06 May 2015 14:48:51 IST

BlackBerry — turnaround or sell out?

Should the phone maker be sold now at a loss or wait till it comes back into the black

In the fourth quarter of fiscal 2015, financially struggling BlackBerry Ltd (BlackBerry) reported second straight quarterly profits, which drove its stock price up by around 5 per cent. John Chen, the CEO of BlackBerry, who was specifically roped in to bring about a change in the company’s fortunes, believed the continuing profits were an indication that the company was on its way to making a successful turnaround.

However, some analysts remained sceptical about BlackBerry’s long-term prospects and thought the company faced an uphill task to get back on the road for growth. Instead, they felt the company should accept one of the offers for takeover that it had begun to receive following its improved financial situation.

The fall of BlackBerry

BlackBerry is a pioneer in the global smartphone market, having introduced the first wireless devices in the late 1990s. By 2008, the company had emerged the market leader in the smartphone market; its stock price reached an all-time high of $149.90 and it had a market capitalisation of $82 billion.

However, the 2007 launch of Apple Inc’s iPhone spearheaded a chain of events that led to the gradual downfall of BlackBerry. The company failed to pay heed to the changing market, where there was a growing focus on catering to the individual customer, rather than the business user.

It struggled to meet the diverse needs of its two market segments. Its new phones failed to appeal to individual customers, while business users felt alienated as the phones lacked the functionality they desired. Its poor organisational structure with two CEOs led to delayed decision-making and inability to understand customer requirements accurately. The company had a string of new product failures, resulting in a loss of smartphone market share to iPhones and Android-based phones.

Moreover, it failed to capitalise on the potential of mobile apps to spur demand for devices. Independent software developers found it difficult to develop apps for the technically complicated Java-based system of BlackBerry phones and BlackBerry further stifled their creativity by putting strict restrictions on app development.

Chen and his turnaround strategy

In the third quarter of 2013, the company made a net loss of $4.4 billion or $8.37 a share, on a revenue of $1.2 billion. In November 2013, after an attempt to sell the company fell through, one of its shareholders, Fairfax Financial Holdings Ltd, infused funds of around $1.25 billion to keep it afloat. Fairfax also brought in a change of management at BlackBerry, when it brought in turnaround expert Chen as the CEO.

Chen went on to execute a series of measures to cut operating costs and boost revenues at BlackBerry. To increase focus on software development, he transferred the task of design, production and distribution to Foxconn. He also undertook a series of measures to bring back business users and make the BlackBerry Enterprise Server (BES) the preferred cross-platform mobile device management solution for companies. In addition, he strove to build new sources of revenue through the BlackBerry Messenger (BBM) service, QNX operating system and a new technology platform for Internet of Things (IoT). Chen expected BlackBerry to be operating cash-neutral by the end of fiscal 2015 and to post a profit in fiscal 2016.

Future course of action

To reverse the company’s market share losses, BlackBerry planned to introduce new smartphones that catered to keyboard enthusiasts — primarily from its business user segment — . However, analysts pointed out that keyboard enthusiasts formed a very small segment of the smartphone market and, by concentrating on them, BlackBerry was losing out on a larger segment of the market.

By late 2014, BlackBerry’s share in the global smartphone market had fallen to less than 1 per cent. Though the company was squeezing out meagre profits, its loss of revenues year-on-year was steep. For fiscal 2015, BlackBerry had a loss of $304 million on a revenue of $3.3 billion, mainly due to a fall in phone sales, services and software.

Sources mentioned that BlackBerry was receiving takeover bids from other technology companies that were around $ 7 billion. Some sources said Samsung was interested in BlackBerry’s turn of fortunes and was keen to acquire its secure technology (10,000 to 15,000 patents). However, the BlackBerry board declared that the company was not for sale, as the takeover bids it received were much below its potential value.

If you are in a senior management position at BlackBerry,

How confident are you that Chen’s strategies to derive revenues from new business lines such as BES, BBM, QNX and IoT will succeed? What else can the company do to grow revenues?

Unlike the previous time, when it failed to find a buyer, as of 2015, BlackBerry had a potential buyer in Samsung. Considering that most analysts thought it was an uphill task to go back on the path of growth, would you want to sell the company, even if the bid amount was below its potential value? Or

Do you think the company should wait a couple of years to start making profits, before it is put up for sale, to gain a higher market price? What is the probability that the company might again start losing money, thereby putting off any potential buyers in the future?

IBS Centre for Management Research. All rights reserved.