Two Reasons Samsung Faces an Uphill Battle After the Galaxy Note 7 Debacle

By Markets Fool.com

The Samsung(NASDAQOTH: SSNLF) Galaxy Note 7 debacle couldn't come at a worse time, as consumer electronics companies gear up ahead of the busy holiday shopping season.

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In this clip fromIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Evan Niu, CFA, discuss this year's smartphone product cycles.

A full transcript follows the video.

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This podcast was recorded on Oct. 14, 2016.

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Dylan Lewis: I think one of the other things that makes this tougher -- and returning back from this a little tougher -- is the product life cycles of smartphones. You look at a place like Chipotle, fast casual, they're able to give away a ton of free product via coupons, Chiptopia, that kind of stuff, and get people back in restaurants relatively quickly, because meals are a routine purchase for people. Smartphones are not. You're buying a phone every two years. Once you get someone in an ecosystem, the likelihood of them staying there is a lot higher. So, I worry there's going to be this class of people coming onto smartphones, or maybe people that recently decided to make the switch over to the Galaxy line, specifically the Galaxy Note line, that they're second-guessing it, might go with another Android device, might decide to go over to something on the iOS side.

Evan Niu:Yeah. That's exactly the thing they need to figure out. Samsung is really good at hardware. Samsung has tried so hard over the past 10 years to get better at software, but of course, they have to get Android from Google (NASDAQ: GOOG) (NASDAQ: GOOGL), and they do their whole modifications and tweaks, this stuff they put on top of it to try to differentiate. But the point remains that Samsung isn't actually good at that stuff. Their software is not very good. They're really good at hardware. If all the sudden, their hardware is having all these problems, there's really not a good reason to buy a Samsung phone. Historically, their hardware has been incredibly well-made. But now, there's no reason. If their one strength is now being called into question...

Lewis:People are going to go elsewhere.

Niu:Exactly. And, even if you want to stay with an Android, there's tons of really good Android phones out there.

Lewis:I think, to help adjust for this a little bit, Samsung is offering customers about $75 to trade in their devices for other Samsung models. That's a good retention effort. They might save some lost customers along the way. But it wouldn't be surprising to see some flight from the brand.

One of the other reasons I think this is troubling is the timing in the calendar year. This is ahead of the holiday season, and it's the biggest time of the year for consumer electronics. To have to wipe out an entire product line ahead of the quarter where you're probably going to be doing 40% of your business, at least ...

Niu:And one of their most expensive, most profitable products, too.

Lewis:Yeah. That's rough, that's really hard to deal with that, as a business.

Niu:Yeah. This is the time, holiday shopping season. Everyone makes all their money here. And now, Samsung has to pull one of their flagship...the Note 7 has been a differentiator compared to the iPhone for a long time, because it comes with a stylus, it's bigger. It was like the posterboy for phablets.Samsung has established itself as the phablet leader, andApple now has the 7 Plus, whichisn't as big as the Note 7 and doesn't have a stylus. But other than that,it's pretty comparable,as far as giant phones go.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), Apple, and Chipotle Mexican Grill. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, and Chipotle Mexican Grill. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.