BlackBerry Is Seen Mimicking Palm’s Decline; For BlackBerry, Consumers Aren’t the Only Problem; Share of Business Customers Is Down to About 5%

BlackBerry Is Seen Mimicking Palm’s Decline

BlackBerry Ltd. (BBRY) reported a more than 40 percent plunge in sales and vowed to cut a third of its workforce, raising concern that it’s on the same downward spiral as Palm Inc., though without prospects for a last-minute buyer. The company said yesterday that it’s eliminating 4,500 jobs and recording an inventory writedown of as much as $960 million for the fiscal second quarter. BlackBerry expects to report a net operating loss of as much as $995 million in the period and sales of $1.6 billion — about half the $3.03 billion that analysts had estimated, according to data compiled by Bloomberg.The bleak results sent BlackBerry shares tumbling 17 percent and drew comparisons to Palm, another smartphone pioneer that fell out of favor with consumers. Like BlackBerry, that company attempted a comeback with a new operating system — only to see it fizzle with shoppers. Palm was able to entice Hewlett-Packard Co. (HPQ) into buying it in 2010, though that didn’t save the product line from being discontinued.

“It reminds me very much of Palm,” said Keith Lam, managing partner with Red Sky Capital Management Ltd. in Toronto. “HP tried to catch a knife buying Palm and it didn’t work out. So I’m not sure why anybody would step in here. These numbers are extremely bad.”

BlackBerry shares fell to $8.73 at the close in New York yesterday, marking the biggest one-day drop in more than two months. The stock has declined 26 percent this year, bringing its market value to $4.6 billion.

Sale Process

BlackBerry said last month that it was forming a special committee to evaluate its strategic options, including a potential sale of the company. Finding a buyer may not be easy, though. JPMorgan Chase & Co. and RBC Capital Markets spent close to a year quietly canvassing potential acquirers without success, people with knowledge of the matter said last month.

BlackBerry also has hired accounting firm PricewaterhouseCoopers LLP to evaluate the company for potential buyers, according to two people with knowledge of the move.

The company put out its financial results a week before their scheduled release, aiming to get the news out of the way and show that it was charting a course toward recovery. In a concession that it has failed to gain traction against Apple Inc. (AAPL)’s iPhones or Google Inc.’s Android devices, BlackBerry is narrowing its focus to the market for corporate users.

Still, that decision may not be enough, Lam said. The revamped BlackBerry 10 lineup, the linchpin of the company’s comeback plan, hasn’t sold as well as analysts had estimated. Customers such as Morgan Stanley are holding off on committing to new devices, concerned about BlackBerry’s future.

Nail in Coffin

“That’s the nail in the coffin,” said Lam, whose firm manages C$220 million ($214 million). While Red Sky was a BlackBerry investor, it’s getting rid of its stake because of the results, he said. “There’s no point anymore.”

BlackBerry’s $1.6 billion in revenue would be its lowest quarterly sales since 2007, when smartphones were a nascent market. Back then, the iPhone had been out for less than three months, and Google’s now-dominant Android operating system was still in the development phase.

Chief Executive Officer Thorsten Heins was counting on the BlackBerry 10 phones — introduced in January to good reviews — to reverse a sales slide, return the company to profitability and make the brand hip again. Instead, its market share continues to slide and BlackBerry remains in the red.

The Canadian company said it will record revenue for sales of 3.7 million smartphones last quarter, mainly from earlier BlackBerry 7 devices. In all, 5.9 million smartphones were sold through to customers in the period, including ones shipped to carriers earlier, the company said.

Z10 Flop

The inventory writedown is mostly for the Z10 touch-screen device, which was seen as the company’s flagship model and chief iPhone competitor. BlackBerry also introduced two phones this year with physical keyboards, the Q10 and Q5.

The adjusted second-quarter net loss will be as much as $265 million, or 51 cents a share, BlackBerry said. That compared with the average analyst estimate of 16 cents.

The latest job cuts follow a move to eliminate 5,000 jobs last year, part of an effort to save $1 billion in operating costs. BlackBerry had 12,700 workers as of the end of March, the last time it disclosed a number.

