I had written an article in early June about how BlackBerry (BBRY) will need to start discounting its flagship BB10 models given the large price difference between the Z10/Q10 and Nokia (NYSE:NOK) and Samsung (OTC:SSNLF) flagship smartphones. The Z10 and Q10 have a MRP of nearly ~$700 in India, compared to ~$500 for the Lumia 920 and ~$625 for the S4. This did not make sense to me as I don't think that BlackBerry deserves such a large price premium. However, BlackBerry India MD said that he would not go down the discounting route followed by his competitors like Apple (NASDAQ:AAPL) and Samsung. A few days after the statement, the Q10 started being discounted with an American Express (NYSE:AXP) prepaid card of Rs 5000 (~$80) card given for free with every Q10. I received a lot of negative comments on this article from readers indicating that Q10 was a great phone and did not need discounting. I also received an email from a BBRY company representative that this was not a discount but a promotion scheme being done by the American Express. BBRY has now removed any pretense on discounting by doubling the Z10 discount to Rs. 11,000 (~$180) on exchange of old smartphones.
BlackBerry said no to discounts in June
Do you think new handsets will push up market share? And if BlackBerry does not bring handsets in quick succession like Samsung does, would you be able to compete at all?
We're not here to ape competition strategy of price drops, or to liquidate old stock or inventory like some companies are doing. India has always been top priority market for BlackBerry globally. Z10 was launched in India within a month of global launch and India will be the second country in Asia Pacific to get the Q10. We're not indulging in price wars with competition or massive cash back offers, but we're offering value…The Q10 (to be launched day after) and Z10 are placed as premium devices in the market for which, we know, that the consumer will pay a premium for the value they offer.
Source - ET
But changed its tune in just a couple of days
BlackBerry's recently launched Q10 which flaunts the conventional QWERTY keypad is now offered at an exclusive scheme for American Express users. Customers who buy the BlackBerry Q10 smartphone in India using their AE cards will be offered a gift worth Rs 5,000.The company is running this promotional scheme for a limited period of June 12 to July 3 this year and is applicable on online purchases only. Under the scheme the AE card holders will get Rs 5,000 as an AE gift card on purchasing the phone using the card. This Gift Card will be a prepaid card and could be redeemed at most of the places which accept the AE cards in India. The trend of introducing discount or EMI offers on the purchase of smartphones has recently been seen picking up in the market. While EMI is a popular one, there are others who offer cashback and exchange offers as well. Knowing that these kind of offers do push the sales of the devices, BlackBerry is also hoping to cash on the promotional scheme for the Q10 which otherwise costs Rs 44,990 and is highly criticized for the same.
Source - BGR
Now it is doubling the discount by a more than 100%
According to the new scheme, a Z10 buyer can get a discount of Rs 11,000 by exchanging their old smartphones. The exchange scheme will be done by retailers who can offer customers different discounts depending on the quality of the smartphones that the customer wants to exchange. This is a popular discounting scheme started recently by Apple and is now copied by BBRY. Note this discount is much higher than the Rs 7,000 discount being offered by Apple on its complete iPhone range. Apple had started this exchange scheme some time ago in India and it has proven to be quite successful as iPhone 4 sales have surged in India. It had forced Samsung to offer 10% cashback discounts on its top models as well. BlackBerry had been reluctant to offer these discounts, but I think poor sales have forced the company's hand. I had never expected to be proved right in such a short span of time.
BlackBerry has started a month-long programme allowing users to trade their older mobiles for the newest model Z10 for hefty discounts of up to Rs 11,000 as the smartphone maker seeks to push sales."Customers across 17 cities will get discount of up to Rs 11,000 if they buy BlackBerry under this scheme. We have given reference rates to dealers for existing BlackBerry users willing to shift to BlackBerry Z10," BlackBerry India's Director for Channel Sales Prosenjit Sen told PTI. Sen said that the scheme is valid for users of other branded smartphones but the discount in that case will be on the discretion of retailer."Our retailers will estimate the resale value of the phone brought for exchange and accordingly offer discount," Sen said.
Source - Economic Times
It is a prudent move in my view
BlackBerry was pricing itself out of the market with its premium pricing and this discounting should help it compete. I think it was foolhardy of the management to think that BBRY phones could get such a sharp premium over other top companies. The recent quarterly results have indicated that Z10 sales are not what they were expected to be. There was a lot of media hype about the huge demand in U.K. and Canada. That did not turn out to be true. The stock has corrected sharply and made it attractive in my opinion. The company's stock had risen a bit too sharply due to the hype. I have been positive on BBRY stock but have advised caution in the last few months. I have received severe blowback from die hard BlackBerry fans many of whom are now turning to the other extreme. I think that BBRY stock offers great value after the 30% correction. The company has some excellent software and services plus its smartphone offers differentiation in an Android world. BlackBerry does not need a 30-40% market share to become a successful company. Even a 5% smartphone market share will be enough. The company management has done a lot of things right in the last 6 months and stumbling once in a hyper competitive industry is not a big sin in my view.
The argument for a partnership or outright sale becomes stronger
I have advocated in the past that BBRY might be better off selling/partnering with a bigger technology player. The smartphone market has become a global one these days and requires huge resources to maintain a global distribution and marketing network. A lot of Samsung's success in recent times can be attributed to its massive marketing spend as it saturates the airwaves with its product advertisements. Nokia is able to cushion the impact of smartphone marketing expenses through distribution synergies with feature phone segment. BBRY does not have that luxury and I am not sure that it can compete with the big technology boys in marketing spend. Having the best hardware and software is not enough because most smartphones look and work almost the same.
Stock Valuation and Performance
BlackBerry has a market valuation of just ~$5 billion and trades at a low valuation with a P/B of 0.5x and P/S of 0.4x. BBRY will not be profitable in 2013, so valuing it using the P/E ratio does not make sense. BBRY stock has climbed by ~22% in 2013. BBRY has declined by ~18% YTD, though it is up more than 30% in the last one year. The frothiness in the stock has mostly been eliminated by the post result stock decline.
The recent quarterly results for BBRY were bad but have given a much better entry point for investors. BBRY has some tremendous assets in the form of BES, BB10, BBM etc. The company is now trading quite cheaply and is an attractive buyout target. Companies such as Lenovo have been rumored to be looking to buy BBRY. The Canadian government does not want BBRY to be sold to foreign buyers, but if BBRY faces the fate of Nortel then the government will have no choice. Western enterprise technology players such as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT) etc. could also look to add BBRY to their portfolios given its strong enterprise strengths.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.