Innovation? Give Me A Break
My view of the smartphone industry doesn't jive with that of those who believe that it will be a high margin source of profits eternal. They're just handheld, watered-down computers that happen to be connected to the internet at all times thanks to the kind (and profitable) services of AT&T (T), Verizon (VZ), and others. The word innovation in this space has been thrown around so many times that I cannot help but facepalm every time I hear the word. Look, Apple (AAPL) took advantage of the fact that transistor technology had advanced sufficiently to enable half-decent performance in a small power envelope. No magic, just a straightforward evolution of the cell phone.
Of course, Apple wasn't the first to this smartphone craze -- that was actually our good friend BlackBerry (BBRY). They were the "innovative" ones that first decided to add some neat functionality to a phone. It was a great e-mail device, it could surf the web, it had a nifty keyboard, and for the life of me, I couldn't stop hearing about "BlackBerry's" in TV shows, online, in magazines, on the news, and so on. It was a craze, and like with all crazes, it caused a stock price bubble:
Of course, everything came crashing down when Apple's iPhone did it better, and then Google's (GOOG) Android sparked a flurry of competition and essentially commoditized the smartphone. If you can all buy the same parts, and if you can all get the same operating system (and customize it as you please) then what differentiating feature do you have, especially if you're behind the technological curve like BlackBerry quickly became?
BlackBerry 10: Back To The Future?
I like BlackBerry. Of all the standalone smartphone vendors, it is the only one that is almost as vertically integrated as Apple: it has its very own operating system. While everybody else is using some flavor of Google's (quite excellent) Android, BlackBerry bought and developed the QNX operating system (see this article by Gregory Vousvounis for more details), which has some interesting advantages over its peers, especially for the enterprise space where security is a must-have.
More importantly, with BlackBerry 10, the company has managed to whip together an updated, touch-friendly version of its operating system, coupled with a much more modern hardware design to go with it:
This is certainly much more "modern" than the most recent incarnations of the BlackBerry line, which looked like this:
Now, call me a pessimist, but remember how unenthusiastic I was about "innovation" as applied to the smartphone space? Well, as an investor my primary question would be:
What does BlackBerry offer users that they could not get with one of the many models of Android phones available?
With Apple's iPhone, you get the "Apple Brand", and you also get a uniquely rich library of "apps", and a pretty good looking device. I think Apple's margins will continue to erode until it becomes a fairly niche player in the smartphone space, but that's a different debate.
With Android, users get choice of form factor, price-points, internal hardware (for the geeks), and style. Do you want an iPhone knock-off? You can get one for quite a bit cheaper than the "real" thing. Want a 5" phone ith a 1080p display and a super high end, battery-sucking quad-core processor? You can get that for about the price of an iPhone. What if you're not a fan of the traditional iPhone style phone and perhaps find something like the Droid Razr M (as you can tell, I was just kidding about getting rid of this thing above -- I love it) attractive? Then you can have that, too. The point is, you can get literally any variety of phone you want thanks to the openness of the Android OS and the multiple vendors that are pushing hard to compete here.
79 Million Subscribers, A Solid Start
As I said above, I like BlackBerry (although confession: I've never owned a BlackBerry device), and it appears that a good number of other BlackBerry "die hards" do, too. In the most recent quarter, BlackBerry reported that it had 79 million subscribers. These folks stuck around, even as BlackBerry still had not put out anything interesting, so it's hard to imagine that they won't be able to find a BlackBerry 10-based phone that they would like to upgrade to.
Unlike Microsoft's (MSFT) Windows Phone which, while I think is great, hasn't ever been popular, BlackBerry has a solid base of users that it can draw on to get the ball rolling. This is a very key advantage that, quite frankly, is worth a lot more than some of the BlackBerry bears seem to think.
Some People Just Like "New" Things
Let's face it: the iPhone is old hat, the Galaxy-Whatever's are still "cool" but are probably going to eventually be comically large, and the other vendors such as Motorola, Lenovo, and HTC put out good stuff but aren't exactly the flashiest names on the market (they will sell well, though). People are intrigued, excited, and attracted to "new" and "different" things. Right now, BlackBerry 10 is as "new" as it gets.
While the company has the plain vanillia-iPhone-clone that I showed above to please the folks who want something like an iPhone but not quite, it will also sell a successor to the traditional BlackBerry with the QWERTY keyboard:
Quite frankly, I'm surprised that nobody else has actually tried to make a BlackBerry "successor" with the physical QWERTY keyboard. While everybody else was furiously copying Apple, this has led to a basically homogeneous landscape when it comes to input (although Swype is a very useful feature for Android phones that iOS doesn't have). Nobody (but apparently BlackBerry) seemed to think that the precision afforded by physical keyboards -- at least for some people -- could actually a huge differentiator.
But There Are Huge Risks...
The most obvious risk is that people may simply be "burned out" on the BlackBerry name. It was once a symbol of "cool", "bleeding edge", and "Barack Obama has one". Apple has had the spotlight, but that's fading too. There's also a very real risk that, as I suspect is the long-term endgame, that phones become just like PCs, toasters, refrigerators, and washing machines -- a tool that isn't particularly exciting and that people buy for as cheaply as possible. The BlackBerry 10 may very well emerge to be a tool that a nontrivial portion of the world's population want to use, but it will always be subject to fierce competition from other players.
In the long run, smartphones will be marginally profitable, and BlackBerry will need to ship high volumes in order to keep the lights on. Companies with other sources of income, such as Google/Motorola, Samsung (SSNLF.PK), Lenovo (LNVGY.PK), and even Sony (SNE) are the most protected from the fickle whims of the consumer.
So here's what I suggest doing...
The Trading Plan
You want to play the BlackBerry success story? I suspect that initial sales will be good, and I think that there will be additional momentum as the phone launches elsewhere in the world. The odds are, you will make money on this trade, especially if you can buy shares on a day when someone releases some "bad news" about BlackBerry 10. But the key is to not get greedy. Once BlackBerry starts reporting nice Y/Y revenue increases and strong profitability, scale out of the position. This growth will be, as it almost always is, ephemeral. However, that won't stop shares from entering a "hype bubble" as it did in the past, and it will ultimately allow you to profit (assuming BB10 actually sees initial popularity).
Don't get greedy, and don't fall into the "fear of missing out" trap. If you make money off of the hype that is being built here, then don't risk your gains by trying to catch that last drop. It's just not worth it.
I think BlackBerry 10 will see initial success, and I think the stock could go up 50-100% from here as the positives keep rolling in. But keep in mind that, despite the brand and the features, at the end of the day, smartphones are a commodity and it will be an eventual race to the bottom. Sell shares gradually into strength and don't get caught holding the bag when/if this stock goes exponential and then crashes again. Too many paper fortunes have been erased by real greed.
Disclosure: I am long AAPL.
Additional disclosure: The AAPL position is a short term trade that I plan to exit opportunistically. I may initiate a position in LNVGY.PK at any time.