BlackBerry Won't Jump Into The Low-End Market

| About: BlackBerry Ltd. (BBRY)

Last Friday, BlackBerry's (NASDAQ:BBRY) CEO Thorsten Heins was asked whether the company would start producing cheaper phones for the emerging markets where people might not be able to offer a high-end phone as easily as the people that live in North America and Western Europe, and the answer was a clear "no." This is very similar to Apple's (NASDAQ:AAPL) tone on the issue.

Many people have been worried about how BlackBerry lost a lot of market share to competitors in the last few years, and many people see smartphones as something that is becoming a commodity. When things become a commodity, they become cheaper in order to keep the interest of people, and we've seen that happen with desktops in 1990s and laptops in early 2000s, along with many other products (for example, automobiles after World War II in North America). As a result, a lot of people feel that making cheap phones is crucial for a company to gain or keep market share in the smartphone market. Apple has always been an exception to this rule, as it has always been seen as the premium company whose products deserve a premium price. BlackBerry wants to be in the same category as Apple, and it doesn't want to compete with low-end phone producers by producing low-end phones.

Recently, I defended Nokia's approach of making low-end smartphones in order to obtain a "foot in the door" status with the users in the developing world who may not be able to afford a high-end phone for a while. After all, building a strong brand name with people who can't afford expensive products at the moment but will be able to afford them as their incomes rise is a strategy that can pay off greatly over time. On the other hand, BlackBerry has different priorities and a different target audience. The company's phones mostly target business people who can afford more expensive phones, and if BlackBerry were to release ultra-cheap phones, this would hurt the company's image in the long run.

Besides, if BlackBerry doesn't want to get into the low-end phone market, this is good news for the investors of the company, because this means the company is satisfied with the way sales are going right now. Companies usually change their strategy when things aren't working out for them. If a company keeps certain things the same, it means they are happy with how things are going in those departments. BlackBerry's management probably doesn't see the need to build cheaper phones, which means that the demand for the high-end BlackBerry phones must be strong.

It looks like many application developers don't believe in a BlackBerry turnaround, as this platform will not offer as many applications as iOS or Google's (NASDAQ:GOOG) Android. Usually application developers write applications for ecosystems that can bring them revenues. Android has the largest number of users, and iOS users are the ones who spend the most money on applications; therefore these two ecosystems are highly profitable for application developers. Without having a meaningful market share, BlackBerry's operating system may lack a lot of good applications, which may hurt the company's market share further. This may be one reason the company might want to release cheaper phones in order to reach more people. On the other hand, users of cheap phones are less likely than users of expensive phones to pay for applications; therefore, reaching cheaper markets might not be all that beneficial for BlackBerry.

Speaking of low-end phones, India is one of the largest markets for these phones. Last Friday, BlackBerry India's managing director Sunil Dutt resigned from his position. This is an interesting development which may or may not be related to the company's turnaround efforts in the country. Mr. Dutt had been in his position for a little over a year, and apparently he received a job offer from another company, which he will be moving to. He said that the company's current performance has nothing to do with the move; however, keep in mind that executives always say that when they move from one company to another. It will be interesting to see what kind of impact Mr. Dutt's resignation has on the company's performance in the Indian market.

On March 24, BlackBerry will announce its quarterly earnings. We will find out how well the company's new phones and operating system are performing, even though they haven't been launched in some important markets (such as the USA) yet. The latest reports suggest that the company is "encouraged" by the early reception of its new phones. The analysts expect BlackBerry to report earnings between -$0.71 per share and $0.00 per share with average estimate being -$0.30 per share. Analysts don't expect the company to be profitable anytime soon, as they expect the company to report a loss of $1.20 per share this year, another loss of $0.61 per share next year and a loss of $0.49 per share in 2015. If BlackBerry can turn a profit within the next couple years, this will surprise many analysts and it will be extremely bullish for the company.

For the time being, it is still very difficult to tell whether BlackBerry's turnaround story will be successful. Even though the company reported a loss of $2.60 per share in the last 4 quarters, it reported a positive cash flow of 1.4 billion during the same period. Cash flow is a better predictor of a company's chances of survival than earnings, because it determines whether the company will have enough cash to finance its operations or not. The next few weeks will be very important to tell us about chances of BlackBerry's survival in the long term. For the time being, I am staying away from this company, but this might change after March 24.

Disclosure: I am long AAPL, NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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