Technology may best be described as a "winner take all" market. The most popular innovations, such as Microsoft (NASDAQ: MSFT) Office, Facebook (NASDAQ: FB) social media, Google (NASDAQ: GOOG) (NASDAQ:GOOGL) Search and the Apple (NASDAQ: AAPL) iPhone have emerged as somewhat standardized protocol within the daily lives of millions. This double-edged sword, of course, has pitted spectacular growth potential alongside spectacular failures. Notable tech busts that literally came and went in a flash may include Sega CD, Microsoft Zune and MySpace. For 2014, the biggest tech flops of the year will likely represent the mirror image of a successful mobile product launch. The mobile revolution has emerged as yet another extension of Moore's Law, which theorized that semiconductor performance would double every eighteen months.
Any review of successive reports out of research firms comScore and IDC would confirm the presence of a dominant Google Android - Apple iOS duopoly above the mobile market. On September 5, 2014, comScore published estimates that Android (51.5%) and iOS (42.4%) systems combined to operate 93.9% of the U.S. smartphone subscriber market through the May - July quarter. On the hardware side of the ledger, comScore and IDC have both also identified Apple and Samsung as the leading tablet and smartphone vendors in the market. Last year, Apple sold 71 million iPads and 150.3 million iPhones for $32 billion and $91.3 billion in fiscal 2013 revenue, respectively.
Impressive mobile growth, of course, has attracted competition from all corners of the technology space. For their part, BlackBerry (NASDAQ: BBRY) and Microsoft will largely remain shut out of the mobile market after their misguided attempts to pitch the Passport and Surface as productivity devices. Alternatively, Amazon (NASDAQ: AMZN) made the mistake of launching its Fire Phone without a killer, or revolutionary, application to further differentiate the device away from the competition. As such, cynical reviewers, such as Fast Company's Tyler Hayes, immediately went on to rip the Amazon Fire as a "comical failure." For now, conservative investors should avoid buying into BlackBerry, Microsoft and Amazon shares, which would be associated with the three biggest technology busts of 2014.
#3 BlackBerry Passport
The Passport has emerged as BlackBerry's latest attempt to capture mobile market share through the launch of a phablet. The term "phablet," of course, is a play upon words that suggests traditional smartphone and tablet features will be fused together within one machine. Most likely, the iPhone 6 Plus and Samsung Galaxy Note 4 will emerge as the two leading phablets on the market heading into the 2014 Holiday Season. Earlier this year, online magazines Tech Radar, Pocket Lint and The Huffington Post each identified the Samsung Galaxy Note 3 as the best phablet on the market. IDC also published estimates that phablet shipments will expand beyond counts of those upon both the laptop and tablet markets, by the end of 2015. According to IDC, the phablet platform will put together a remarkable 60% five-year compound annual growth rate into the near future.
The Passport, of course, will run upon an updated version of the BlackBerry 10 operating system, which Forbes has already slammed as "an enormous, record breaking flop." In terms of physical specifications, the BlackBerry Passport weighs in at 194 grams, while also standing 5 inches tall by 3.6 inches wide. Notable technology critics Larry Dignan and Pete Pachal did describe the box-like Passport as an "odd creature" and "very strange" upon their own initial viewings. The Passport does feature a working QWERTY keyboard that has emerged as somewhat of a BlackBerry trademark.
BlackBerry, again, has aggressively marketed its Passport as a productivity device. To do so, Waterloo cited academic research that defined 66 characters per line on a book as "optimal." The 4.5-inch square Passport screen may display 60 characters per line, which compares favorably to standard rectangular smartphones that show 40 characters. In his recent BlackBerry blog post, Matt Young claimed that the Passport would emerge as an ideal tool for mortgage brokers, healthcare professionals, writers and financiers who analyze spreadsheets, edit rough drafts, and fire off emails throughout the day. A 2013 APQC survey of 336 respondents, however, concluded that tablets offered less in productivity gains at the workplace than did conventional laptops. The APQC information dovetails with successive reports out of Google that have suggested consumers purchase smartphones for entertainment, rather than for work.
On September 26, 2014, BlackBerry reported a narrower than expected net loss of $207 million upon $916 million in revenue, for its fiscal Q2 2015, which ended on August 30, 2014. Wall Street was clearly pleased with the results, as traders drove BlackBerry shares to $10.26, for a 4.7% gain on the session. Be advised further that BlackBerry was coming off a year when it racked up $965 million in losses off $1.6 billion in Q2 2014 revenue. The improving bottom line has largely been the consequence of aggressive cost-cutting measures, rather than any real turnaround in business performance. For Q2 2014, BlackBerry posted $1 billion in cost of sales, $627 million in inventory write-downs, and $527 million in selling, marketing and administration costs. By Q2 2015, BlackBerry cost of sales and selling marketing and administration costs had been whittled down to $484 million and $195 million, respectively.
Perhaps most importantly is the fact that BlackBerry incurred a mere $7 million in Q2 2015 inventory write-downs. A Passport flop, of course, would expose BlackBerry to the risk of massive inventory write-downs and selling, marketing and administration costs, without any real uptick in revenue throughout fiscal 2015. In all, a weak Passport launch may drive BlackBerry toward $1 billion in net losses over the next year, and further decimate shareholder value.
