to take an alternative Samsung product.

Even more importantly, Samsung must urgently diagnose the precise cause of Note 7 failures to ensure that upcoming smartphone models, which may share design elements and components with the Note 7, do not suffer the same fate. Every other smartphone maker will be reviewing their engineering approaches as well, to ensure they do not have similar problems in future.

IHS expects Apple to raise iPhone 7 production significantly to meet increased demand, especially of the larger Plus model. Unlike Google's Pixel, V20 or upcoming new Huawei Mate, the iPhone 7 Plus is available now. Apple has repeatedly claimed large volumes of iPhone buyers are Android switchers. The Note 7 recall will be an excellent market test of the strength of Apple’s appeal to Android owners. Apple even offers an Android app to help switchers move across their content to iOS. 

The death of the Note 7 will have an impact on the overall "phablet" category. As the signature device, the absence of Note 7 shipments mean this overall segment of the smartphone market will be smaller in 2017 than previously.

In China, Samsung's position is different. Two years ago, Samsung was one of the strongest smartphone players in the market, but since then its volumes have fallen dramatically. There are many phablet smartphones on offer from numerous Chinese OEMs which offer viable alternatives to the Note 7, although few have the signature stylus of the Note.

Beyond the short term impact, Huawei will be the biggest beneficiary from any brand damage to Samsung. Huawei has already been performing strongly and has moved into a clear third position in global smartphone shipments -- behind Apple and Samsung – and aims to be number one. Like Samsung, it uses Android and offers smartphones at a wide range of prices. Huawei will look to pick up sales right across its portfolio, assuming it is Samsung’s brand which has been hurt, and not solely the Note brand.

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