How Much is the Galaxy Note 7 Exploding Battery Recall Going to Cost Samsung?

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When 2016 is said and done, one of the biggest misfires of the year will be Samsung’s Galaxy Note 7 smartphone; and not due to poor sales or buggy software. Rather, a battery with a tendency to overheat and catch fire.

As cases of the phone catching fire became more and more common since its release in August, the South Korean firm started to feel the heat itself. On September 15, the US Consumer Product Safety Commission dealt a blow to Samsung when it announced its formal recall of the device after receiving 92 complaints about the battery overheating or going ablaze, even including 55 cases of property damage. Consumers are entitled to a refund or replacement device from this week.

Also this week Samsung began the recall process in its native South Korea and the painful inconvenience of a recall became clear. Consumers showed up at stores to get their phone exchanged or get a refund. Instead they met a slew of conditions. They needed to return the phone to the exact store they purchased it in and priority would be given to people that activated their Note 7s first, meaning anyone that just bought theirs would have to wait. “It is quite bothersome to use my personal time,” said one annoyed Samsung customer. “It’s inconvenient to change to a different [phone].”

The overall handling of the controversy hasn’t been impressive either. On September 2, the company first announced that it would be recalling all 2.5 million phones and warned users to switch them off and not use them. Airlines took precautions by banning the devices in checked luggage and insisting that anyone on-board keep them off completely during the flight.

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Samsung then sort of contradicted itself by announcing a software patch that would prevent the battery from overheating and catching fire. This didn’t exactly instill confidence. Why would a company that just told its users that stop using a faulty device then turn around and say a software update would fix a hardware issue safely? Was the Note 7 now safe to use? Clearly not.

Early estimates at the cost of the recall for the South Korean company tip the damage at 5 billion won lost in revenue. That’s about $4.4 million. Granted, that might seem like a drop in the ocean for a company with annual average revenues of $300 billion. But the fiery battery disaster led to a 7% drop in the company’s stock once the recall was made official. It suffered its worst one day price decline in 28 years and lost more than $14 billion in its value. That’s bad news for shareholders but the real damage will be in consumer trust or what remains of it.

So how did this catastrophe happen? The fatal flaw for Samsung appears to lie in good old competition. With the iPhone 7 looming, and the ostentation and flash that comes with every Apple launch, Samsung seemingly felt under pressure to deliver an impressive new product before its arch nemesis stole the spotlight.

According to a Bloomberg report, and “people familiar with the matter”, Samsung wasn’t expecting anything particularly inventive from its Cupertino peer. It smelled an opportunity to capitalize and get a superior device on the shelves first and maybe take a little shine off the iPhone 7’s launch.

“They pushed suppliers to meet tighter deadlines, despite loads of new features,” said the Bloomberg report. It was looking for a device that would capture the attention—and wallets— of the smartphone buying public with its sleek design, iris scanner, hi-res camera and that so-very-crucial battery that lasts for more than a couple of hours.

And Samsung would have gotten away with it if it wasn’t for that meddling battery. This supposed grand plan rebounded and we’re in this mess now. It turns out you just can’t rush these things. Now instead of taking the lead in the smartphone wars at a critical moment, it finds itself with a shoddy phone that’s associated with fires and failure while the costs keep racking up.

It speaks to a wider challenge for Samsung. Even if its latest phones turn out to be successes it still feels like it’s in an eternal game of catch-up with Apple, at least on the surface and in terms hype and buzz. Samsung devices, for the most part, have been reliable and of good quality in the past but it just cannot drum up a fraction of the excitement that Apple can with the flick of a switch.

The Galaxy Note has been something of an ugly duckling in the smartphone family anyway. The Galaxy S range from Samsung has been generally well-received by users and critics down through the years. The same couldn’t be said for the Note, which critics called too big when it first launched in 2011. Fast forward a couple of years and people were fawning over the iPhone 6 Plus and its 5.5-inch display. This should have been the Galaxy Note’s moment at last but Samsung’s over-zealousness may have been its downfall.

This marks a moment of particular frustration for the company that should only be mounting. It had shipped 77 million smartphones in Q2 this year, according to data from IDC, and grown its market share to 22.4%, a boost from 21.3% the previous year. It had, coincidentally, benefitted from the dry period in between iPhones but now it risks undoing that progress.

Given the flashing headlines around this faulty device, you would be forgiven for thinking Note 7s were exploding all over the place. In fact, only 0.1% of devices are believed to be affected but that’s still a dangerously high amount of phones and the risk is too high. Samsung is already facing a lawsuit in Florida from a man that claims his Galaxy Note 7 burned through the fabric of his trouser pocket and caused him severe burns. “He has a deep second-degree burn, roughly the size of the phone, on his right thigh,” claimed the man’s lawyer. “Unfortunately for my client the recall came too late.”

The lawsuit was a filed a day after the recall was announced so Samsung should expect more lawsuits like this, whether they’re genuine or not, and that means even more costs; though most of them will probably settle if they ever go to a full case.

Despite the financial costs of the recall, Samsung’s biggest challenge will be the reputational damage caused by the fault.

Normal sales of the device will resume on September 28 in South Korea and replacements are underway in the States but the company will have to wait for approval in other jurisdictions after proving the Note 7 is safe.

It won’t be an easy task to mend the bridge between consumer and company. It is one thing for Samsung to face potential court dates with angry customers and consumer groups but the court of public opinion can be equally as vicious and unforgiving—at least right now.

We consumers can have short memories. While Samsung’s Note 7 recall feels unprecedented, widespread recalls in various different industries are not all that rare. Just look at the auto industry where the past few years have been littered with recalls but sales have been fine in the grand scheme of things.

Marcelo Claure, CEO of Sprint, one of the carriers selling Galaxy Note 7s, predicts that most people will have forgotten about this whole mess in six months.

That may very well be the case but still, if Samsung truly wants to purge this whole fiasco from people’s minds then its next device will need to be an absolute winner and it will need a pretty amazing battery.