BlackBerry Priv: Why BlackBerry Is Still Making Smartphones


BlackBerry’s (NASDAQ:BBRY) first Android handset – the Priv – will hit the market on Friday. The handset is seen as a last stand of sorts for BlackBerry’s smartphone unit, and the company is trying to hit a sweet spot by marrying its industry-leading security and productivity features with Android’s expansive software ecosystem. However, investors may still be skeptical of the new device. The momentum in the smartphone market hasn’t been working in BlackBerry’s favor after a string of underwhelming launches – hardware sales are down 42% y-o-y for the first half of fiscal 2016 – and the company has made it clear that its future will be mostly about selling software and services to governments and corporations. [1] So why does BlackBerry still bother with smartphones, and what could the Priv possibly bring to the table?

We have an $8 price estimate for BlackBerry, which is roughly in line with the current market price.

See our complete analysis for BlackBerry here

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Why Does BlackBerry Still Bother With Smartphones?

BlackBerry’s handset sales fell to just 800,000 units in fiscal Q2, down by about 60% year-over-year, marking its lowest tally since at least 2007, and BlackBerry’s share of the smartphone market fell to about 0.3%. ((Smartphone OS Market Share, 2015 Q2, IDC)) However, there are a few good reasons for the company to stay in the game despite the pessimism. First of all, it doesn’t take a lot to move the needle for BlackBerry at this point, considering that its top line has declined by over 80% in the last three years. If the Priv – with its premium price of about $700 – is a hit, it could drive meaningful growth for the company. Moreover, the smartphone industry tends to be largely perception-driven, and a single hit flagship product can bolster a company’s brand image and create a halo effect around its entire product line. Additionally, the smartphone business gives the company a platform to sell services and retain enterprise clients in highly regulated verticals.

What The Priv Has Going In Its Favor

The Priv could offer customers the best of both the Android and BlackBerry platforms, by combining BlackBerry’s security, productivity and communications features with Android’s vast software and app ecosystem. This should address a critical issue that has plagued most of BlackBerry’s BB10 based devices. Additionally, we believe that BlackBerry has a good shot at creating a degree of product differentiation in a commoditized Android smartphone market given its software and security expertise – something that most big-name Android vendors lack (Samsung’s Knox system hasn’t really resonated with enterprises). For instance, the device will feature new hardware enhancements and encryption technology to better protect data stored on the device and guard against tampering by hackers. Finally, adopting Android could help to bring down device and software development costs for the company, since it would only need to customize the Android software for its devices, while adding related security and privacy features.

Risks: Narrow Appeal, Distribution, Apple’s Enterprise Strength

It remains unclear if the device will find an audience outside the corporate and government verticals, as individuals are likely to care less about the device’s security USP as compared to enterprises. This makes the Priv’s hefty price ($700) harder to justify in the consumer smartphone market, where there are a plethora of more economical choices. The enterprise smartphone space itself has changed a fair amount since the time when BlackBerry practically dominated the market. The Bring Your Own Device (BYOD) trend has become more prevalent, allowing employees to use their own mobile devices for work, with enterprise email and security needs alone being addressed by corporate IT departments. This could restrict the sales of the Priv to highly regulated verticals where companies still need to provide handsets.

Competition could also prove intense, with Apple – the largest smartphone vendor by revenues – strengthening its presence in the enterprise market, driven by increased support for Microsoft applications and its enterprise-focused collaboration with IBM. Apple’s enterprise revenues stood at $25 billion in FY’15, up 40% year-over-year. Weak distribution is also likely to be another pitfall for the Priv, as AT&T is the only major U.S. carrier expected to carry the device at launch. Although the handset will be available unlocked via BlackBerry’s online store, wider carrier availability would have allowed BlackBerry to reach the broadest possible audience.

The Bottom Line: Upside Potential Is High, With Little Downside Risk

While it’s possible that BlackBerry has more handsets in its product pipeline, it is safe to assume that the Priv will decide the fate of the company’s smartphone division. If the device clicks with consumers, there is some substantial upside to be gained. For example, if BlackBerry doubles its handset market share to 0.4% over the next seven years, it could result in an upside of close to 25% to our current price estimate. On the other hand, if the device fails in the marketplace, there’s not too much to lose, since we estimate that the handset business accounts for just about 10% of BlackBerry’s value anyway.

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Notes:
  1. BlackBerry Q2 Press Release []