BlackBerry Has a Business Model Problem
BBRY needs a new wave of value-added services or it will not keep the faithful in the fold.
As I wrote back in February (see Just How Profitable are BB10 Phone Sales for Blackberry?), many of the BB10 devices that are sold to replace BB7 phones are expected to be only moderately profitable over their lifetime. The up-front gross profit when selling the phone is offset by the loss of BB7 subscriber revenue over a two- to three-year time frame.
BBRY’s FYQ1 was a startling example – services revenue fell 13% YoY, or $135 million (adjusted for the Venezuelan capital control problem). The Venezuelan situation cost another $72 million. These two factors cost the company approximately $0.30/share in EPS.
That’s the difference between a $0.13 loss and $0.17 in earnings. Not to mention the difference between the stock price being down 25% and up 25%.
The decline in services revenue has to be close to 100% gross profit (GP), as running the BBRY Network is a fixed cost. Here’s another way to put it: If BBRY makes 40% GP each time it sells a BB10, it must sell $2.50 in device revenue to account for each single dollar lost in services.
BBRY’s traditional business model was leveraged on the value-added services provided by its proprietary network (NOC) and its distributed device management platform, BES. The network provided security (a secure tunnel between your company’s email (and apps) and your device), data compression to offset slower data connections, and distributed device management for IT (polices, compliance, wipe, etc.).
These traditional BBRY value-added services were designed for another era – slow data connections, devices issued by the company, device management by IT, and email and text messaging as “The App.” Clearly the mobile landscape has changed – in most of the world bandwidth is not a primary concern. Messaging is a commodity. Device management has expanded to include application and user management. Security is still an issue, but many large vendors are pursuing the mobile device, application, and security market. And importantly, “The App” is applications -- both personal and corporate -- and an ecosystem of application and storage services.
To state it another way, BBRY doesn’t have a device problem, it has a “services” problem. To drill down even further, it has a “NOC” services problem. The company has a huge investment in a worldwide proprietary network (NOC) that currently adds little value to BB10 users.
The consumer BB10 device only uses the NOC for provisioning, BBM presence, and guaranteed delivery of BBM messages (it indicates if a BBM has been delivered or read). Users can now have voice and video over BBM, but that’s hardly unique in today’s world of free Skype and FaceTime, and moreover, it isn’t NOC-specific. Think about Google Inc (NASDAQ:GOOG) all of a sudden losing its search revenue…crisis time in the Googolplex as it tries to figure out how to make money on Android, Gmail, and Google +.
BBRY still has a well-regarded mobile management solution -- BES10 -- that now is cross-platform. But that’s a competitive business (it used to be the only game in town) with Citrix Systems, Inc (CTXS), VMware, Inc. (NYSE:VMW), Symantec Corporation (NASDAQ:SYMC), Microsoft Corporation (NASDAQ:MSFT), and many, many more, all working to solve this problem for enterprise customers. And all with a large, engaged channel of partners quite adept at selling IT management solutions.
Meanwhile, BBRY has announced it’s moving BBM to Apple Inc. (NASDAQ:AAPL) and Android this summer (although the first release is messaging only -- no video or voice). It’s unclear how management plans to monetize BBM on iOS and Android. In fact, it’s unclear how management is going to monetize any BB10 value-added services, including BES10, other than through a traditional licensing model.
So what is the company going to do with its huge NOC investment with its material day-to-day costs? As long as a BB7 device is running, the network is still needed, even if that user number is “1.” The company is in the unenviable position of having a fixed cost business with rapidly declining revenue.
Not to pile on, but there’s a cherry on top of that rhubarb sundae: It’s unclear if BES10 even needs the NOC to be competitive.
In summary, the Z10 and Q10 are solid devices that will mature as time goes on. They will initially attract the BBRY faithful (primarily business/professionals) that care about effective messaging and a keyboard.
But BBRY has to step up with a new wave of value-added services that leverage its NOC or it will not keep the faithful in the fold, and worse for shareholders, it will have a business model that can’t make money.
Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
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