With weaker-than-expected quarterly results, some analysts are suggesting BlackBerry's (NASDAQ:BBRY) results may just be strong enough for the company to survive as a niche manufacturer. However, these analysts are focusing only on smartphone sales, they are ignoring the best chance for future success AND IT IS NOT BES10!
Over the first half of 2008, Research in Motion (now BlackBerry) was seen as "King of Mobile Communication." Many investors believed that it was unstoppable, driving shares in June of 2008 to a high of $147.50.
But Steve Jobs had a vision. He saw a world where a single device would replace the slew of devices everyone carried. From this vision, the iPhone was born. A pocket sized device which integrated the functionality of phone, camera, PDA, GPS, Web browser, email client, media player and game device.
By the end of 2008, the iPhone had lit RIM's world on fire. By September 2012, it had crashed and burned. It was no longer a significant player in the smartphone market and shares had tumbled to $6.25.
Over the years BlackBerry had battled head to head with Apple, trying to build a 'better' iPhones, while allowing the crown jewel, BBM, to languish.
BBM slipped from first to fifth place in mobile instant messaging behind WhatsApp with 250 million users, Viber with 200 million users, Line with 160 million users and WeChat with 100 million users. In addition, Skype (with 750 million subscribers) recently incorporated instant messaging, which suggests BBM may have slipped to 6th place.
...Fast Forward to Today...
Operationally BlackBerry is back and firing on all cylinders.
By the end of this year, it will have launched a new OS along with six new devices, released a new version of BES, significantly enhanced BBM and offered BBM services to both iOS and Android users. It is this last move, overlooked by analysts, which may be the company's future.
Although the success of BES won't hurt BlackBerry's bottom line, it can't save BlackBerry. Even if BlackBerry captures 100% of the mobile device management (MDM) market, revenue would still only be about one-quarter of the revenue BlackBerry earns from subs. Research by Gartner estimated the total global MDM segment for 2013 to be around $500 million.
Although rooted in instant messaging, extensions to BBM cross over into traditional VOIP and electronic money transfer. In many regards, the extensions redefine what people view as instant messaging, just as the iPhone redefined mobile phones.
By the end of this year, BBM may have a significant edge over the competition as it will be first to market to offer a unified "real-time" messaging suite. Downside for BlackBerry is that they will need to battle various market leaders on numerous fronts.
- BBM Chat & Groups - Instant Text Messaging
- (Top competitor WhatsApp)
- BBM Voice and Video - Voice Messaging and VOIP
- (Top competitor Skype)
- BBM Channels - Pushed Community Messaging
- (Top competitors YouTube Channels and Twitter)
- BBM Money - Instant Money Transfers / Electronic Wallet
- (BBM will be first to market - closest rival being PayPal)
To gain an appreciation as to the threat presented by each of these competitors, have a look at the user base and annual revenue.
User Base (millions)
BBM revenue believed to be ~20%
Skype revenue believed to be ~2.5%
Mobile revenue believed to be ~40%
PayPal revenue believed to be ~35%
The first thing interesting with these numbers is that they suggest far more money can be made in related 'paid' services than in basic messaging. This suggests that giving away basic BBM Messaging to gain market share may not have been a bad move.
Looking at the numbers, potential revenues from related services are definitely large enough to match, or even surpass, BlackBerry's traditional revenue from subs.
With regards to direct competitors, although those like WhatsApp may have significant user base, revenue is limited. This may restrict its access to the resources necessary to expand beyond the 'traditional' instant messaging niche. It may be too small to attract the financial sector partner required in order to expand into electronic money exchange.
Larger players, like Twitter, YouTube and PayPal, focus so closely on their particular market segment it is unlikely they are looking to expand beyond that niche.
This leaves Skype as the most likely direct competitor for BBM.
Monetizing 'Free' BBM
A clue as to the long-term strategy underlying free BBM came out in the recent quarterly earnings call. Thorsten Heins, with regards to free BBM coming to Android and iOS, said the following.
And at Blackberry Live, we also announced our plan to bring the much-loved BBM service for free to iOS and Android, responding to our users' number one desire to be able to connect to all of their friends and family, irrespective of which smartphone they carry.
This announcement was met with tremendous reception, and anticipation has been building in the market ever since. We remain on track to launch the core BBM experience for these platforms, including chat and BBM groups, before the end of the summer.
