BlackBerry’s (NASDAQ:BBRY) stock rose more than 6% Wednesday amid optimism that customers are switching from rival platforms such as iOS and Android to BlackBerry. Speaking to Spanish newspaper Expansion, CEO Thorsten Heins said that the new BB10 smartphones have been “attractive for customers coming from other platforms” – a customer response that he found “a little surprising.” This comes not long after the positive commentary that had followed the Z10’s launch in Canada last month when the company had said that sales were more than 50% better than any other launch day for BB in the country. The positive sentiment has boiled over to the enterprise segment as well, where BlackBerry has managed to secure two major deals this week: one with the German government and the other in the U.K. with a mental health organization.
While it may indeed be a big positive for BlackBerry if it has managed to take market share away from Apple or Android with the BB10 launch, it is also rather premature to draw such a conclusion from the recent comments without actual numbers. Considering that BlackBerry’s smartphone market share has been on the decline for quite some time and that the smartphone market has more than doubled in size over the last two years, it is hard to put any kind of context around the announcement. Moreover, these are still early days and BlackBerry will need to ensure that the retail demand doesn’t fizzle out post the initial euphoria in order to stage a turnaround in its smartphone business – something that could prove exceedingly tough in a market largely dominated by the iOS and Android.
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Keeping this in view, we maintain our $12 price estimate for RIM’ stock, about 10% below the current market price. An upside/downside to our price estimate completely hinges on the sustainability of the initial success and the kind of market share gains that BB10 sees in the coming months.
BB10 success depends on U.S. uptake
Geographically, what has hurt BlackBerry the most is the drop in perceived brand value in what is one of the most lucrative smartphone markets in the world, the U.S., where the company has now lost its 3rd position to Windows Phone. According to Strategy Analytics, Windows Phone made good market share gains on some high-profile smartphone launches in Q4 2012 to overtake BB for the first time ever. BlackBerry will he hoping to reverse the losses now that BB10 is out, but delays in launching the first BB10 smartphones on U.S. soil is going to make it much tougher. According to the company, the first BB10 device won’t be launched in the U.S. until mid-March at least.
It should therefore give the company a breather if initial sales in the developed markets of U.K. and Canada have actually been strong enough to reverse the market share declines it has seen over the past year. The beleaguered company’s smartphone unit sales have fallen year-over-year for the last six consecutive quarters. Last quarter saw BlackBerry ship only 6.9 million smartphones, a precipitous drop of more than 50% y-o-y and about 7% q-o-q. In this respect, BlackBerry’s earnings release later this month is going to be extremely crucial for it will give us the first real insights into how the BB10 launch played out.
Enterprise market crucial for BB’s survival
In the enterprise market as well, where BlackBerry has traditionally been a dominant player, both Apple and Samsung have upped the ante in recent quarters. Last month Samsung debuted its KNOX enterprise mobile solution with which it expects to make its Android smartphones more secure and take advantage of the ongoing BYOD (Bring Your Own Device) trend to directly challenge BlackBerry in the enterprise. Apple, meanwhile, has snagged a couple of major deals with Home Depot and the New Zealand government at BlackBerry’s expense. While Home Depot is reported to have replaced over 10,000 BlackBerry smartphones with iOS devices, the New Zealand police force plans on arming 6,000 officers with iPhones and about two-third of them with iPads over the next three months. Other notable agencies that have recently announced their BlackBerry to iOS migrations include the U.S. Immigrations and Customs Enforcement Agency, the National Transportation Safety Board and Australia’s Treasury Department.
As a result, BlackBerry’s share in the enterprise smartphone market fell to only about 10% last year. Apple, on the other hand, accounted for almost 50% of the smartphones shipped to enterprises, followed by Samsung at 16%.
As important as the retail is to BlackBerry, a lot more crucial will be its ability to latch on to the remaining enterprise clients. By our estimates, the BlackBerry services division, which includes push e-mail fees and is reliant on continuous enterprise patronage, is RIM’s most valuable division currently, accounting for more than 35% of our price estimate for the stock. It is on the back of this division’s high-margin revenues that BlackBerry has managed to generate cash in the last few quarters despite seeing its handset revenues fall by nearly half in the past year.
But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms as the bring your own device (BYOD) movement becomes more popular could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES) potentially making the BES 10 upgrade process costlier and complicated, thereby reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)
A lot depends on BB10’s reception in the market, and RIM faces an increasingly uphill battle against the two well-entrenched mobile ecosystems of the iOS and Android. The competitive pressures will come not only from potential customers deciding to purchase rival smartphones, but also from developers unwilling to devote their resources to a platform with questionable chances of taking off.
Although we do not expect RIM to ever reach the heights it once commanded in the smartphone market, if RIM does manage to make BB10 a strong smartphone OS, it could still claw its way back into the market and continue to generate cash from its enterprise and retail niche. RIM’s mobile market share has plummeted from over 3% in 2011 to an expected 1.8% in 2012. However, if BB10’s launch helps RIM win market share back to over 3% by the end of our forecast period, there could be 30% upside to our price estimate.