BlackBerry's 'Velvet Rope' Strategy: Don't Fight Goldman

| About: BlackBerry Ltd. (BBRY)

A false sense of security may have fallen on short-sellers positioned with at least 135 million shares short in BlackBerry (NASDAQ:BBRY). We believe that the short interest has grown since the last reported number on January 15th because of the negative rebate (the cost to borrow shares that are in high demand to short) that has risen since our last article above 6% annually with prices varying at different "Wire Houses". BlackBerry has struck a chord with many loyal fans around the globe. News is spreading that the new Z10 and soon to follow QWERTY keyboard cousin Q10 are fast, cool and are "hard to get". That is unless you are in the U.K., as fellow SA contributor Michael Collins reported on Friday and updated this morning, claiming anecdotally the Z10 is sold out in many U.K. locations. All Things D also reports things are off to good start in the U.K. David Pogue of The New York Times and ABC News Reporter Joanna Stern have clearly shown that BlackBerry, which is sporting a new trading symbol, is back in the game. In fact, the non-immediately U.S. available Z10 is causing a lot of buzz for the product in blogs and can be followed daily on the BlackBerry addict website

Barron's reports Goldman Sachs analyst Simona Jankowski, who has a $19 price target and also knows the shares are getting harder to borrow, is quoted as saying:

"We continue to see significant upside to estimates over the next three quarters, as BB10 devices drive upside to the Street's ASP and margin forecasts. With 110 carriers completing lab testing by February, 50 carriers offering integrated billing, and Verizon getting an exclusive for the white Z10, we continue to see strong carrier support for BB10. Consumer adoption will decide the ultimate outcome, but estimate revisions should be a positive catalyst in the meantime."

We must admit that the recent sell-off since the January 30th launch and the ensuing 25% downdraft in the share price which closed at $13.02 on February 1st is not what we expected. However, we see this as a buying opportunity which may be short lived as others start to see what is happening around the globe with user adoption. Our feeling is that many have been misclassifying BlackBerry as another Palm in the making. In fact, that is not a fair comparison as Palm was never a smartphone company. In fact Palm built a PDA {personal digital assistant} OS and outsourced its device manufacturing to Casio (OTC:CSIOF) and others and never really could really graduate from that role. BlackBerry was a wireless SMS messaging company, then added email and phone capabilities and emerged as the creator and leader of smartphones. This lasted until Apple (NASDAQ:AAPL) IOS and Android OS and their respective devices were born in 2007. BlackBerry founders and entrenched management were slow to recognize and adapt to the virtual "Tsunami" they had created.

This is reminiscent of what happened to Volkswagen in the early 1970's and continued into the 1980's. Like BlackBerry, Volkswagen [VW] (OTCPK:VLKAY) was the pioneer of the fuel-efficient compact car in the worlds biggest market, the U.S. Starting in the 1950's, the "Beetle" from Germany reached its pinnacle of popularity and notoriety and subsequent declined in the mid 1970's, ironically unable to fully re-capture traction from the fuel crisis in 1974, when Japan's Honda and Germany's BMW started to lure away VW customers with lower priced and more compelling designed cars. Also like BlackBerry, VW had developed an international market which kept the company alive despite lagging popularity in the U.S. New management and a completely changed product line and target market and acquisitions has made VW a world leading company now owns Audi, Porsche, Skoda, Bugatti, Bentley and Lamborghini vehicle brands as well. While VW was originally a German Government company at first, it went public in 1960 and has a historic past. Here is an excerpt from Forbes in June 2012 :

"VW's worldwide market share has been growing steadily, from 9.6 percent in 2007 to 12.3 percent in 2011. Last year, Volkswagen outperformed the rest of the industry, even surging past its own internal targets, with global sales of 8.3 million vehicles, and a record $14.8 billion in operating profit on revenues of $209 billion."

Clearly, VW found its way back to its leadership position in an industry which is as competitive and fickle as the smartphone market. We think Thorsten Heins, BlackBerry's CEO, has learned something from his German brethren. As the first of its kind, VW struck a chord with the marketplace and became an iconic brand. BlackBerry did as well and is still used by our president today. The value of these brands coupled with everyone's love of a "comeback" story gives BBRY a very compelling chance to succeed. Ironically, this was part of Apple's comeback story as well.

As fellow SA contributor Nick Chiu pointed out in his article "Impact Of Age, Income And Ethnicity On Smartphone Decisions", navigating the marketing plan for smartphone industry takes an in depth knowledge of demographics globally. We believe that BlackBerry has clearly taken this as the cornerstone to their roll-out plan. Embedded in this is a calculated "velvet rope" constricted supply and create controversy to help build anticipation and buzz. The result has created numerous headlines such as "Unlocked BlackBerry Z10 sells for $1,725 on eBay" which is part of a gorilla low cost marketing strategy that competitor Apple has notoriously used when it too was struggling to come back from the digital "trash bin".

In the meantime, product sales in their top markets including the United Kingdom and Canada are first to begin. This is logically a smart cash-flow/inventory management with demand certain to be highest in theses markets and subsequently will lead to a fast "turn" of cash intensive resources. As Chiu points out, ethnicity and age are a key to "gaming" your marketing plan for success. We think the move to bring Alicia Keys on board plays on this intricately planned BB10 platform and related device rollout. In fact, Alicia Keys is singing the national anthem at this years SuperBowl and is also starring in the BlackBerry's Superbowl "mashup" which was placed YouTube. The actual ad was very different and is also available on YouTube.

The real roll-out BlackBerry is managing is their ground up new Operating System {OS} BB10. BB10 goes beyond people and connects things as well. Heins called the M2M {Machine to Machine} opportunity as the 'Internet of Things' in his launch speech. This will be the platform that will compete with IOS and Android. Our personal experience with the Dev Alpha B device reveals a very fast browser and an easy to use on screen keyboard that feels very different from and Google's (NASDAQ:GOOG) Android, AAPL's IOS and Microsoft's (NASDAQ:MSFT) Windows 8 Phones. Thorsten Heins announced on CNBC that the BlackBerry tablet which was released last year will be able to get an upgrade of the new BB10 software soon, signaling that this software will be the core of their future tablets as well. Dan Shey of ABI Research describes BBRY's prospects as :

"M2M or the Internet of Things is the next frontier for mobile and wireless computing. BlackBerry's QNX platform is a fantastic starting point for a stake in this market,but BlackBerry can't fall behind in IoT as it did with touchscreen smartphones if it hopes to become a mobile computing platform company."

We agree with Dan. In fact we also think the cash flow from BBRY's new strategy which lets enterprise managers control competitor's device with the BBRY enterprise management software will actually preserve the current profitable revenue stream BBRY has from its enterprise business.

Disclosure: I am long RIMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.