BlackBerry is the biggest spender on research and development among publicly traded Canadian companies, according to data compiled by Bloomberg. That makes its employee base important for the nation’s economy.

‘Knock-On Effects’

“Even if they aren’t all in Canada, the knock-on effects could be significant over the coming months,” said Terrence Connelly, principal at hedge fund Contingent Macro Advisors LLC in Lafayette, California.

The inventory writedown, meanwhile, extends a streak of similar charges. The company took a pretax expense of $485 million in December 2011, a second charge of $267 million the following March and a third writedown of $335 million in June 2012.

Still, BlackBerry continues to offer new products. Earlier this week the company introduced the Z30, a model with the company’s largest screen yet. The device goes on sale in the U.K. and Middle East starting next week.

A team of accountants and lawyers from New York-based PricewaterhouseCoopers have been working at BlackBerry since August, said people familiar with the process, who asked not to be identified because the contract hasn’t been made public.

The smartphone maker previously hired Perella Weinberg Partners LP as an adviser — alongside its bankers at JPMorgan – – to help explore its options, a person familiar with the decision said earlier this month.

Fairfax Financial Holdings Ltd. (FFH), BlackBerry’s largest shareholder, has talked to Canadian pension fund managers to try and build support for a takeover deal, according to a person with knowledge of the discussions. However, he hasn’t made much progress, the person said.

“It appears the only option BlackBerry has is to ultimately sell itself,” said Neeraj Monga, an analyst at Veritas Investment Research Corp. in Toronto. “But it seems nobody’s stepping up to the plate.”

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

Updated September 21, 2013, 4:18 p.m. ET

For BlackBerry, Consumers Aren’t the Only Problem

Share of Business Customers Is Down to About 5%

RYAN KNUTSON, CLINT BOULTON and WILL CONNORS

BlackBerry Ltd.’s BB.T -16.08% last-ditch move to abandon its consumer business and focus on selling devices to companies is a risky bet that it can hang on to ground that is rapidly eroding.

Just three years ago, BlackBerry had a market share of nearly 70% among business customers in North America, according to the research firm IDC. This year, that figure has dropped to around 5%, IDC says. Globally, BlackBerry’s business market share has slipped to around 8% from 31% in 2010, according to IDC.

The cause is the same as in the consumer market, where BlackBerry has been pushed to the corners by dominant smartphone makers Apple Inc.AAPL -1.04% and Samsung Electronics Co. Once consumers grew addicted to using iPhones in their personal lives, they began insisting on being able to bring them to work.

BlackBerry had developed a new touch-screen smartphone in an effort to combat the threat. By giving up on the consumer market, it risks falling further off the pace when it comes to devices people want to carry.

The trend—referred to a Bring Your Own Device—is one Douglas Menefee, chief information officer of Schumacher Group, saw firsthand after allowing employees to use their personally-owned devices for work two years ago.

About 100 employees at the Lafayette, La., health-care staffing company use BlackBerrys, down from 450 workers a few years ago. He also supports 635 iPhones, 250 iPads and 75 smartphones that run on Google Inc.’s Android software.

“It’s been a no-brainer for us to embrace a model which provides our workforce their own personal preference for their mobile devices,” Mr. Menefee said

Larry Conrad, chief information officer at the University of California at Berkeley, which allows employees to bring their own devices, said he doesn’t see workers returning to BlackBerry. He says he hasn’t seen any of the school’s several hundred administrators using them.

BlackBerry spokeswoman Kara Yi said the company remains the leader in securely managing mobile devices for companies.

“BlackBerry is much more than a device company,” she said.

Still, the company acknowledged in a securities filing in June that it has “encountered challenges adapting to the BYOD movement.” Businesses that previously “required employees to use the BlackBerry” now permit “employees to choose devices offered by the Company’s competitors.”

That has resulted in “a decline in revenue and market share, particularly in the U.S., BlackBerry wrote.

Steve Brasen, managing research director at Enterprise Management Associates Inc., an analysis firm for the information technology industry, says the situation is actually much worse. “They imploded,” he said.

