On January 30, 2013, the company formerly known as Research in Motion brought its BlackBerry 10 operating system to market. On that very same date, the then Research in Motion confirmed its permanent name change to BlackBerry (BBRY). In conjunction with this product launch and name change, BlackBerry has awarded rhythm and blues musician Alicia Keys the title of "global creative director." BlackBerry is effectively carting out its biggest guns in a last ditch effort to survive its own Waterloo. The smartphone market, however, is quickly transitioning out of growth and into the product maturity stage of this business cycle. Smartphone margins will inevitably shrink, as competition intensifies and product is increasingly commoditized. For long-term BlackBerry shareholders, bottom line results from the BlackBerry 10 launch will prove to be too little, and too late to save this investment.
BlackBerry at Waterloo
On June 23, 2008, BlackBerry stock established an all-time high at $147.50, as this company controlled roughly half of the smartphone market. By late September 2012, however, BlackBerry shares had collapsed to a 52-week nadir at $6.22, before closing out the latest February 24, 2013 trading session at $15.73. The recent sharp rebound in share price performance and day-to-day volatility may be largely attributable to speculation related to the BlackBerry 10 release alongside frantic short covering. BlackBerry shareholders must recognize that their positions may quickly implode back towards zero if the BlackBerry 10 release fails to reignite interest in this brand.
In a scathing February 2012 piece, Jessie Hicks and The Verge dismissed BlackBerry as an electrical engineering company, rather than a consumer electronics movement. Technocrats in the BlackBerry executive suite brought this business to its own Waterloo, after they haughtily dismissed Steve Jobs and his original Apple (AAPL) iPhone as little more than a hippie fad. BlackBerry engineers were effectively left with mouths agape - at the concept of a touch screen handset lacking any traditional QWERTY keyboard.
A 2008 photograph of President Barack Obama and his trusted BlackBerry handset captured the initial essence of the smartphone revolution. Back at that time, the BlackBerry was an indispensable tool for the seasoned executive, young go-getter, and political bureaucrat. The BlackBerry, or Crack Berry, was engineered to accommodate workaholics, who admired efficiency and security. Today, however, it is teenage girls and hipsters who effectively hold sway over the smartphone market. The smartphone is but one portal into a consumer electronics ecosystem for software applications, entertainment, and audiovisual production. Ironically, it is Apple that has emerged to set the Gold Standard for this integrated business model. For survival, BlackBerry is forced to beat a retreat away from its own technocrat culture at Waterloo, and towards an embrace of the Apple Way.
For its latest 2012 fiscal year ended September 29, 2012, Apple reported iPhone unit sales of 125 million. On the top line, this iPhone sales performance calculates out to be $80 billion out of Apple's $156 billion in total 2012 revenue. The iPhone, of course, represents the ultimate centerpiece and gateway into Apple's closed and horizontally integrated iPad, iTunes, iPod, and iMac ecosystem. Juxtaposed against Apple, the Google (GOOG) business model features open infrastructure for competing original equipment makers to create product that drives traffic towards Search and online advertising. For its 2012 fiscal year ended December 31, 2012, Google earned $43.7 billion out of $50.2 billion in total revenue through advertising. According to Asymco analyst Horace Dediu, Google only collects a mere $2.75 in profit per Android device sold, per year. Google's mobile strategy is effectively a defensive move to protect Search.
In the aggregate, niche marketing, minimalist design, and counterculture appeal are common denominators supporting the established Apple iOS - Google duopoly. On February 6, 2013, research firm comScore released its latest summary of the U.S. smartphone market. This report averages data for the quarterly period between October 2012 and December 2012. During this range in time, Google Android and Apple iOS operating systems powered a respective 53% and 36% of U.S. smartphones. The Android - iOS duopoly continues to consolidate strength, as indicated by a combined 3% increase in share above the prior quarter. As original equipment makers, Samsung (SSNLF.PK) and Apple together controlled 57% of the market during this latest quarter.
At the bottom of this "winner-take-all" paradigm, Nokia (NOK), Microsoft (MSFT), and BlackBerry are struggling to maintain any semblance of relevance. The BlackBerry 10 platform will ultimately branch off into two separate X10 and Z10 handsets. The full touch screen BlackBerry Z10 is already available for sale, while the QWERTY keyboard X10 launch has been postponed. The Z10 is the flagship phone that will compete directly against the Nokia Lumia 920, Samsung Galaxy SIII, and Apple iPhone 5. The Z10, of course, is notable for security features that effectively establish a firewall between work and personal profiles. Furthermore, BlackBerry and Visa (V) executives have already negotiated a deal to transform this phone into a virtual wallet through near-field communication technologies. BlackBerry shareholders, however, must be alarmed while perusing the latest Verge review claiming that the Z10 lacks a "killer app."
As smartphone features converge together, it will be nearly impossible for BlackBerry to directly challenge the established brand appeal of Google and Apple. This is a game of musical chairs, where Google and Apple already occupy two out of the three available seats in the room. Prospective BlackBerry investors, when evaluating the possibilities of industry consolidation, may quickly discover that the BlackBerry 10 launch was simply too little, and too late to save this company. The BlackBerry 10 event will fail, and force BlackBerry financial managers to effectively float the note through debt refinancing, layoffs, and even asset division sales over the course of the next year.
The Bottom Line
On December 20, 2012, BlackBerry released its third quarterly report for fiscal year 2013. For this quarterly period ended December 1, 2012, BlackBerry lists out its improving cash position, net income, and subscriber base of 79 million as highlights. When broken down further, however, these opening highlights paper over a situation that continues to deteriorate. Last quarter, BlackBerry tallied $2.7 billion in revenue, which is sharply down from the year-over-year mark of $5.2 billion. For Q3 2013, BlackBerry suffered through an operating loss of $230 million. The scant $9 million in third quarter net income is largely the result of $226 million in tax credits. A failed BlackBerry 10 launch will only add to selling, marketing, and administration costs, without any significant increase in revenue.
The BlackBerry balance sheet now includes $12.6 billion in assets over top of $3.3 billion in liabilities, which calculates out to $9.3 billion in shareholder equity. At $14 per share, times 524 million shares outstanding, BlackBerry is now worth $7.3 billion in market capitalization. According to Wall Street, BlackBerry investors would fare better if this business were immediately sold off or broken up into spare parts, instead of continuing to operate, lose money, and wreck the balance sheet even further. Value investors must acknowledge that BBRY stock has consistently traded beneath book value over the past year.
During its latest earnings conference call, BlackBerry executives intimated that this company was up for strategic review. BlackBerry business segments are now on the market to the highest bidder. Unfortunately for speculators, buying interest targeting the depths of the smartphone space is practically nonexistent. In theory, all assets that cannot be leveraged for profit will depreciate towards zero over time. BlackBerry closed out its last quarter with $3.1 billion in intangible assets on the balance sheet. This amount will be written down, as the smartphone patent bubble bursts, after peaking last May 2012 around Google's $12.5 billion buyout of Motorola.
The majority of BlackBerry assets are relatively illiquid. Over the next eighteen months, BlackBerry managers may be forced to aggressively collect receivables and work off inventories, in order to make good upon called debt. BlackBerry is now a value trap, and investors should sell the stock and take profits, before shares break down and through technical support at $12.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.