Recent smartphone history has been dominated and distorted by a new-style search for the holy grail, the obsession of every vendor with being Apple. The off-sync timing of BlackBerry’s financial cycle has created a sad ratio in the past few years ‘ the length of the lines for the new iPhone directly proportional to the awfulness of the Canadian firm’s warnings. This time, as ‘ despite all the lackluster reviews and analyst disappointment ‘ Apple racked up a record first weekend of iPhone 5S/5c sales, BlackBerry first warned of a profits collapse and then announced a possible $4.7bn deal which would take it into private hands. Indeed, Apple sold more handsets last weekend than BlackBerry did in the whole quarter.
What follows is the fire sale that has looked almost inevitable since reported talks with large acquirers came to nothing, and will see the end of the smartphone dream and a pullback to core enterprise businesses, supporting the handsets of others in the mobile corporation. There are many instances of mismanagement, over-confidence and poor execution in BlackBerry’s downfall, but the one big error was the pursuit of the grail, of producing a smartphone that would outdo the iPhone.
A decade ago, many predicted the demise of RIM, as it then was, because other vendors had copied its iconic mobile push email system, and it appeared to have no differentiation left. Yet it continued to grow ‘ because products that religiously worshipped come along only once in a blue moon, and they take a very long time to be dislodged from their pedestal. If only RIM had recognized that, and continued to focus most of its efforts on its key strength, rather than going after someone else’s equally irrationally iconic product. BYOD and other changes would have been challenges, for sure, but as current performance indicates, not impossible ones ‘ if the development of mobile devices and platforms had not gained funds and strategic importance out of all proportion to their likelihood of success.
BlackBerry is not the only one to make the mistake, of course. After all, the iPhone has never been that good, by traditional device criteria. How hard could it be to copy it? As the host of mobile email developers of the noughties found, it’s not about emulating the screen resolution or going one better in the megapixels. It’s about recreating an emotional experience, itself born of Apple’s real genius, which is to make technology usable, enjoyable and addictive.
All its challengers have been found wanting in this area. Android will gradually squeeze out iOS, but that is because Google created a giant, free-for-all platform, not because Android is a lovely user experience. And Google’s own attempt to be a smartphone maker in the style of its former friend is likely to fail, with other companies taking home the Android gold ‘ mainly those which can tap into the sheer scale and reach of the platform, like Samsung. Nokia made the opposite mistake from RIM, dismissing the Apple threat for far too long, but the future owner of its handset business, Microsoft, has a tougher job than Google. A ‘new Apple’ will emerge, but it will not be any company trying to beat the iOS maker at its own game.
So what remains for BlackBerry now? Like Nokia, it will see most of its device business disappear and a return to the plumbing of the mobile experience. The tentative buy-out deal comes from a group led by its largest shareholder, Fairfax Financial Holdings, which would offer $9 a share, a 3.1% premium over the closing share price at the end of last week, after stocks crashed by 20% on a devastating profit warning.
The group has six weeks to conduct due diligence, and in that period BlackBerry can look for other offers, a process in which its special committee of directors has been engaged for months, with no results. However, now a ‘stalking horse’ price has, in effect, been set, interest may emerge from the enterprise sector, with much-rumored candidates like Oracle ‘ busily building its mobile enterprise and even its carrier back end platforms ‘ IBM or Microsoft. There have also been reports of former co-CEO and co-founder Mike Lazaridis mounting his own bid, backed by private equity firms like Blackstone Group or Carlyle Group ‘ though a return to a leadership which made so many bad errors in its latter years would hardly inspire confidence.
Whatever the outcome, BlackBerry will disappear from the stock exchanges and the mainstream device market, though we can hope its core technologies, like BBM and BlackBerry Enterprise Server, could continue to bring their genuine value and differentiation to another firm’s platform. Those systems may not have consumer clout, but they have contributed as much to a simple, compulsive mobile experience as the iOS user interface.
Before the end game is clear, there is considerable pain to come. At the end of last week, BlackBerry announced plans to slash its workforce, its overall cost base and its product range in a last ditch bid for survival. Its share price slumped by 20% on that day ‘ after Nasdaq suspended trading for 35 minutes ahead of the announcement – as the firm issued a warning of a profit collapse in its second fiscal quarter. It is anticipating a GAAP operating loss of $1bn on revenues of just $1.6bn, only just over half of what Wall Street ‘ already in pessimistic mode about the Canadian vendor ‘ had expected (forecast consensus was $3bn).
In response, BlackBerry said it would cut about 4,500 jobs worldwide and, over the next nine months, reduce its outgoings by half. It will streamline its smartphone portfolio from six to four devices, all business focused, and do what it should have done when its troubles first hit ‘ concentrate on its established enterprise base, especially back end systems.
CEO Thorsten Heins said in a statement: ‘Going forward, we plan to refocus our offering on our end-to-end solution of hardware, software and services for enterprises and the productive, professional end user. This puts us squarely on target with the customers that helped build BlackBerry into the leading brand today for enterprise security, manageability and reliability.’
The firm is clearly abandoning the consumer space, acknowledging the massive failure of the Z10 ‘ launched as the firm’s turnaround model ‘ in a huge charge against inventory. This non-cash, pre-tax charge against inventory and supply commitments will total between $930m and $960m and is ‘primarily attributable to BlackBerry Z10 devices’ in the increasingly competitive smartphone market.
Along with a pre-tax restructuring charge of $72m, this will feed into an expected net operating loss of US$950m to $995m. Adjusted gross margin is expected to be 35% to 37% and adjusted net loss, before inventory and restructuring provisions, is projected to be $250m to $265m. The company has total cash of $2.6bn and no debt.
Revenue for the second quarter is forecast at approximately US$1.6bn, of which half is expected to be services revenue. The company expects to recognize hardware revenue on about 3.7m BlackBerry handsets, with most of these being older BlackBerry 7 models (some BB10 devices which shipped during the quarter will not be recognized as revenue until they are sold on to end users). About 5.9m handsets were sold through to consumers in the quarter, reducing inventory.
The company’s few bright spots concern its back end products. It claims increased penetration of BlackBerry Enterprise Service 10 (BES 10) with more than 25,000 commercial and test servers installed to date, up from 19,000 in July.