Blackberry – No prisoners

Life without handsets will be little better than with.

• John Chen has finally admitted the possibility of failing to turn around Blackberry saying that the company will exit handsets if it can’t turn a profit.
• This would result in Blackberry becoming just another Mobile Device Management (MDM) vendor like AirWatch, Mobile Iron and Good.
• This space is crowded and increasingly, it is the big IT vendors that are moving in to take over.
• VMware’s $1.54bn takeover of AirWatch is unlikely to be the last in this space.
• This will create a horrible problem for BlackBerry.
• Firstly, it is already behind the others as it has to retrofit its service to offer cross platform support whereas the others have been designed from the ground up with this in mind.
• Secondly, most of these large vendors sell other products into the enterprise and can afford to give this service away in order to cement business in other areas.
• This will make life extremely difficult for Blackberry and I doubt whether it will survive on its own as a pure MDM vendor.
• Even if Blackberry does make it work in MDM, the valuation of the company is likely to be far less than it is today.
• This is because of the nature of hardware and software.
• A hardware business typically has high revenues but lower margins as the ASP per smartphone will be around $200.
• A software business based on smartphones will attract a fraction of that per device resulting in much lower revenues but higher margins.
• Even in this instance, revenues will be far lower without hardware meaning that it will be increasingly difficult to justify a valuation of $4.2bn on software revenues alone.
• I think that it is extremely likely that this is the road that John Chen will be forced to take.
• He thinks that he can make money shipping 10m units a year.
• This looks like a tall order given that Android vendors Huawei and LG Electronics are struggling to keep their heads above water shipping 50m smartphone units last year.
• I have a lot of confidence in John Chen, but unlike Sybase, there is too much out of his control at Blackberry and that means that the handset business is likely to fail no matter what he does.
• The handset market takes no prisoners when it comes to profitability and Blackberry is one of the weakest, most vulnerable players out there.
• What is more, everyone knows it and is coming after its customers with a vengeance.
• Hence, I suspect that he will announce a move to become a pure MDM player towards the end of this year which will mean a huge leg down in valuation as the recovery potential will be that much lower in absolute terms.
• Investors should get out now while some are stilling willing to believe that the handset business can be turned around.