The Inevitable Death of BlackBerry

When a company has bad news, they often try to bury it. BlackBerry was scheduled to announce quarterly earnings this week, but instead decided to pre-announce them last Friday, on the same day that the media was focused on the new iPhone launch. The “earnings” turned out to be a billion-dollar loss. They also announced a plan layoff 40% of their staff and to pare their lineup to four phones: two for enterprises and two for “prosumers.” The stock immediately fell 20% before trading was halted. On Monday, in news surprising only for its timing, BlackBerry announced that its largest shareholder, Fairfax Financial Holdings, was planning on buying the remaining shares of the company at a valuation of $4.7 billion and taking it private. Is this a good price, and what are the future prospects for a private BlackBerry?

Amateur Hour is Over

Mistakes have been made. Ten years ago, President Bush stood on the deck of an aircraft carrier under an embarrassingly premature “Mission Accomplished” banner. Two and a half years ago, BlackBerry unveiled its PlayBook tablet with the advertising slogan, “Amateur Hour is Over,” which not only managed to be just as foolish as Bush’s banner, but simultaneously contradicted the “play” in the product’s name. Sales of the product have been so dismal that it didn’t even warrant a formal discontinuation; after months of neglect, BlackBerry simply announced that they had decided against bringing their new OS to their tablet.

When the iPhone was announced in 2007, BlackBerry’s executives were dismissive and unconcerned. By the time they realized the graveness of their situation, several years later, BlackBerry OS 7 was hopelessly out-of-date. Borrowing Apple’s strategy from the late 1990s, BlackBerry bought a new operating system, and then developed it further with features from their existing OS. The new BlackBerry 10, however, was released much later than planned, by which point the company’s situation has slipped further. With a new CEO, a new OS, and new phones, BlackBerry set out to remake itself in 2013 as a leaner, but still successful player in the phone market.

It failed.

BlackBerry’s Future

Returning to our earlier question, what are BlackBerry’s future prospects? The answer is easy: BlackBerry will die.

While a vibrant, competitive market for phones is both essential, and exactly what we have, BlackBerry will never again be a part of that market. Its failures can best be summed up as: “too little, too late.” The current mobile landscape is ruthlessly competitive, but there are only two winners: Apple and Samsung. Apple has succeeded by created a highly desirable, premium product, that completely controls the upper (most profitable) segment of the market, and is buttressed by Apple’s carefully managed and completely unparalleled App Store. Samsung has taken a shotgun approach, creating myriad good-enough phones for almost every conceivable user. The only phone they don’t make is a high-end device with iPhone screen sizes. There are many reasons why these two companies are so successful, but one thing in particular that only they have is cash—lots of cash. The iPhone is so overwhelmingly desirable that it basically sells itself. Most phones, however, are sold by cell phone carrier store sales staff. If a customer walks in and is not confidently set on an iPhone, there is only one brand the staff is likely to recommend: Samsung. The reason is simple. Samsung pays huge kickbacks (known in the industry as “spiffs”) to sales staff. While an iPhone sale might net a salesperson two or three dollars in total commission, a new Galaxy could easily put $30 in the salesperson’s pocket, depending on the current (hidden from customers) promotions. BlackBerry itself used to offer similarly large spiffs, but with a rapidly dwindling supply of cash, it’s simply no longer in a position to offer such an incentive. The same fate has befallen HTC, which makes phones of comparable (or in the case of the HTC One, vastly superior) quality to Samsung’s, but is unable to compete with the cash-fueled marketing might and sheer scale of Samsung’s operation.

Having lost scale, phone makers have already lost the war. Stores won’t stock what they can’t easily sell, and what they don’t stock they can’t sell. It’s a death spiral and no phone company has ever pulled out of one. There is simply no plausible scenario where BlackBerry continues for any significant length of time as a phone maker. The company’s historical strengths have been in governments and enterprises, but even more than consumers, these buyers demand stability. Why should they commit to a company that is unlikely to exist in the near future? And so the death spiral accelerates.

BlackBerry’s Value

So just what is the company worth? The company’s cash currently stands at $2.6 billion, though they lost half a billion in the last quarter and this number will undoubtedly shrink further. The handset business itself is completely worthless; they’re shipping small numbers of poorly-selling phones. What about the brand? I think it’s likewise worthless. The number of “CrackBerry”-toting loyal fans has dwindled to an insignificant number. At this point it probably does more harm than good. Hypothetically, an obscure Asian brand of Android phones might consider buying it as an inroad to Western markets, but I think they’d be better off following Huawei’s lead and just advertising their existing name. BlackBerry as a brand is boring and old.

What about the patents? In 2011, a coalition led by Apple, but including, among others, Microsoft, Sony, and—yes—even BlackBerry, bought a trove of patents from bankrupt Nortel for $4.5 billion. Shortly thereafter, Google bought Motorola for $12.5 billion, of which $5.5 billion was attributed to the company’s thousands of patents. The patent bubble has burst, however. Google’s purchase has failed to win it a single court victory. Indeed, last month they were forced to pay Microsoft $14 million for abusive practices with Motorola’s patents. This has surely soured the perceived value of future patent sales, though by how much is impossible to tell. Apple, Google, and Microsoft certainly can afford to overpay for BlackBerry’s patents if they feel they need them “just in case,” but it’s increasingly difficult to justify such outrageous prices as were recently seen. The eventual selling price is likely to be just whatever it takes to keep the patents out of the hands of more-troublesome patent trolls.

I have so far overlooked one other aspect of BlackBerry’s business: services. Indeed, in the last quarter, fully half of their revenue came from “services.” So what is this? It’s BlackBerry Enterprise Service. BES is a server that sits in front of an enterprise’s Microsoft Exchange server and lets BlackBerry phones connect to the server, while allowing administrators fine-grain control over the settings of their employee’s phones. The problem with this revenue stream should be obvious: It’s completely useless without a BlackBerry phone, and there soon won’t be any phones to support. If a company switches from BlackBerry to iPhone, all they have to do is essentially unplug BES. The iPhones already have native support for Exchange. Given the relatively short lifespan of phones, BES revenue will rapidly evaporate as companies switch devices.

So what are we left with? A modest pile of rapidly-burning cash, a worthless brand, worthless hardware, and patents of highly questionable value. If Fairfax intends to profit from their purchase, they should proceed with shutting down operations as soon as possible after the sale closes. The longer they wait, the more cash BlackBerry will burn through, in an attempt to delay what is absolutely inevitable.