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Valuing Blackberry Ltd (BBRY): A Strategic & Critical Review

|Includes: AAPL, BlackBerry Ltd. (BB), IBM, MSFT

For most people Blackberry Ltd is synonymous with Blackberry smartphones. However Blackberry is a collection of highly valuable assets, many of which are at the verge of operating as standalone IT companies or as an integral part of global diversified IT companies.

Blackberry benefited immensely from globalization and now same globalization is bringing a new predicament, where scale, size & resources become crucial in maturing industries. 'To acquire' or else 'be acquired' has become a way to survive & thrive. What started as a race between smartphones and their operating systems has now evolved into a global war of ecosystems. In this article I will further expand on why it may be difficult for Blackberry to continue in its current structure, high value of Blackberry's various assets and why markets may be valuing this collection of invaluable assets at a rock bottom.

The mobile ecosystem, I am most familiar with, has at least four pillars- iTunes, iCloud, app store and a wide range of iBrand hardware. So from iPod to iMac; I own four different i-devices, each one acting as optimized delivery outlets in different situations for the same personalised integrated content. New pillars are being added as I write and existing pillars further strengthened. Apple has effectively pinned me down into their own 'Hotel California':

"You can check out anytime you like but you can never leave"!

When I visit a shop to buy a TV or a PC, I see numerous products from several companies, stacked up nicely on the shelves. All products mainly differ in size, speed, power, pixels, finishing etc. Purchase decision boils down to 'how much I want' and 'how much I pay'. Apple and other global smartphone companies are escaping or delaying their place on this commodity shelf space, by building their ecosystems. For little blackberry to develop its own would be a swim against the tide.

'Blackberry Enterprise Services' business with its gold standard security is a high margin and highly profitable IT business in mobile computing. BES has maintained its market leading position in its field despite a relentless decline in market share of Blackberry phones from nearly 50% to low single digit over a period of last 5 years. This is an outstanding feat when you consider BES had been for most part operable only for Blackberry phones. This is akin to my legs being shortened bit by bit, by over 90% during 5 years and I am still the best runner in the town! People do not change easily; their accountant, security guard, Barber or IT service provider. BES serves as a 'security guard' and 'IT provider' for enterprises. Now BES has started to open up for other mobile platforms, together with tremendous growth of mobile computing and rising need for security makes it a even a bigger value. Societies around the world are becoming increasingly security conscious in all aspects of their lives. A long-term trend in making over the last several decades possibly at least in part linked to rising overall global prosperity and a faster rise in prosperity of relatively few. There are many areas, which have high security needs but currently have low penetration of mobile computing for e.g. hospitals needing to maintain confidential patient data. There are areas, which have high security needs and are increasingly moving on mobile computing platforms as well, for e.g. online gambling, online dating, online monetary transactions etc. These trends will further accelerate as mobile computing approaches or even exceeds, the functionality of static computing.

A globalized world further enhances BES's potential as an integral part of other diversified global IT Companies like IBM, taking advantage of their greater global reach and being a part of bundle offering. I get cable TV, broadband, Mobile phone subscription and fixed telephony; all delivered in a bundle package by a single provider which works out not only cheaper but also convenient in having a single contract, single bill and a single point of contact for troubleshooting. My service provider even though no better quality wise, still earns my long-term loyalty. Why would enterprises not prefer to have all their diverse IT needs met by a single provider in a Bundle! Vodafone recently acquired Kabel Deutchland for a high premium price, pursuing the same bundle strategy. IBM is just an example. Similar collaborations may be feasible with other global IT companies like Microsoft, oracle or even HP. BES could be extremely valuable for Apple or Google as well, helping them to diversify into enterprise space and adding Blackberry's security to their evolving ecosystems.

Blackberry messenger is a gold standard in mobile messaging & communication with more than 50 million active subscribers. How market has priced various companies with subscribers, may give at least some idea to its potential stand-alone valuation.

Facebook with 600 million (daily active) to 1.2 billion (monthly active) subscribers, valued at $120 billion, Pandora media with 70 million active users is valued at $5 billion, Skype with 170 million registered user and much less active users at the time of Microsoft's $8.5 billion purchase.

BBM's 50 million subscribers are just on the Blackberry phones and it is now going live for over a billion App-droid users.

QNX and Certicom were standalone IT companies and have expanded their unique businesses since been acquired by Blackberry.

Wall street analysts typically value Blackberry's patents from what is on the balance sheet, which mainly includes purchased patents & Licenses for e.g. from Nortel sale. Blackberry has been a research in motion for nearly two decades. Its own in-house patents however, do not show up on the balance sheet. Analysts also try to assign a value per patent, as if they are buying tomatoes by kilos. Each single patent has its unique characteristics & valuation, which can only be discovered through a market process by participants for whom that patent has a business value. Such participants include neither me, nor any analyst but could be any company in mobile computing arena including all those mentioned above. Value of security patents would be several times higher for Apple then it is in Blackberry's hands. Blackberry's premium security can be scaled to a sack full of premium Apples or restricted to a handful of Blackberries.

It is as if I own the best tea plantations in the world but not selling my premium tea leaves at distribution out lets around the world, instead continues to make a plain cup of tea by an out dated process and selling at my 'nowhere to be seen' shabby little shops!

Blackberry's smartphone division is a loss making business in an increasingly commoditized sector. Its eventual place lies with the companies who have the advantage of scale. Nokia managed to sell its even more unprofitable handset division for a price much more then current market valuation of the whole Blackberry Ltd! Market has started to price up Nokia in a big way, as soon as it sold its handset division.

Market may be overly fixated on its battered smartphone division but is it also signaling that Blackberry in its current structure cannot thrive in a globalized world where scale, reach & resources have become more important than ever? Is market also predicting that even innovation or entrepreneurial zeal may have a hard time continuing on an unstable background of constant reorganizations at Blackberry? Thereby, valuing this otherwise an extremely invaluable company (excluding cash) at 2-3 % of its peak value in 2008. Nortel in bankruptcy sale fetched more than 3 cents on the dollar of its glitzy dot-com bubble valuations.

Blackberry has decided to go private in what appears to be rather an insider's deal than a due market process. This will likely buy out or force out public shareholders at a historical bottom to make way for a group of wealthy investors. For the first time in history Blackberry management may be relieved to see a lower price on Blackberry stock which would mean an easier takeover by Fairfax led consortium, who had no problems facilitating a golden parachute pay package, which curiously coincided with the last peak of Blackberry's stock price in May. This is a big deal for the Fairfax consortium, taking full advantage of the extremes of market pessimism.

Blackberry private or public may continue in its current united form of value destruction. Alternatively it may adopt a path of creative destruction by letting its invaluable assets break free to discover their full potential, true value & rightful owners through an open market process.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.