Analysts say the longer BlackBerry takes to close on a takeover offer from Fairfax Financial Holdings, the worse the smartphone’s outlook is.
BlackBerry’s once bountiful fortune at risk of shrivelling up
Renee Morad, Foreign Correspondent, writes from New Jersey
At one time, professionals carried BlackBerrys as a status symbol of corporate power and success. Then a wave of consumers jumped on the BlackBerry bandwagon, thanks to the brand’s messenger application that became popular with teenagers and young adults.
Today, however, the so-called “CrackBerry” that caused users to check their smartphones incessantly is increasingly being traded for more entertaining smartphones such as the iPhone and Android-based models.
BlackBerry’s five-year decline was brought to the forefront of the public eye when the company announced last month a second-quarter loss of close to US$1 billion and plans to lay off about 4,500 employees, representing 40 per cent of its workforce.
The Waterloo, Ontario-based smartphone maker’s revenue for the quarter that ended on August 31 was $1.6bn, with a net loss of $965 million ($1.84 a share). In comparison, the same quarter last year delivered revenues of $2.9bn and a loss of $229m (44 cents a share).
Since BlackBerry’s fateful earnings report, the company’s share price has tumbled 25 per cent.
This grim outlook comes just eight months after the company unveiled its new operating system and a flagship Z10 smartphone – featuring BlackBerry Hub, a touchscreen keyboard and BBM Video – aimed at rivals Apple and Samsung.
However, the write-down of unsold Z10 smartphones largely contributed to BlackBerry’s losses.
To add insult to injury, a class-action lawsuit has been filed against BlackBerry by a shareholder who claims it misled investors about its future, including how the BlackBerry 10 smartphone line would perform against competitors.
BlackBerry stated last year that it was “progressing on its financial and operational commitments” and that the BlackBerry 10 platform was well received by developers.
The lawsuit aims to represent thousands of shareholders who bought BlackBerry shares between September 27 last year and September 20 this year.
Before the lawsuit, BlackBerry admitted to spending cash at a higher rate as it moved to sign a tentative deal that could take the company private. Fairfax Financial Holdings, the company’s largest stockholder, last month made a $4.7bn bid, offering $9 a share to privatise the firm.
Along with its earnings report last month, the BlackBerry chief executive Thorsten Heins issued this statement: “We are very disappointed with our operational and financial results this quarter and have announced a series of major changes to address the competitive hardware environment and our cost structure.
“We understand how some of the activities we are going through create uncertainty, but we remain a financially strong company with $2.6bn in cash and no debt.”
Analysts, however, are sceptical of Mr Heins’s optimism, saying the longer it takes to close the Fairfax deal, the worse BlackBerry’s outlook is.
Michael Walkley, a senior equity analyst at the investment bank Canaccord Genuity, said: “For a multibillion-dollar bid, you would expect the deal to be near the final stages and practically done, but this situation is almost the opposite of what we normally see.
“All the upside goes to Fairfax. If someone else steps up to bid, Fairfax gets rewarded as the company’s largest stockholder and they can also step away from their offer.
“This illustrates the poor situation and weak negotiating power of BlackBerry.”
Mr Walkley believes the clock is ticking for the smartphone maker to go private.
“The more delays there are, the more will unravel in the public eye and the less likely another bidder will step in,” he said.
It is crucial for a deal to be made before next month, when the next quarterly results will be reported, says Mr Walkley. He anticipates that the next earnings report would be much worse than the last and would call attention to the cost of having excess inventory of all phone models.
In a note to clients, Stuart Jeffrey, a communications equipment equity analyst at Nomura, wrote: “With BlackBerry’s change in strategy now very public, we believe that operators, distributors, consumers and enterprise customers and partners will quickly drop their support for BlackBerry and look at alternatives.
“This uncertainty and pressure may yet result in the proposed bid failing or being cut in price.”
Ronald Gruia, a director at the business consultancy Frost & Sullivan, says BlackBerry’s decline illustrates the importance of keeping pace with innovation.
“If you don’t keep up with innovation you will fall behind, and it will be very hard to recover,” he said. “With BlackBerry … they were trying to push long-term contracts and server-based solutions but failed to recognise the advent of the touchscreen.”
He adds that BlackBerry also failed to recognise the importance of mobile applications such as Skype and Angry Birds. “The company just wasn’t watching what was going on in other fragments within the consumer market,” he said.
While the security that BlackBerry gadgets offer remains strong and crucial in sectors such as government and health care, other markets are shifting their focus to a “bring your own device” workplace, in which companies adapt to employees’ preferred mobile devices by ensuring security restrictions are in place and workplace data can be monitored.
Despite its fall from grace, BlackBerry is pushing forward, trying to make the best of a challenging situation.
This week at the biannual electronics fair Gitex Shopper in Dubai, BlackBerry’s Z10 smartphone was sold at a hefty discount, for as low as Dh1,000, compared with its debut retail price of Dh2,599. Some retailers are also offering three months of a six-month contract with a local telecoms company for free.
In addition to the Z10, BlackBerry’s Q10 and Q5 phones are also being offered at a discount, with free add-ons such as handsets and tablets.
Although the Arabian Gulf has been a strong market for BlackBerry, the UAE’s telecoms regulator in August said Samsung was the market leader in the second quarter, with a national market share of 13.8 per cent, followed by BlackBerry with 10.7 per cent, and Apple with 7.4 per cent.
Even in Canada, where BlackBerry remains somewhat of a national symbol, its products are being met with resistance. For instance, Roger Communications, a Toronto-based carrier that was one of the first in the world to offer BlackBerry gadgets, said it would not sell the flagship Z30 phone because it believed the device was not a good fit for its customers.
“Carriers aren’t willing to take on additional risk with BlackBerry,” says analyst Mr Walkley.