#2 Microsoft Surface Pro 3
On October 26, 2012, Microsoft went fully live with Windows 8 as the first major software release out of Redmond in three years. With Windows 8, Microsoft also introduced its Metro concept, where traditional smartphone, tablet and desktop interfaces were fused together beneath one operating system. The Surface tablet, of course, also launched alongside Windows 8 in what was a curious attempt to bridge the technical gaps between laptops and tablets. In 2013, Microsoft did take a $900 million Surface RT inventory-related charge after the company failed to move product. Microsoft, in trying to be all things to all people, ultimately ended up pleasing nobody.
Still, Microsoft repeatedly went back to the well, and eventually introduced the Microsoft Surface Pro 3 on May 20, 2014, in New York City. The Microsoft Surface Pro 3 runs upon updated Windows 8.1 software, which Brad Chacos of PC World referred to as "the great compromise" between PC loyalists and Microsoft executives pushing the Metro theme. The Microsoft Surface Pro 3 now retails for between $799 and $1,549. The Surface keyboard-cover, of course, is sold separately for $129.99. Microsoft has aggressively pitched its Surface Pro 3 as "the tablet that can replace your laptop." Microsoft even went so far as to compare this tablet directly against the MacBook Air on the Surface Pro 3 landing page.
On March 27, 2014, Microsoft did finally make its Office software available for the Apple iPad. In retrospect, however, this move may have confirmed a concession of defeat. IDC recently listed out Apple, Samsung, Lenovo, ASUS and Acer Group as the top-five tablet vendors in terms of calendar Q2 2014 shipments. That quarter, fifth-place Acer Group shipped one million tablets. Microsoft, despite its five-year running average of $28.8 billion in annual operational cash flow, has literally failed to scratch the surface of this market, and ship a mere one million tablets per quarter. To add insult to injury, NFL commentators have repeatedly referred to the Surface as the iPad this regular season after Microsoft negotiated a $400 million advertising deal with the league.
Microsoft, at its core, will remain a software business that delivers product to enterprise customers. For fiscal 2014, the Commercial Licensing operating segment generated $38.6 billion in gross margins off $42 billion in segment revenue for Microsoft. Microsoft Commercial Licensing did account for the volume sales of server products, Office and Windows operating system licenses. For the sake of comparison, Computing and Gaming Hardware accounted for a mere $893 million in gross margins off $9.6 billion in segment revenue. Interestingly, Microsoft did include the Surface alongside its popular Xbox gaming console within this Consumer and Gaming Hardware division. In all, Microsoft closed out its 2014 books having posted tallies of $86.8 billion in revenue and $59.9 billion in gross margins.
The weak Surface Pro 3 launch, of course, has sabotaged Microsoft's efforts to generate real growth through mobile. Going forward, Microsoft will likely maintain its 15-year run as a beta stock that simply tracks the S&P 500 Index, while also returning larger amounts of capital back to shareholders in the form of buybacks and dividends.
#1 Amazon Fire Phone
On September 8, 2014, online retailer Amazon made the unprecedented announcement that it would be slashing the price of its 32GB Fire phone to a lowly 99 cents if customers agreed to the terms and conditions of a two-year service contract with wireless carrier AT&T (NYSE: T). The 32GB Fire Phone originally debuted at $199, a short 45 days earlier, on July 25th. Interestingly, the sharp price reduction for the Fire phone does parallel the failure of Amazon's bait-and-switch tactics to trickle down to real growth at the bottom line. Going forward, the Fire flop will expose shareholders to even greater financial risks as Amazon stock has remained significantly overvalued relative to earnings throughout the past year.
Prior to launch, Amazon aggressively marketed the Firefly and Dynamic Perspective technologies of its Fire handsets. According to Amazon, Firefly is capable of recognizing more than 100 million separate movies, songs, telephone numbers, website addresses and physical goods. Alternatively, Dynamic Perspective provides rotating 3D sightlines of various objects and street scenes, with the help of four specialized cameras and four infrared LEDs. Still, critic Sebastian Anthony was to promptly compare Firefly and Dynamic Perspective to the mere "gimmicks" of a "mostly mediocre phone." An incredulous Anthony even went on to openly wonder as to "who in their right mind would buy Amazon's Fire Phone?"
Amazon has now been relegated to offering up its one full-year of its Prime services to further convince consumers to part ways with 99 cents and take home the Fire Phone. Amazon Prime normally retails for $99 per year. Prime membership grants rights to more than one million songs, 500,000 e-books and 40,000 separate television shows and movies. Most importantly, Prime also offers free two-day delivery of goods on goods purchased through Amazon. Amazon, yet again, is literally giving away product in an attempt to drive online traffic toward higher-margin sales.
At the September 26, 2014 closing bell, Amazon shares changed hands at $323.21, which also calculated out to $148.9 billion in market capitalization. Amazon, however, has already racked up $18 million in losses upon $31 billion in revenue through the first six months of 2014. In 2013, Amazon did report $274 million in net income, after banking $75 million in net profits, at the comparable semiannual point in time. This year, Amazon may close out its 2014 books with $250 million in net income, at best. At current levels, Wall Street traders are valuing the Amazon business model for 600 times current estimated earnings. This stock is wildly overpriced, especially after considering the idea that shareholders may bear the brunt of massive asset write-downs in the aftermath of the Fire Phone flop. Conservative investors should avoid buying into Amazon as shares will likely endure a major price correction within the next 18 months.
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.