How aggressive a trader needs to be depends highly on his edge. When the edge is negative… the operator should optimize by taking as much risk as possible… [because] betting small would ensure a slow and certain death…
Nassim Taleb - Author, Philosopher, Trader
The defending side usually strives to organize tactical complications, to take the battle into irrational positions in which the opponent's material superiority would lose its significance.
Anatoly Karpov - 12th World Champion in Chess
Technology Fads Do Not Explain BlackBerry's Situation
I hate faddish debates about technology. Who makes the best smartphones? That's like asking which is the better soft drink, Coke or Pepsi?
I don't care. The differences are small. If we buy a Nokia phone, it's likely to serve its functions of making phone calls and browsing the web. The same holds for most reputable branded products in any industry.
Those who believe in drastic quality differences between major branded phones aren't being objective. Their mentality is a function of mass marketing and bandwagons. All the big players sell phones of reasonably quality.
BlackBerry's (BBRY) revenues declined for five consecutive years and arguments about poor product design can't explain it. Sure, it's a variable, but it's a small variable. Most narratives about BBRY's decline are based on these types of superficial discussions. So, where did BBRY actually go wrong?
Case Study: History Of BlackBerry's Strategic Error
We already know where BBRY went wrong prior to November 2013. BBRY tried to compete head on with superior and better scaled rivals. Simple and direct attacks on more powerful adversaries lost BBRY billions of dollars. The big guns had better marketing, advertising budgets, network effects, and possessed large infrastructures to make fully integrated ecosystems (apps, entertainment, etc.).
Current CEO John Chen's missteps are more difficult to identify. This is because his good moves were heavily publicized, which shrouded the key mistake. First, Chen retreated BBRY into its security niche; slowing its competitors' attack was a wise defensive maneuver. He scaled down operations to prevent further cash bleed. He reduced CAPEX through strategic partnerships. He began making sensible acquisitions in the security frontier. He cut projects that weren't profitable and offered little promise.
It seemed BBRY would start innovating again. Chen wanted to exploit latent patents in BBRY's portfolio. Chen was venturing into new areas and using start-up style tactics by cutting losers and riding winners. Even the switch to the Android OS seemed like a radical concept (initially). I came to view BBRY as a high risk/reward opportunity. So, what's the problem?
The problem is that Chen is trying to win with a slow, positional strategy. He's trying to reposition BBRY against entrenched rivals and isn't taking enough risks. He aims to build BBRY's position into a security powerhouse via acquisitions. But Apple (NASDAQ:AAPL) and IBM (NYSE:IBM) have been entering the enterprise mobility management (EMM) space in unison since 2014. BBRY is trying to slowly position itself against… Apple and IBM combined? This strategy is wrong, and I failed to notice the mistake in the beginning.
Fighting From The Inferior Position
Referring to the two quotes at the beginning of the article, it's foolish to play a slow, safe, positional strategy when we're at a disadvantage (scale, budget, cash, brand, distribution). If we try, we'll lose over time to a more powerful opponent who possesses the edge. It would be a "slow and certain death."
For example, let's use a Blackjack table in Las Vegas. If we actually wanted to beat the casino, then it would be dumb to place $10 on every bet. With a 51% chance of losing each hand, playing small and steady will guarantee a total loss of all funds in the long run.
How do we beat the casino? Well, there's no guarantee because they have the edge. But to maximize our chances, we should throw our whole bankroll on the first bet (and quit if we win). That gives us a 49% chance winning a significant profit. Those odds are superior to the alternative of gradually losing everything. Ironically, high aggression minimizes the incumbent's edge over a defender. This is because the defender can always get lucky in the short term.
Chess players understand this concept well. If they find themselves with a material disadvantage at the chessboard, they know it's unwise to slowly build the position back. The opponent will continue to have more and/or better pieces. Defenders must resort to tactical complexity, such as calculated piece sacrifices, sneaky pawn advances, attacks on the king, and hidden traps.
Tactics are risky. But they increase the probability of the opponent making a mistake. Getting lucky with tactics is the defender's only chance. Risk must be embraced when we find ourselves in precarious situations.
Tactical Complexity In Business
Innovation in business is similar to tactical complexity in games of strategy. Innovation isn't the only form of tactic, but it's by far the most predominant choice. If we get in on something new, we get there early, and we fight hard, it's possible take down the most entrenched competitor. The incumbent is often slow to react and underestimates the impact of the innovation. The trade off, of course, is that most innovations fail to market because tactical maneuvers are risky. But when we're down, tactics are the only way of "maybe" escaping defeat. This is where BBRY failed.
BBRY has failed to fully acknowledge its situation. It creates new smartphones just like business as usual. They're nice phones, but there's nothing truly innovative about them. BBRY is widely believed to have better security. But how much better is it? Does it even matter? Operational results speak for themselves; overall revenue decreased like clockwork since 2011.
Positional strategy works when we have greater or equal resources compared to our opponents. This is clearly not BBRY's situation against Apple, Samsung (OTC:SSNLF), IBM, and many of its other competitors. With an inferior position, BBRY must embrace the dirtier and opaque world of tactics. But where are the tactics? Where are the innovations? How is BBRY trying to disrupt the industry and level the playing field?
BBRY acquired several smaller companies in 2015. The biggest was Good Technology. Chen believes the synergies will improve client offerings and reduce overhead expenses. This is undoubtedly true. What's the problem? Again, Chen is trying to win with a positional strategy.
BBRY's security improvements are mere optimizations with no disruptive force behind them. They're lacking in tactical complexity, which is necessary for a chance to rebound. By taking no risks and slowly trying to position itself against better rivals, BBRY has been slowly and steadily bleeding itself into bankruptcy. It's betting $10 per hand at Blackjack.
BBRY As A Speculation
I believed BBRY was a high risk/reward speculation with a positive expected return. I thought that IF the company got into the right venture, it could have exploded in value. This explosive potential would offset the higher probability of losing money.
Today, I think that assessment was optimistic. I failed to grasp the full extent of Chen's error. He isn't aiming at any real disruption and that reduces the chance of a turnaround. By failing to embrace innovative tactics while conducting business as usual against superior opponents, Chen has slowly crippled this company's position and reduced its value.
I don't know what BBRY's shares are worth. I believe they're worth at least their net cash because cash flow remains positive and the software segment is growing. However, I'm adopting a wait and see approach going into the future. I'll go long again if something changes for the better. This might be consistently improving operations, an unexpected catalyst, or a drastic reduction in share price to deep value territory. But there's no point buying the shares now. I think a wise speculator would wait.
Disclosure: I am/we are long BBRY CALL OPTIONS.
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.
Additional disclosure: I initially staked 4% of my portfolio in BBRY call options. As I am no longer bullish, I plan to hold them until expiration with no plans for replacement.