Beginning of the end for BlackBerry, analysts warn

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Six consecutive quarterly profit losses; £3bn sale to Fairfax Financial Holdings agreed; BlackBerry to exit the consumer space and focus on the B2B market

“It’s the beginning of the end for BlackBerry.” This was the view of one leading industry analyst after efforts to revive the one-time smartphone giant appeared to fail last month.

The Canadian manufacturer has seen its global market share plummet over the past four years, from the dizzying heights of 19.9 per cent in 2009 to just 2.7 per cent today, according to IDC.

Like Symbian, which in 2009 led the market, one place above BlackBerry in the OS space, BlackBerry has failed to keep pace with the evolving market, losing ground to comparative newcomers Android, iOS and, more recently, Windows Phone.

In January, the manufacturer made drastic attempts to rectify this with the launch of its much-delayed BB10 operating system and two new smartphones, the Z10 and Q10.

BlackBerry president and CEO Thorsten Heins (pictured) confidently took to the stage in New York on launch day claiming BB10 would “reinvent” the organisation, and help turn its ailing fortunes around.

Heins admitted the decision to “reinvent” its OS, rather than adopt Android, was a “risky” one, while the company’s UK and Ireland MD Rob Orr – since departed – told Mobile News that 2013 marked the most significant period in the manufacturer’s 29-year history. This has proved to be the case.

Last month, BlackBerry made three key announcements which some claim could spell the end of the company – at least from the point of view of hardware manufacture – in the next 12 months.

Q3 results
The current situation began on September 20, when the company issued a profit warning before posting its Q2 financial results.

The results revealed losses of more than £599 million ($965 million), representing a sixth consecutive quarterly loss.

Revenue for the three months to August 31 was approximately $1.6 billion (£1 billion), down 49 per cent from $3.1 billion (£1.9 billion) in the previous quarter and down 45 per cent from $2.9 billion (£1.8 billion) in the same period last year.

To put this into perspective, BlackBerry’s Q3 results ending November 2012 – just two months before the launch of its first BB10 device, the Z10 – put losses at around £70 million.

Handset sales have also fallen significantly in the past two quarters, from 6.8 million – which included 2.7 million BB10 devices – down to around 3.7 million. Heins admitted most of these sales were of older models running on the BB7 operating system – although figures for each were not given on this occasion.

In contrast to his more positive comments of the past, Heins sounded defeatist in a statement issued after the firm cancelled a quarterly conference call with the press the day before the results were released on September 26.

“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,” he said.

The company has taken drastic action by announcing it is effectively moving away from the consumer space, to “refocus on the enterprise and prosumer [professional consumer] market”, its core base. This will see it reduce its handset portfolio from six devices to four, including two high-end and two entry-level phones, aimed purely at business customers.

Staff cuts
The knock-on effect of this decision, however, will be a 40 per cent reduction in staff (around 5,500 people), taking staff cuts close to 10,000 in the past year.

This is part of an internal restructure designed to reduce BlackBerry’s operating expenses – the cost of producing handsets – by approximately 50 per cent by mid-2014.

The move marks a dramatic turn in the company’s strategy, after it has stepped up its efforts to attract customers through a series of consumer-focused ad campaigns, as well as strengthening the entertainment offerings available through its BlackBerry World store to compete with its rivals.

This decision was made just three days before the firm announced it had agreed a deal in principle to sell its business to fellow Canadian company Fairfax Financial Holdings for £3 billion.

At the time of writing, Fairfax, led by a consortium, was two weeks into a six-week long due diligence process at BlackBerry.

Fairfax reaction
News of the deal has not been greeted with optimism though.

Following the announcement, BlackBerry’s share price tumbled by six per cent, below the $9 per share purchase price offered by Fairfax.

Fairfax chairman Prem Watsa, the man behind the bid, has also been forced publicly to defend his company’s decision following the price fall.

Heins said: “We understand how some of the activities we are going through create uncertainty, but we remain a financially strong company with $2.6 billion (£1.6 billion) in cash and no debt.
“We are focused on our targeted markets, and are committed to completing our transition quickly in order to establish a more focused and efficient company.”

Death of the BlackBerry?
Analysts remain sceptical, however – they say the future of BlackBerry is still very much in doubt, regardless of whether a sale is agreed or not.

Airtime distributor Mainline’s managing director, Andrew Borden, welcomes the decision by BlackBerry to focus its efforts on the B2B space, saying the company “understands” the business market and has managed to hold its own against iOS and Android in this space.

“We broadly welcome BlackBerry’s plan to refocus on the business market. Business is where BlackBerry made its name.

“It is a market it understands and where it still has a significant presence, despite the inroads being made by Apple and Android.”

However, Ovum chief telecoms analyst Jan Dawson takes a dimmer view, describing the decision to exit the consumer space as the “death knell” for BlackBerry.

He says that without the consumer business the company will not be able to achieve the scale needed to remain profitable and predicts it will exit the devices business “by the middle of next year”.

He said: “Unless Fairfax plans to radically change or accelerate BlackBerry’s strategy, it’s unlikely to be able to turn the company around.

“The company’s device sales are cratering, and its announcement last week that it no longer intends to pursue the consumer market is essentially the death knell for this business.

“BlackBerry’s supply chain relies on scale for profitability, and it will never again be able to achieve the scale necessary to make money on devices.

“It’s likely that BlackBerry will be out of the device business entirely by the middle of next year.”

He continued: “Normally, companies are taken private in order to give a long-term strategy time to pay off without the hassles of short-term investor scrutiny.

“But BlackBerry’s key problem for the last couple of years has been the lack of such a long-term strategy. It simply hasn’t articulated a way to rebuild its business as its device sales drop precipitously.

“We’re likely seeing the beginning of the end for one of the most iconic brands in mobile technology.”

CCS Insight chief of research Ben Wood agrees that BlackBerry’s future is still far from certain, but he expects more suitors to come forwards before a deal is finalised with Fairfax.

He said: “At this stage further bids on BlackBerry’s assets cannot be ruled out, but this certainly marks a new chapter in the destiny of the company whether this bid is accepted or a rival offer materialises.

“Irrespective of this bid, questions around BlackBerry’s future remain unchanged.

“The profit warning on Friday was a clear indication of the extreme difficulties BlackBerry faces in the hyper-competitive mobile devices business.

“This latest bid underlines the seriousness of the company’s situation. By going private, the structure and purpose of the company can be redefined behind closed doors.

“It seems unlikely it can continue as it is and while the most attractive option is to focus on business users, tough decisions will need to be made about which parts of the business to persevere with and which pieces to spin off or abandon.”

Full article in Mobile News issue 549 (October 7, 2013).

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