BlackBerry Passport: Microsoft Surface Part Deux

| About: BlackBerry Ltd. (BBRY)


BlackBerry has begun to market its Passport handset as a productivity device - as did Microsoft with its Surface.

Like Microsoft, BlackBerry will not be able to gain real traction within an already saturated mobile space that values entertainment above work productivity.

Conservative investors should avoid buying into BlackBerry stock. Business operations at BlackBerry are not likely to improve over the course of the next year.

On June 19, 2014, BlackBerry (NASDAQ: BBRY) CEO John Chen first revealed the new Passport handset in a limited demonstration at the company's annual general meeting in Waterloo. Upon initial review, the technology commentariat immediately mobilized to debate the merits of the Passport's box-like physical dimensions amongst themselves. For its part, BlackBerry has begun to pitch the Passport handset as a productivity machine for white-collar professionals. On paper, the BlackBerry Passport marketing campaign appears eerily similar to that of the failed Microsoft (NASDAQ: MSFT) Surface tablet. As such, a real turnaround at BlackBerry is not likely to materialize over the course of the next year.

The Metro Concept

The Surface tablet will be forever linked to Windows 8 and the Metro concept. With Windows 8, Microsoft engineers attempted to integrate traditional smartphone, tablet and desktop features within one Metro, or universal, operating system. As a part of the Metro concept, Surface machines were designed to bridge technical gaps separating tablets from personal computers. Microsoft, of course, has aggressively promoted its Surface Pro 3 as the "tablet that can replace your laptop." The Microsoft Surface Pro 3 homepage does include links to help consumers make direct comparisons to the Apple (NASDAQ: AAPL) MacBook Air.

Legions of technology reviewers have also compared the Surface machine against the iPad tablet. Today's somewhat routine Microsoft versus Apple comparisons follow a similar framework to those made during the 2006 "Get a Mac" advertising campaign. In these series of commercials, Apple was personified as the chic and helpful hipster, while Microsoft was the corporate relic.

As a workstation, each Surface tablet did include one functional keyboard and a USB port for printing off documents. Microsoft, however, literally conceded defeat in the tablet wars after making free versions of its crown jewel Office software available to iPad users last March. A 2011 survey out of Google did conclude that consumers used tablets for "fun," while maintaining laptops for work-related activities. Apparently, the Microsoft Surface tablet, in conjunction with Windows 8, failed to alter these mobile market dynamics.

In 2013, Microsoft took a $900 million Surface RT inventory-related charge. Moor Insights & Strategy principal analyst Patrick Moorhead went on to speculate that former CEO Steve Ballmer was forced out of Microsoft to "save face" after the Surface RT "debacle." Recent data out of research firm IDC may confirm that the Surface has remained all but irrelevant within the tablet market. A July 24 IDC report listed Apple, Samsung, Lenovo, ASUS and Acer Group as the top-five Q2 2014 tablet vendors in terms of unit shipments and market share.

Apple, as the leading tablet vendor, shipped 13.3 million iPad units for a 26.9% share of this market through the second calendar quarter of 2014. For the sake of comparison, fifth-ranked Acer Group shipped one million tablets, which calculated out to a mere 2.0% in market share. Again, Microsoft has largely remained shut out of the tablet space, despite averaging $28.9 billion in annual operational cash flow for five years running. Both BlackBerry and Microsoft have failed to recognize that consumers have largely reserved tablets and smartphones for entertainment, instead of work productivity.

The Passport and the Phablet Market

The phablet is somewhat similar to the "2 in 1" tablet-laptop hybrid within the mobile market spectrum. The term "phablet" suggests the blend of traditional smartphone and tablet features within one machine. Online magazines Tech Radar, Pocket Lint and Huffington Post have all identified the Samsung Galaxy Note 3 as the best phablet now on the market. The Samsung Galaxy Note 3 features a 5.7-inch screen that presents graphics in 1080 x 1920-pixel resolution. The technology commentariat has also largely agreed that the iPhone 6 launch will ultimately branch off into two separate 4.7 and 5.5-inch screen handset wings. For the sake of comparison, the Apple iPad Mini screen measures out at 7.9 inches, diagonally.

As with the Surface, the BlackBerry Passport will fail to alter the dynamics of an already crowded mobile market, without a "killer," or revolutionary, application. According to comScore, the Android (51.9% share) - iOS (42.1% share) duopoly controlled 94% of the U.S. smartphone subscriber market through the April - June quarter. Meanwhile, BlackBerry lost 30 basis points in share through this same time frame to close out the spring months with a mere 2.4% of this market.

BlackBerry, for its part, has gone on to aggressively market its Passport for "breaking design boundaries." The box-like Passport machine stands 5.04 inches tall by 3.56 inches wide. The Passport features a 4.5-inch screen that presents images at 1440 x 1440-pixel resolution, above a working QWERTY keyboard that has become somewhat of a BlackBerry trademark. BlackBerry has also made the claim that the Passport runs upon the largest battery on the smartphone market. Prominent technology reviewers, however, have already dismissed the BlackBerry Passport as a "strange" and "odd creature."

Still, BlackBerry has pitched its Passport as a productivity device. Matt Young, in his BlackBerry blog post, railed against the "entertainment-driven look" of the standard smartphone, before citing academic research defining 66 characters per line, per book, to be "optimal." The BlackBerry Passport has been designed to show 60 characters per line, which according to Young, makes for favorable comparisons against traditional smartphones that display roughly 40 characters, horizontally. BlackBerry appears hopeful that architects, financiers, healthcare professionals and writers will covet the Passport for reviewing blueprints, analyzing spreadsheets and composing documents throughout the day. The real market for white-collar professionals and BlackBerry diehard customers, however, may be described as limited, at best.

The Bottom Line

Again, the BlackBerry Passport and its associated marketing shtick have come off as quite similar to that of the Microsoft Surface campaign. For 2015, BlackBerry may ship one million Passport handsets at an average price of $500 per unit, for an additional $500 million in revenue. The Passport, however, would effectively degenerate into a wash sale, if its launch were to also add $500 million in selling, marketing and administration costs to the 2015 income statement. Most likely, a failed Passport launch would expose BlackBerry shareholders to massive asset write-downs over the course of the next year.

On June 19, 2014, BlackBerry released financial results for fiscal 2015 first quarter ended May 31, 2014. BlackBerry, of course, opened its Q1 2015 by highlighting a return to GAAP profitability. For its latest quarter, BlackBerry did generate $23 million in net income off $966 million in revenue. A quick review of the Q1 2015 report, however, may confirm the idea that BlackBerry's improved financial results were largely the result of aggressive cost cutting, instead of improved business performance. Last year, BlackBerry racked up $84 million in losses upon $3.1 billion in Q1 2014 total net sales. Taken together, cost of sales and operating expenses fell by a combined $2.3 billion over the past year.

Be further advised that Fairfax Financial and a consortium of institutional investors now own $1.25 billion in BlackBerry convertible debentures. Terms of the debenture agreement granted rights for bondholders to exchange principal for BlackBerry stock at $10 per share. Full conversion of these debentures may therefore expand the balance sheet from 525 million to 650 million shares of common stock outstanding and expose shareholders to massive 23.8% ownership dilution. BlackBerry's recent Q1 2015 financial results also included a favorable $669 million swing in terms of debentures in fair value adjustment above the prior quarter.

For now, conservative investors should avoid buying into BlackBerry and its recently improved cash flow from financial and investing activities, which have remained separate from any real turnaround in operations. Strong operations, of course, are more so critical to the long-term viability of any business.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.