Security Breach Overshadows BlackBerry Quarterly

| About: BlackBerry Ltd. (BBRY)

'Breaking news' implicated BlackBerry in the Edward Snowden affair which involves claims that British Intelligence illegally monitored foreign government communications during the 2009 G20 meeting in London.

BBRY closed down 0.97% on Monday following the release of the news. Although share value recovered on Tuesday, expect further volatility as more details are released.

The leaked documents state:

... during G20 meetings in April and September 2009 GCHQ used what one document calls "ground-breaking intelligence capabilities" to intercept the communications of visiting delegations.

This included:

• Setting up internet cafes where they used an email interception programme and key-logging software to spy on delegates' use of computers;

• Penetrating the security on delegates' BlackBerrys to monitor their email messages and phone calls;


New converged events capabilities against BlackBerry provided advance copies of G20 briefings to ministers … Diplomatic targets from all nations have an MO of using smartphones. Exploited this use at the G20 meetings last year.

No further information regarding the severity of the breach has been provided. BlackBerry responded to the report with the following statement.

We remain 100 percent confident in the superiority of BlackBerry mobile security for clients using our integrated device and enterprise server technology. Our public statements and principles have long underscored that there is no 'back door' to secure BlackBerry Enterprise Solutions.

BlackBerry has previously acknowledged that they give governments 'lawful surveillance methods for emails sent between people over BlackBerry Messenger'. BlackBerry also provides the government in India with "metadata" for BES messages sent within the country including sender, recipient and the id of the device initiating the message (but not the contents).

If BES security is compromised, watch for news releases from various governments downgrading the security clearance allowed for data sent using BlackBerry devices.

Financial Implications

Irrespective as to the success of the BB10 launch, revenue from services still represents BlackBerry's bread and butter. Growing these revenue streams is where Thorsten Heins has indicated he sees BlackBerry's future. Ask yourself:

  • Can BES10 succeed in a competitive marketplace if it doesn't live up to its security claims?
  • Will auto manufacturers use BBM for MTM (machine to machine) firmware updates if BBM can be hacked?
  • Will BBM Money succeed, if BlackBerry's '100% Secure' BES platform is not '100% Secure'?

If accurate, this news could derail BlackBerry's long-term recovery. Not only could it cut into current service revenues of $900 million, it could undermine US government and US corporate sales, which are the company's last strongholds in the States. In addition, with the allure of security tarnished, would BlackBerry still be able to charge a premium for their devices?

Bright Light in Tunnel

I expect, once more is known, we will learn that the breach was far less extensive than alluded to. BES security has recently been reviewed and approved by various governments closely allied with the UK including Germany.

It is more likely that foreign government officials sent the intercepted messages using 'public' BBM, rather than BES secured messaging. British Intelligence would only have needed to use the tools already provided by BlackBerry for monitoring illegal activity to intercept these messages.

As long as BES has not been compromised, Blackberry's reputation will remain intact. Unfortunately, the timing of the story is such that it may give the shorts another month's reprieve before we see any significant increase in share price. This is worth taking into account when deciding how large a position to take prior to the release of the upcoming quarterly report.

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.