Ever since news about BB10's launch in the U.S. came out, BlackBerry (NASDAQ:BBRY) has been riding a wave of momentum. The latest news to perk up the stock was that Verizon (NYSE:VZ) will join AT&T (NYSE:T) in launching the Z10 in the U.S. later this month. While AT&T will get to launch the long-awaited full touch Z10 smartphone on March 22, Verizon will do the same a week later on March 28. However, prospective BlackBerry buyers on Verizon will be able to pre-order their handsets starting March 14. The pricing remains the same for both the carriers -- i.e., $199 with a two-year postpaid contract. Other U.S. carriers have also expressed interest in BlackBerry's new devices: T-Mobile has been taking pre-orders for the Z10 from business customers since March 11, and Sprint (NYSE:S) is expected to launch the Q10, another BB10 handset with a Qwerty keyboard, soon.
The company announced that it has received an order of 1 million BB10 units from a single unnamed buyer, making it the single largest purchase order in its history. However, details about the deal were not made public, making it hard to draw any context out of the announcement. For example, we do not know if all those units will be shipped in a single order or delivered over a period of time. It is also not known who the customer is. If it is an existing major carrier partner that has signed a multi-year contract for not only the existing BB10 models, but also the future ones -- the contract may not be all that impressive. Keeping the abstractness of the announcement in view, we maintain our $12 price estimate for BlackBerry's stock, about 25% below the current market price. An upside/downside to our price estimate, completely hinges on the sustainability of the initial success and the kind of market share gains that BB10 sees in the coming months.
BB10's U.S. Outlook Uncertain
Geographically, what has hurt BlackBerry the most is the drop in perceived brand value, in what is one of the most lucrative smartphone markets in the world -- the U.S., where the company has now lost its third position to Windows Phone. According to Strategy Analytics, Windows Phone made good market share gains on some high-profile smartphone launches in Q4 2012, to overtake BB for the first time ever. BlackBerry will he hoping to reverse the losses, now that the Z10 is scheduled to launch in the U.S. next week, but changing public perception of a company that failed to keep up with Apple and Samsung in a fiercely contested smartphone market will be tough.
However, the growing number of U.S. carriers announcing support for BlackBerry has given the company hopes of staging a comeback in a market that it used to once dominate. But, while carrier support is a necessary prerequisite, it may not be sufficient to increase user adoption at a time when rivals Android and iOS are attracting the most developer resources, and BlackBerry's limited app availability is being seen as a serious impediment to a high-end smartphone experience.
BlackBerry will also have to fight with a resurgent Windows Phone for a greater share of the carriers' marketing budgets. Sure, carriers are looking to increase competition in the smartphone market and lessen the impact of subsidies on their margins, but it remains to be seen how much marketing weight they are willing to put behind the new OS, given iOS and Android's popularity and Lumia's strong holiday quarter with WP8. The delays in launching BB10 handsets in the U.S. due to an unusually long carrier-testing phase, may have potentially been due to this reluctance.
With BlackBerry nowhere near its peaks of customer appeal, it will look to get its installed base to upgrade to BB10 initially. We expect most of the early BB10 adopters to be BlackBerry fans and existing subscribers, of which there are about 80 million around the world currently. A majority of these subscribers are in international markets, where BBM's appeal is still pretty strong. BB10's success in the U.S., will therefore depend on the number of Android and iOS users it manages to convert, especially now that BlackBerry's market share has tumbled to a historic low of 1.1% in the country last quarter.
Enterprise Focus Crucial
As important as retail is to BlackBerry, a lot more crucial will be its ability to latch on to its enterprise clients. By our estimates, the BlackBerry services division, which includes push email fees and is reliant on continuous enterprise patronage, is the company's most valuable division currently, accounting for more than 35% of our price estimate for the stock. It is on this division's high-margin revenues that BlackBerry has managed to generate cash in the last few quarters despite seeing its handset revenues fall by nearly half in the past year.
But a carrier push to reduce fees as well as a loss of enterprise customers to rival platforms as the bring your own device (BYOD) movement becomes more popular could hinder BlackBerry's strategic move to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES), potentially making the BES 10 upgrade process costlier and complicated, further reducing BB10's chances of pushing into the enterprise market.
Making it tougher for BlackBerry is increasing competition from retail stalwarts Apple and Samsung that are upping the ante in the enterprise market. Last month, Samsung debuted its KNOX enterprise mobile solution, with which it expects to make its Android smartphones more secure and take advantage of the ongoing BYOD trend to directly challenge BlackBerry in the enterprise sector. Apple, meanwhile, is touting the security of its closed iOS ecosystem and the iPad's popularity to sign on enterprises customers at BlackBerry's expense. As a result, BlackBerry's share in the enterprise smartphone market fell to only about 10% last year. Apple, on the other hand, accounted for almost 50% of the smartphones shipped to enterprises, followed by Samsung at 16%.
A lot depends on BB10's reception in the market and BlackBerry faces an increasingly uphill battle against the well-entrenched mobile ecosystems of the iOS and Android that are steadily making their way into the enterprise market as well. BlackBerry's mobile market share has plummeted from over 3% in 2011 to an expected 1.8% in 2012. Although we do not expect BlackBerry to ever reach the heights it once commanded in the smartphone market, if it manages to take its market share back to over 3% by the end of our forecast period, there could be a 30% upside to our price estimate.
Disclosure: No positions.