BlackBerry Eyes Subscriber Growth With Q5 And Cross-Platform BBM Support

Having released its new BB10 platform with high-end handsets earlier this year, BlackBerry (NASDAQ:BBRY) is now targeting the emerging markets with low-end smartphones. At the BlackBerry Keynote address held on May 14, the handset maker took the wraps off the Q5 – its long awaited QWERTY replacement for the earlier generation low-end Curve handsets that were a rage in the emerging markets.

While BlackBerry will look to improve margins and return to full-year profitability with the help of high-end smartphones, the low-end models will be used primarily to stem the subscriber loss it has been suffering for push email and BBM services in the recent quarters. With the handset division in the doldrums, BlackBerry’s services have grown in importance to contribute the most value to its stock – almost 30% by our estimates. The success of the low-end BB10 models is therefore very important if the company has to stay relevant in a highly competitive mobile market where differentiating with services and content will become increasingly important in the coming years.

Keeping the importance of its service division in mind, the company has also decided to make BBM available to rival platforms such as iOS and Android. The cross-platform functionality removes the exclusivity that had for years served BlackBerry well in attracting new subscribers and is probably an admission of the fact that the messaging service is no longer a big differentiating factor given the huge popularity of third-party apps such as WhatsApp and WeChat. Both WhatsApp and WeChat now boast of a subscriber base that is more than twice as big as that of BlackBerry’s, and the gap may only widen further if Blackberry continues to lose subscribers every quarter. It is therefore a good sign that the company is focusing on its services a lot more with the new BB10 platform, which has been built with cross-platform mobile device management (MDM) support for enterprises as well.

Our $13.50 price estimate for BlackBerry is about 10% below the current market price.

See our complete analysis for BlackBerry here

Subscriber Loss Has Been Worrying

Despite delays in launching BB10, BlackBerry’s subscriber base held up surprisingly well for the most of last year primarily due to demand in the emerging markets. However, the last two quarters have been deeply disappointing in this regard with the company reporting loss of subscribers in each of them. Last quarter, the company lost as many as 3 million subscribers, thrice the subscriber loss in the previous quarter, to end with a subscriber base of 76 million. This metric is very important for the company since a decline in subscriber base not only reduces the size of BB10’s potential addressable market, but also has a direct impact on BlackBerry’s ability to draw high-margin recurring service fees in the future.

The recent steep subscriber loss is indicative of the rapidly dropping demand for BlackBerries in the emerging markets, where the company is facing huge competition from cheap Android smartphones. Adding to the pressure is the rise of third-party apps such as WhatsApp and WeChat, whose cross-platform functionalities have reduced BBM’s ability to draw subscribers to the BlackBerry platform. This is why BlackBerry has had to respond by not only releasing a cheaper BB10 model to compete more effectively in the emerging markets, but also making BBM compatible with rival platforms. It is likely that BlackBerry’s service ARPUs are going to decline further as a result of this move, but BBM’s security and privacy should still help it command a premium over the rest.

Enterprise Focus Crucial

As important as retail is to BlackBerry, a lot more crucial will be its ability to latch on to its enterprise clients. High-margin service revenues are a big reason why BlackBerry has managed to to generate cash in the last few quarters despite seeing its handset revenues fall by nearly half in the past year. However, the enterprise market is no longer a BlackBerry stronghold with Apple and Samsung making the most of its handset troubles to poach its enterprises customers in recent years. 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%.

The company is therefore looking to appease enterprises by shipping a cross-platform mobile device management solution with its enterprise servers that will enable companies to manage rival platforms as well. But a carrier push to reduce fees as well as a loss of enterprise customers to rival platforms as the bring your own device (BYOD) movement becomes more popular could hinder BlackBerry’s strategic move 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, and further reducing BB10’s chances of pushing into the enterprise market. (see BES 10 Fragmentation Increases The Risk For RIM)

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