Our approach to growing BBM cross-platform is an example of the new service revenue opportunities we can capitalize upon with our technology and innovation. Our goal is to support and [unintelligible] the new and exciting BBM initiative as needed, in order to allow us to be as focused and as agile as other social networking competitors.
He only states that free BBM Chat and BBM Groups will be offered on Android and iOS. The inference being that for the 'full' BBM experience (including BBM Voice, BBM Video, BBM Channels and BBM Money) you are going to have to pay. This opens the door to two either 'pay per use' OR a monthly 'premium service' plan.
Although 'pay per use' is more likely, offering a monthly service plan does have the advantage that it would avoid 'ticking off' current BlackBerry customers. Loyalists still under contract, and required to keep paying for service others get for free, may otherwise become alienated and resentful.
If BBM recaptures market share, BBM Money will still only be successful if it is easier to use than incumbents OR offers something new. Current feedback suggests BBM Money will achieve both.
- With BBM Money, to send money you create a message, click on a 'send funds' box and enter the amount to attach (i.e. easier than attaching a file). Once done, the funds are transferred directly to the recipient's bank account.
- With PayPal, you login to PayPal, select the email address you wish to send the money to, enter the type of transaction and the amount to send. Once sent, assuming the person you sent the money to has a PayPal account, the recipient needs to log in and accept payment. The money is then frozen by PayPal for a period of time before it is allowed to transfer the funds to the bank account.
Speculation is that the financial partner BlackBerry is working with to take BBM Money global is Visa. BlackBerry has met with Visa on numerous occasions over the past year. The assumption is that they have been in talks with regards to NFC Payments.
However, I believe that it is more likely that the talks have been with regards to BBM Money. Talks have continued despite VISA announcing its own applet for NFC Mobile Device Payments. If Visa is on board, BBM Money will instantly gain brand recognition on par with PayPal.
In regard to the size of market and competition for BBM Money, consider that PayPal only has 120 million users while Skype has 750 million users. Even without needing to compete with PayPal, there is a huge potentially untapped market for an electronic wallet.
BBM Money, in addition to being a potential cash cow for Blackberry, has the potential to create a moat limiting new market entrants. In order to enter the game, new entrants will need to convince financial institutions that the infrastructure the messaging platform uses is secure prior to entry. BlackBerry's back end is one of the most trusted networks in the world.
Suffice it to say that YouTube and others providing similar services are earning billions in promotional revenue through similar approaches and market research suggests that this market is growing at a rate of 30 to 40% per annum.
As we move forward, competitors for BlackBerry should no longer be seen as Google or Apple. The competitor to focus on is Microsoft. The battle won't be Windows versus BB10, rather it will be BBM versus Skype.
BlackBerry technically holds the upper hand at this point in time, but caution is warranted considering that Microsoft has greater market presence and deep enough pockets to quickly address deficiencies.
One up side to BB10 devices selling so poorly (perhaps under 2 million units last quarter) is that neither Google or Apple likely see BlackBerry as a serious threat anymore, at least not on the same scale as Microsoft. With Microsoft a common threat, talks between BlackBerry, Apple and Google to incorporate BBM/BES into all three mobile OS now has a greater chance for success. This would be a huge boost for BBM and BlackBerry.
Does the potential BBM offers justify investing in BlackBerry?
Too early to tell.
It comes down to if BBM gains momentum retaking top spot in mobile instant messaging. The launch on Android is only weeks away, and how well the app is received will answer the question. Specifically, watch for BBM to move in to the magical 100 million to 500 million installs camp on Google Play joining Skype and WhatsApp.
In a previous article, I suggested that BlackBerry was not traditionally a service company. As such, I went on to argue that it would have a tough time making the transition from manufacturer to service company.
Since then I had it pointed out to me that I completely overlooked that BlackBerry was as much about the instant messaging service as the handset. Or as Thorsten Heins put it to shareholders.
We've never been a device-only company, as we are also running a global secure data network and services business. And we don't plan to run the company with a short term device-only strategy.
What is exciting about Blackberry today is that we are getting very comfortable with who we are as a company, and where we will fit in the market.
To me it very much sounds like BlackBerry may have made the same mistake as I had and until recently saw itself as a device rather than as a service company. This renewed focus can only help BlackBerry's chance to succeed.
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.