On January 30, 2013, BlackBerry (BBRY) launched its latest BlackBerry 10 operating system. A small cadre comprised of technology insiders and Wall Street financiers perceive the BlackBerry 10 event as a last ditch effort to save this company and ward off bankruptcy. In the near future, the BlackBerry 10 platform will ultimately branch off into two separate devices in the X10 and Z10. The Z10 is available now, as a fully touch screen operational handset, while the traditional QWERTY keyboard X10 will roll out at a later date. An extensive Verge write-up grants the Z10 a solid seven out of ten rating that effectively proclaims this flagship phone lacks a "killer app." Without any so-called "killer app," however, the BlackBerry 10 event is already doomed to fail. Investors should take heed and avoid, or liquidate stock.
The Killer App
The killer app, or application, is a software program identifiable by its effective necessity. The trajectory of the technology revolution, of course, is an accelerated version of the classic business cycle. The killer app can very well transition between drawing board idea, launch, growth, maturity, decline, and bust within the span of six months. In rare cases, one killer app is the driving force behind multi-billion dollar corporations, entrenched subcultures, and international trends. In this Web 2.0 era, examples of the killer app would include Google's (GOOG) Search and Maps alongside Apple (AAPL) iTunes, Pandora (P) streaming music, Facebook (FB) social networking, and Amazon (AMZN) electronic shopping. For technology firms, a blockbuster launch is always the first step towards monetization. Over time, the killer app transforms into a vital node of an integrated ecosystem.
At present, BlackBerry is in desperate need of an immediate home run. Besides improvements in near-field communications technology, BlackBerry 10 security, telecommunications, and audiovisual features may now be described as standard equipment. Unlocked, or sans service contract, BlackBerry Z10 phones retail for between $800 and $1,030 globally. At this price point, the Z10 will compete against premium Lumia 920, Apple iPhone 5, and Samsung Galaxy SIII handsets.
As time marches on, the Google Android - Apple iOS duopoly is becoming even more entrenched at the top of the smart phone market. Brand appeal is even more critical for third-party developers, who can now distribute applications with the help of established operating system infrastructure. Taken together, Apple iOS and Google Android offer access to more than 1 million software applications through third party developers. Over the past year, Apple has paid out more than $8 billion to developers, after taking its 30% share of incoming revenue. For the sake of comparison, the BlackBerry 10 offers access to a mere 70,000 applications. Most likely, the majority of these applications will add little value to the BlackBerry 10 experience. Without a "killer app," BlackBerry will not gain traction in the all-important U.S. market. Instead, the company will be relegated to hawking cheap phones throughout the developing world.
The U.S. Market
On December 20, 2012, BlackBerry released its latest report for the Q3 2013. For the third quarterly period ended December 1, 2012, BlackBerry reported $2.7 billion in revenue. Of this amount, BlackBerry took in a mere $520 million in the United States, which is significantly less than the $1 billion in U.S. revenue collected during the year-over-year period. Taken together, BlackBerry sales have been relatively weak throughout North America and the United Kingdom over the course of the past year. According to The Economic Times, BlackBerry remains relatively popular in India, where it is known for dumping old inventory onto this emerging market. In the future, the BlackBerry 10 launch will be dismissed as a failure, if this company is forced to sell off Z10 phones for pennies on the dollar in India.
On February 6, 2013 research firm comScore reported its analysis of the December 2012 U.S. smart phone market. This report presented averages of data for the three-month period between October 2012 and December 2012. According to comScore, BlackBerry operating systems powered a mere 6% share of all smart phones, which is actually down from last quarter, when the company served an 8% share. The Windows platform, with its 3% share, fared even worse. Meanwhile, the Google Android - Apple iOS duopoly controls 90% of the U.S. smart phone market. As an original equipment maker, Apple now maintains a 36% share of this market and leads the pack. For now, the Apple playbook calling for near total integration is the clear winner, financially. Alternatively, Google Android, and its open architecture, is most popular in terms of unit sales.
The BlackBerry 10 has no killer app to alter the landscape of this marketplace. If anything, investors should prepare for industry consolidation. At today's valuations, prospective industry consolidation would still leave BlackBerry shareholders holding a toxic bag of assets.
The Bottom Line
Last May 2012, Google closed out its $12.5 billion acquisition of Motorola. Later that summer, a Federal jury ordered Samsung to pay Apple $1.05 billion to settle a patent infringement lawsuit. These events marked the apex of the smart phone patent market. By now, the patent bubble has burst, as evidenced by demands from the Federal Trade Commission for Google to provide competitors with access to former Motorola patents on "fair, reasonable, and nondiscriminatory" terms. Acknowledging the collapse of smart phone patent valuations is critical for trading BlackBerry. During the latest earnings conference call, BlackBerry executives announced that the company was up for strategic review. Any business segment may therefore be sold off at any time to the highest bidder.
On February 15, 2012, BlackBerry shares closed out the trading session at $14.15. Wall Street now values BlackBerry at $7.3 billion in market capitalization. BlackBerry closed out its latest quarter, however, with $12.6 billion in assets over top of $3.3 billion in liabilities, or $9.3 billion in shareholder equity. BlackBerry now trades for significantly less than book value, but is actually a value trap. Traders accurately anticipate a BlackBerry 10 flop, and ongoing operating losses. In theory, BlackBerry shareholders would fare better, if segments of this business were to be sold off immediately. At this point, however, there are no takers.
The Q3 2013 BlackBerry balance sheet includes $3.1 billion in intangible assets. This illiquid position will depreciate towards zero, if it cannot be leveraged to turn a profit. This decline in intangible asset valuations, alongside deteriorating operating cash flow will inevitably damage the balance sheet and book value, before share prices also collapse towards zero.
BlackBerry is now a strong sell. Shares will break down sharply, after falling through technical resistance at $12. Despite this bearish analysis, BlackBerry is still no definite short sale candidate. According to famed British economist John Maynard Keynes, "markets can remain irrational longer than you can remain solvent."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.