Quick Thoughts: Anyone Buying Blackberry Would Be Like Sprint Buying Nextel

Written August 12th, 2013 by

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-          BBRY is years too late in deciding to explore a sale of the company. Its messaging franchise and device platform have been overrun by competition – a turnaround may be impossible.

-          Much of the $2.8 in cash would likely be burnt by an acquirer in either trying to fix it or shut it down. A Chinese suitor would also raise serious red flags given government contracts.

-          The supposedly valuable patents are likely already cross-licensed to the most important players, limiting their usefulness to a buyer. If not, why hasn’t Blackberry tried to monetize them?

-          BBRY’s email service is losing its differentiation quickly, with rivals drooling over its 70m subs. Buying BBRY to gain scale could be very painful as the platform dies (N.B see Sprint/Nextel).

What is it with Canadian tech companies? I had a front row seat for the sad dissolution of the once powerful Nortel, run into the ground by management’s delusions of grandeur in the wake of the bursting of the internet bubble. For the last few years, the erstwhile Research in Motion has been blithely ignoring the obvious, hemorrhaging market share in the smartphone market that it helped to invent as it painstakingly crafted its competitive response to the Apple iPhone and the horde of Android-powered products that came right behind it. Since the iPhone hit the market in 2006, Blackberry has been a day late and a dollar short with every overhyped hero product intended to turn the company’s fortunes.

No matter who buys Blackberry, public or private, it will be VERY difficult to regain traction in the smartphone market. Google’s Android army and Apple are far, far ahead in market share, and, perhaps, even further ahead in consumer mindshare. Even industry whipping boy Microsoft has more market share momentum than Blackberry, which has seen its slice of the global smartphone market drop from 4.9% to 2.9% over the past 12 months, unthinkably dropping below 1% share in the US. The “low-end” Q5 smartphone was latest hero phone trotted out to save the day, but apparently debuted to yawns in Blackberry’s remain strongholds in Southeast Asia and Africa. In those handful of countries where Blackberry still retains leadership via widespread use of its proprietary Blackberry Messaging platform, the $400 Q5 is neither fish nor fowl – way too expensive to participate in the wild growth of the low-end market and too down market for the elite who could afford the Q10 anyway. As open multi-platform 3rd party messaging programs proliferate and smartphone price points plummet, well-heeled Indonesians and Nigerians alike are open targets for the panoply of well-spec’d and attractively priced Android devices flooding the market.

It is very hard to make a moribund brand cool again, even if you hire Alicia Keys as your brand Ambassador. The platform is an afterthought to developers, and the lack of scale puts anyone who owns it at a distinct competitive disadvantage. For investors hoping for a greater fool to jump on Blackberry as a way to jumpstart a smartphone program, the ugly history of HP and Palm is still fresh in the memories of the struggling PC industry players often trotted out as potential acquirers. Moreover, the last bastion of Blackberry’s North American business are enterprises, including many government agencies, that still rely on the company’s secure, closed messaging infrastructure. It’s hard to imagine a transfer of this network and its 10s of millions of high value users transferred to a Chinese company like Lenovo without the vehement opposition of the US and Canadian governments.

Some advocates for Blackberry point out the company’s other assets. For example, there is more than $2.8B in cash and investments on the balance sheet. However, it seems unlikely that any buyer would get the chance to harvest much. Operations appear poised to begin burning cash, a turnaround program would require significant further investment in product development and marketing, and even an ordered shutdown would require substantial cash severance payments and losses on asset disposition. Patents, you say? Some analysts have put multibillion dollar price tags on Blackberry’s intellectual property, but caution is advised. If the patent portfolio was as valuable as some say, why hasn’t the company already tried to monetize it? There is no sign of significant royalty income, and odds are that Blackberry has already negotiated cross-licenses with the other major players without gaining advantage. If so, an acquirer could not assert those patents to litigate against a rival that already has licensed access to the IPR. This would obviously blunt the value of a deal to members of the Android ecosystem locked in mortal combat with Apple.

To me, the idea of an established device player buying Blackberry to gain access to its customers or technology reminds me of Sprint’s ill-fated purchase of Nextel. At the time of the deal, Nextel was still profitable and was gaining subscribers, largely on the strength of its superior “push to talk” capability. However, equipment vendors for the GSM and CDMA networks operated by Nextel’s rivals were making rapid progress on bringing their own “push to talk” capabilities to a satisfactory level of performance. Sprint, a CDMA operator itself, had to know this, but pushed ahead with the Nextel deal anyway, thinking that it could transition all of the users to its own network over time. Instead, the network rivals had a field day harvesting the former Nextel “push to talk” subscribers from Sprint.  Replace “push to talk” with email/messaging, the network rivals with Android smartphone makers, and Sprint with whatever poor sap decides to buy Blackberry.

 

For our full research notes, please visit our published research site.

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