- Blackberry has decided to shut its smartphone division.
- The curtains are finally down on a one-time leader.
- What brought this and what does it mean for BlackBerry stock and its investors?
BlackBerry Ltd. has finally decided to shut down its in-house hardware design and manufacturing unit, as has been widely reported across media outlets over the last fortnight. The announcement brought down the curtains on what has been a roller-coaster decade, to say the least. The fall has been incredibly fast with BlackBerry's smartphone market share falling to a 0.1% in Q2 2016. This is in stark contrast to 2010, when the company accounted for nearly a fifth of the world's smartphone market?
While the announcement to quit the hardware manufacturing does not mean the complete disappearance of BackBerry branded devices from the market, it could mean significant cost savings for the battered company. The company will in fact be outsourcing the BlackBerry brand to third party ODMs and collecting a royalty on the same. What brought about the fall of this one-time smartphone giant? And more importantly, what does this move mean for BlackBerry investors?
3 Mistakes which brought BlackBerry Down
We can point out to the following as major reasons which brought about the fall of BlackBerry Ltd.
- Failure to recognize competition: BlackBerry failed to recognise/accept the threat Apple (NSDQ:AAPL) iPhone and the android army presented to their dominance. Quoting from the book "Losing the Signal: The Untold Story Behind the Extraordinary Rise and Spectacular Fall of BlackBerry", as cited by Forbes:
The next day Mr. Lazaridis grabbed his co-CEO Jim Balsillie at the office and pulled him in front of a computer.
“Jim, I want you to watch this,” he said, pointing to a webcast of the iPhone unveiling. “They put a full Web browser on that thing. The carriers aren’t letting us put a full browser on our products.”
Mr. Balsillie’s first thought was RIM was losing AT&T as a customer.
“Apple’s got a better deal,” Mr. Balsillie said. “We were never allowed that. The U.S. market is going to be tougher.”
“These guys are really, really good,” Mr. Lazaridis replied. “This is different.”
“It’s OK—we’ll be fine,” Mr. Balsillie responded.
Well, in hindsight, this denial about the competitive threat that Apple presented could definitely be pointed out as one major reason for the downfall of BlackBerry. Given the popularity which Apple today enjoys, selling over 200 million iPhones a year, is a proof of how costly this mistake turned out to be.
- Failure to recognise the markets need: The market was gradually moving from physical keyboards on smartphones to touchscreens. The growth of iOS and Android is a testimony to this fact. However, BlackBerry actually took a step backwards in 2014, when John Chen, the then newly appointed CEO, announced a plan to return to physical keyboards. Well, the only difference such a move made was to accentuate BlackBerry's fall, as the firm lost even the 1% market share it claimed back in 2014.
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- Leveraging on a Security as a core competency: BlackBerry was built on the promise of security and enterprise customers were quick to flock to BlackBerry devices. However, BlackBerry failed to notice that the gap was actually closed by OS updates from Android and iOS over the years. The result: Corporates/enterprises adopted the BYOD policy which sent BlackBerry spiralling down a dark hole. BlackBerry, in short, tried resting on its laurels, rather than trying to innovate. The company lost its core competency of 'security' even as the other major mobile OS made major progress. To top it all, the firm continued to charge flagship-level prices, even as the devices continued to lose their charm with users.
A silver Lining for BlackBerry shareholders
However, there could be a silver lining for BlackBerry investors in the seemingly, bad news. BlackBerry's hardware division was costing a lot in terms of inventory write-offs as well as failure to break-even. By outsourcing the brand, BlackBerry can still earn royalty fees and leverage the strength (if it still exists) of its brand without the associated manufacturing costs and the risks of inventory write-offs, which should boost operating profitability in the coming quarters. The move also frees up capital, which can be used to invest in the growing software segment.
The mobility segment, which includes the BlackBerry devices, reported revenue of $105M in Q2 2017, down 49% YoY. While the segment operating margin improved to 25% at the gross level, up from negative 10% in the year ago quarter, the division continued to report losses at the operating level. The segment operating expenses came in at $35M in the latest quarter. Given the rate at which BlackBerry Mobility revenue has been declining (40% + over the last couple of quarters), this is indeed a smart move, which could save the company close to $140M in annual operating expenses, based on the latest quarter details. Investors should note that given the state BlackBerry currently is in (over 100% operating loss in latest quarter), every saved million will count.
Another benefit of the decision to ditch in-house smartphone manufacturing will be the absence of further inventory write-offs related to BlabkBerry smartphones. The company took a charge of $144M against inventory write-offs through the first two quarters of FY 2017, which negatively impacted gross profit margins by a huge 20 percentage points. Hence, the move to outsource smartphone design and manufacture could give BlackBerry a few million dollars in revenue without the accompanying problems inventory write-offs and associated operating costs. The move to shutter the business could save the company over $400M annually (it could actually be higher given the increasing trends in the write-offs).
BlackBerry Ltd. recently announced the shuttering of its Hardware design and manufacturing operations. The move to outsource the design and manufacture will help the company to milk the 'BlackBerry' brand (from royalty revenue) while also helping to significantly improve the overall profitability of the firm. Hence, the move was a smart move for BlackBerry stock as well as its investors.
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