Samsung Bows Under Note7 Fallout

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Three owners of Galaxy Note7 smartphones this week filed a complaint in a federal court in New Jersey that could become a class action lawsuit against Samsung.

"Plaintiffs and the Class have suffered injury in fact, incurred millions of dollars in fees, and have otherwise been harmed by Samsung's conduct," the complaint states.

Samsung recalled the phones and stopped producing them after faulty batteries caused a number of the original products and their replacements to smoke and ignite.

The Department of Transportation last week banned the defective Galaxy Note7s from all U.S. flights.

Samsung on Friday warned that it would lose about $US3 billion during the current quarter and in the first quarter of 2017. The company earlier in the week had warned that it would take a hit of about $2.6 billion due to the recall impact.

The DoT, which oversees federal government policy for all commercial travel in the U.S., announced the ban under an emergency order with the Federal Aviation Administration and the Pipeline and Hazardous Materials Safety Administration (PHMSA).

The extraordinary move by the agencies means that Galaxy Note7 owners no longer can transport the devices in checked baggage, in carry-on luggage or on their person, when boarding U.S. flights. The ban also eliminate the phones from air cargo, effectively making it almost impossible to use it on long-distance trips.

Samsung last week expanded its product recall after several of the reissued phones exhibited the same overheating and fire hazards that were found in the original Galaxy Note7 devices. Samsung's recall allows for customers either to get a new Samsung phone of a different model or a full refund from the retail store or the mobile carrier that issued the phone.

Samsung is offering up to $100 in bill credits for customers exhanging their Galaxy Note7 for another Samsung device, and up to $75 for customers who already exchanged their Note devices for another Samsung phone.

According to the Consumer Product Safety Commission, the federal agency that oversees products recalls, Samsung had received 96 reports of phones overheating in the U.S, including 23 since the original Sept.15 recall. The company received 13 reports of burns and 47 reports of property damage due to the overheating and fire risks.

The DoT recognized the inconvenience of the move, but said that passenger safety must take priority, Secretary Anthony Foxx said.

"We are taking this additional step because even one fire incident inflight poses a high risk of severe injury and puts many lives at risk," he added.

Passengers attempting to fly with a Galaxy Note7 phone will be denied boarding, and anyone attempting to evade the ban by placing a device inside checked luggage will be subject to criminal prosecution in addition to fines, the DoT noted.

The PHMSA has issued a special permit to Samsung to ship the devices by ground in order to complete the product recall.

Samsung last week said it would focus on improving product safety by making significant changes to its quality assurance process.

Samsung had self-tested the lithium-ion batteries at a lab that it owns, The Wall Street Journal reported, noting that it is the only phone manufacturer with such a process.

The second recall likely will do lasting damage to Samsung by pushing some of its longtime customers to other makers of Android devices -- or, if they are willing to learn a new OS, to a proven rival in Apple, the maker of the iPhone 7, which just launched last month.

"Because the switching time and pain of moving from Android to iOS is so high, they are more likely to lose these customers to Google if they're on Verizon, or LG or Motorola if they're on other carriers," observed Rob Enderle, principal analyst at the Enderle Group.

"They'll want another top-end phone," he told the E-Commerce Times, it's not likely they'll be willing "to configure an iPhone from scratch."

Samsung will suffer some short-term brand damage and lose a few customers to the iPhone, but a greater number to rival Android phone makers, said Jitesh Ubrani, a senior research analyst at IDC.

However, over the long haul, he told the E-Commerce Times, Samsung's brand can survive the crisis.

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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