BlackBerry Crumbles And Goes Private
BlackBerry has agreed to be acquired by one of its largest individual shareholders in a deal that values the business at just US$4.7bn. Canadian insurance company Fairfax Financial Holdings Ltd - which already owns 10% of BlackBerry - still needs to complete due diligence before closing the acquisition, leaving BlackBerry free to pursue or consider alternative offers in the meantime . BMI believes the announcement may finally provoke rival players in the smartphone industry to move in on BlackBerry 's robust and attractive enterprise-grade messaging and mobile data solutions. However, we still believe that a privately-owned BlackBerry can still be a valued contributor to the business communications market.
The Canadian handset manufacturer was, just five years ago, the dominant player in the smartphone business and hit its peak in Q410/Q11, when it shipped almost 15mn handsets per quarter. Of late, however, s hipments have fallen as low as 3.7 mn units ( quarter ended August 2013) and the company advises that it will report a US$950-995mn net operating loss for the August quarter linked to a US$930-960mn write-off of inventory and a US$72mn restructuring charge. Despite positive reviews of its new but much-delayed operating system (OS) and accompanying devices, the company's reliance on the consumer market has proved to be its undoing, as BMI has long opined.
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Apple 's iPhone - launched in 2007 - catalysed interest in smartphones among mass-market users already tied to the Apple hardware and content ecosystem. Apple's fast-growing content and a pplications stores drew in more customers faster than o ther device-makers could match . The touch-based user-interface embraced by Apple also caught the eye of millions of consumers and, although BlackBerry eventually responded by offering touchscreen devices and a content store of its own, those responses came much too late and were, in many respects, too half-hearted to convince those consumers unwilling to commit to the expensive Apple ecosystem . The void was quickly filled by Google -backed Android and the latter has become the most popular smartphone platform in the world.
BlackBerry devices remain very popular among long-term business users as well as among younger consumers in emerging markets where the secure and low-cost BlackBerry Messaging (BBM) service has served as an ideal mobile social networking platform. Subscriber and value-added service (VAS) revenue growth in Indonesia, Malaysia and Thailand - among other examples - continue to be driven by BlackBerry product bundles.
Prior to the buy-out announcement, BlackBerry had said that, while it was focused on improving and propagating its new BlackBerry 10 OS ecosystem, it would narrow its focus to serve the enterprise and 'prosumer ' customer segments and slim down its smartphone portfolio to just four devices, two of which would be aimed at high-en d users. The company was sensibly looking to scale down its activities in the low-margin mass-market consumer business - where Samsung , LGE , Huawei , ZTE and others now dominate - in favour of growing its margins from the profitable enterprise market, where there are more opportunities to sell software and services.
It is not clear whether BlackBerry's new owners still support that strategy: indeed, the timing of the takeover announcement, coming just days after details of the upcoming quarterly results and strategy change were released to the media, suggests Fairfax's views may differ significantly. Alternatively, the deal could be seen as a ploy on the part of Fairfax to stimulate interest in the company while it still has a viable commercial future. Due diligence will not be completed until early November 2013 and BMI believes BlackBerry's extensive intellectual property portfolio - as well as its massive BBM user base - would appeal to a broad array of players in the smart device ecosystem. Prospective white knight bidders range from hardware giants such as Lenovo and Huawei Technologies to content, software and service providers - such as Amazon - that are looking for a dedicated platform for their products. We would not be surprised if one or more counter-offers are launched in the next few weeks.
BlackBerry has been considering its options for almost two years. That it has taken this long to agree to being taken over is indicative of how far removed from commercial realities its founders were and how difficult a path its inheritors have walked to try to keep the business essentially intact .
BMI has argued before that the company still has much to contribute to the mobile sector as a service provider and that its long-term survival may rest more on its patents and software/services portfolio, products that can be profitably licensed to other players in the value chain. If its new owners remain committed to its current strategy, we would hope they have a pragmatic view of BlackBerry's position in this crowded market and refrain from emphasising growth through sales of devices to budget and style-conscious consumers.