I all too often have to remind investors to be careful about analyst research notes that have a clear agenda regarding BlackBerry (NASDAQ:BBRY). Last week Deutsche Bank's Modoff issued a research note claiming underwhelming demand for the Q10 in the UK. Below I discuss Modoff's methodology and expose some tragic flaws in the report.
Firstly Let's Look at 'Methodology.'
Deutsche Bank didn't visit stores but rather called them from the US. As someone who has done numerous store checks I can tell you that they are best done in person. You need to strike up a personal contact with a manager. This is the only way you will glean nuggets of information that are of value. Store managers have been told not to discuss sales specifically with members of the press or researchers. Simply put, the most common response to channel checks is to "call our head office, I can't comment." Basically with 'Telephone channel checks' you will repeatedly be blocked over the phone until you find an irrelevant employee who might break this rule and shed some information. This inevitably skews your study to less sophisticated respondents and diminishes the quality of the study. Telephone checks are only worth so much.
The questions asked by Deutsche Bank were loaded. See below:
"We first asked sales representatives their first choice for smartphones and recorded their unaided response.
We then asked what they thought about the new BB10 platform, followed by a comparison to the iPhone 5 or SG4 and finally, what was their best selling smartphone."
In my opinion the question is loaded as we all know the iPhone 5 and SG4 are the most popular phones in the world. Why even bother with this comparison unless you are trying to make a point that the Q10 isn't a success? Basically, if the Q10 sells at a 10 to 1 ratio to those phones, it would represent 10% market share and would be a fantastic result in terms of earnings impact and gains in market share for BBRY. You cannot compare the Q10 to the iPhone 5 and SG4 in terms of raw sales as expectations for the Q10 are so much smaller. For example, if the Q10 were to sell at 1 to 10 vs those phones, it would be tripling its 3% or so US market share. Not bad?
"This gave us insight into device popularity. Where possible, we tried to gauge unit sales."
Now you might also think that in order to gauge 'unit sales' you would need the phone to be on release in the stores that you checked?
EE Have Not Released This Phone Yet; It Is Still On Pre-Order!
This is the message you will hear if you call the business upgrades or the consumer upgrades teams on Friday last week, the day after this article appeared. The Q10 is only available for "pre order" on EE via telesales, upgrades, or online. They even apologized to me for the confusion with their website showing "available."
I found this odd so I called the High Street Kensington EE store. They did not have it yet, but the rep there did tell me that it might be available in one or two of the flagship stores, but release was very limited.
I next called Oxford Street (flagship store), and here's what they told me. "Very few in stock. We get it in dribs and drabs. It's in very high demand." If EE haven't really launched the Q10, how can they represent 50% of Deutsche bank's sample?
Deutsche Bank could have avoided this awkward situation by simply calling Vodafone who have launched the Q10, but then maybe they would have told them something Modoff's team did not want to hear, like it's doing well? There are three networks in the UK, Modoff could easily have called Vodafone, EE, and O2? Why did he choose not to check Vodafone if checking 30 stores? Vodafone has had the Q10 the longest. Sadly had Deutsche Bank done their research correctly and picked two operators that were actually selling the handset, the study would still have been flawed.
The Q10 is sold to business users mostly, and those sales will not be seen by the high street stores, but will occur directly via the business telesales and upgrades team. This is another little known fact that needs to be taken into account when doing channel checks in the UK. Operators tend to sell directly to consumers and certainly to businesses. The stores are more for walk-in issues. The brunt of operator sold handsets do not hit the high street stores but rather sell directly to end users via upgrades. So the very point of trying to channel check the UK via operator high street stores reveals a glaring error of the highest order as it shows a deep lack of familiarity with distribution unique to the UK.
If you did want to check consumer demand for handsets in the UK, you would simply have to call the largest high street retailer of handsets in the UK, the Carphone Warehouse as I did here. The Carphone Warehouse is the most important and knowledgeable phone retailer in the world. In 2007, when Best Buy USA needed to buy a mobile operation to jump-start their mobile business, they bought a 50% stake in Carphone Warehouse. It is simply unforgivable to run 'channel checks' aimed at retail consumers in the UK and not check CPW.
I know first hand that investors, upon reading his previous UK research notes, have pointed out to Mr. Modoff that he cannot ignore the Carphone Warehouse and Phones4U. They are the UK power retailers to consumers.
Why did Mr. Modoff still choose to base his sample on EE stores which have not properly launched the handset?
Why did Mr. Modoff not call Carphone Warehouse or Phones4U?
What Can Investors Do About All This Flawed Research?
Earlier this week I flagged the ITG research study in the UK. In that article an SA contributor pointed out that the head of research at ITG was an 11-year veteran of notable bear, Pacific Crest. Research is rarely research when it comes to battleground stocks in a tug of war. It becomes all too often a tool for propaganda for bulls or bears to color their target stock.
Research can be paid for in numerous ways:
- It can legally be purchased and ordered on the demand.
- Trading commissions can influence research; Chinese walls are unfortunately paper-thin.
An analyst who has led his clients astray in a horrific short position has a duty to try and pull them out. All these factors come to bear when analysts issue a research note. Each side is trying to paint his horse. Deutsche Bank just forgot to bring enough paint today.
Disclosure: I am long BBRY. 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.
Additional disclosure: Short Deutsche bank research team