BlackBerry (NASDAQ:BBRY) has been reorganizing its business over the last several quarters, shifting its focus from hardware to enterprise mobility related software and services. The company has been counting on the loyalty of its large yet declining user base of government institutions and corporations, who value its reputation for security and its proven mobile device management software (MDM), to stem its precipitous revenue declines and eventually drive growth. However, the company's transformation into a profitable software and services player isn't going to be an easy task. Its software and services revenues fell by around 29% year-over-year during the previous quarter (Q1 FY 2015) and competition in the MDM and security space is heating up, with a series of high profile deals by dominant players such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Moreover, BlackBerry's subscriber base has been dwindling, falling from around 79 million in early 2013 to an estimated 50 million at the end of the last quarter, while monetization for its new offerings has yet to gather steam. In this note we take a look at some of the key challenges that the company's software and services business faces.
Trefis has a $8.50 price estimate for BlackBerry, which is slightly below the current market price.
Success Of Cross Platform Strategy Could Be Clouded By Apple and Google's Recent Deals
BlackBerry has taken several initiatives to shore up its enterprise service offerings. It introduced cross platform support in the BES 10 version of its enterprise software in order to capitalize on the growing "bring your own device" (BYOD) trend, providing support for rival platforms including Android and iOS. However, competition in the mobile security and MDM market is intensifying with dominant smartphone players entering the space. For instance, Google intends to integrate Samsung's (OTC:SSNGY) KNOX mobile enterprise security and device management offerings into its upcoming Android L operating system. While we think it's unlikely that KNOX will offer the depth of features that BlackBerry offers with its BES services, the integrated offering could see a meaningful uptake in enterprise and government sectors, given Google and Samsung's formidable marketing capabilities. Apple too recently forged a wide-ranging enterprise-focused deal with IBM (NYSE:IBM), which would see the two companies collaborate in areas including software, data security and device management. Given that these deals involve the two companies - Google and Apple - that command over 95% of the mobile market, BlackBerry's cross platform offerings could face an uphill task, despite the company's reputation and long track record.
BES 12 And New Handset Introductions May Not Drive Subscriber Growth
BlackBerry has also invested considerable resources in developing the latest version of its BlackBerry Enterprise Server called BES 12. BES 12 would unify support for BES 10 and BES 5 - a legacy version of BlackBerry enterprise software that supports the company's older, yet popular BB7 handsets. This would make it simpler for organizations to operate BB7, BB10 and other third-party devices on a single infrastructure. However, we believe that this strategy is largely BlackBerry device focused, and is only likely to serve to retain existing BlackBerry users rather than entice additional users for BlackBerry services. Moreover, the company's sales mix has also been shifting in favor of BB10 based smartphones of late, possibly undermining the need for the BB7 support in the first place. During the previous quarter, BB10 handsets accounted for about two-thirds of the company's shipments, compared to the prior quarter when they were outsold by legacy BB7 phones.
BlackBerry also seems to be counting on its handset business to drive subscriptions to its BES service. The company plans to launch two new high-end smartphones, dubbed Passport and Classic, this year. However, it seems unlikely that these handsets will be able to shore up the company's subscriptions meaningfully, since the smartphone market momentum is clearly not working in BlackBerry's favor, given the dominance of the iOS and Android platforms. BlackBerry's smartphone market share has fallen from around 2.9% a year ago to around 0.5% as of Q1 2014, while its device revenues have fallen by around 82% year-over-year. According to IDC, BlackBerry's smartphone market share could dip further to around 0.3% by 2018.
Monetization Concerns For EZ Pass Strategy
BlackBerry has been trying to attract more customers to its BES 10 platform through its EZ Pass program, which allows organizations running earlier versions of BES or competing mobile device management platforms to trade up to the BES 10 offering free of charge. The company intends to eventually monetize these users by billing them for technical support and by encouraging them to upgrade to a more premium version of the service that offers enhanced security features. However, the program could have near-term implications on BlackBerry's profitability, since the company would not earn anything from free licensees, while still providing them with technical support until January 2015. More importantly, it remains to be seen how effectively the company is able to convert these free licensees into higher value customers.
Disclosure: No positions