Part of the problem, he said, is that the company was too focused on its business customers and ignored changes in the consumer market that eventually took a toll. When it did make strong efforts to adapt with phones like the touch screen Z10, which hit the market this spring, it was “too little too late,” Mr. Brasen said.

On Friday, BlackBerry said it would take a charge of nearly $1 billion largely to reflect the diminished value of Z10 phones in inventory. The company also said it would lay off 4,500 employees in an effort to cut expenses in half. The company also said it would pull out of the consumer market and focus instead on its core business and professional customers who “helped build BlackBerry into the leading brand today for enterprise security, manageability and reliability,” Chief Executive Thorsten Heins said on Friday.

The company’s increasing dire financial picture made drastic action necessary. BlackBerry said Friday it would post a loss of $950 million to $995 million for the three months that ended Aug. 31. The company said its revenue for the period would be about $1.6 billion, down from $2.9 billion a year earlier. The company also continues to look at options for selling itself.

Investors reacted poorly, sending the stock down more than 17% on the news.

There are some bright spots. BlackBerry still holds about 38% market share among businesses with more than 10,000 employees, and more than 33% share in government and financial institutions, according to Mr. Brasen’s research.

Its BlackBerry Enterprise Server, which helps companies manage their employees’ devices, is also something companies have been holding on to, Mr. Brasen said, in part because it is expensive and complicated to replace.

BlackBerry says device management is an area it will focus on for growth. An update to its BlackBerry Enterprise Service allows it to support Apple’s iOS and Google’s Android software, and it now has more than 25,000 commercial and test servers installed globally, up from 19,000 in July. BlackBerry said it would announce eight new business contracts on Tuesday.

But in order to rebound in the enterprise market, BlackBerry is going to have to recapture executives who have already moved on.

BlackBerry would have to build mobile technologies—hardware or software—that would “reinvent mobile computing if they plan to regain the trust of the enterprise customer,” said Mr. Menefee, the Schumacher CIO. “I just don’t see it happening.”

Tracey Rothenberger, chief operating officer of Malvern, Penn.-based Ricoh-Americas Corp., said fewer than 500 of the 9,000 smartphones he manages for the printer and copier maker are BlackBerrys. The remainder are Android or iOS handsets. “For me, it’s kind of game over for them,” he said.

Mr. Rothenberger said BlackBerry still makes great software for securing mobile devices, but its competitors are catching up.

“I think there is a limit to how long they can hold out as the premier secure solution in mobility,” Mr. Rothenberger said.

Companies looking for an ultra-secure environment likely will stick with BlackBerry, he said. But there is nothing compelling that would make him use BlackBerry devices or the BlackBerry Enterprise Server, which he said is “expensive for most organizations” to purchase.

The challenges aren’t lost on BlackBerry’s CEO, Mr. Heins.

“You have to be good in consumer to be good in enterprise,” Mr. Heins said on the company’s June 28 earnings call. Because it is “the employee in the enterprise deciding which device makes it into the enterprise.”

BlackBerry’s downfall came down to apps

John Shinal, Special for USA TODAY11:39 p.m. EDT September 20, 2013

SAN FRANCISCO — You have to give BlackBerry credit for making one last go of it in the hand-held device market, one that the company helped pioneer when it was known as Research in Motion.

The Canadian company’s most recent products were late with key features compared to Apple and Android offerings, but they were enough at least to make the z10 BlackBerry a legitimate smartphone — and propel its shares 40% in the first three months of this year.

Let’s hope some of the 4,500 people to be laid off by BlackBerry were smart investors who sold into that stock surge, before news of the layoffs started hewing off large amounts of the company’s market value.

As we said in a column here in March, the company’s new smartphone and tablet likely wouldn’t be enough to turn around its momentum.

That wasn’t a bold call, of course, given that the one-time leader in the market for a combination mobile phone/email device had seen its market share shrink to niche status.

But it’s worth remembering why the company failed.

BlackBerry’s missteps went beyond one that has been the death of many makers of mobile devices: failing to keep up with fickle consumer tastes, which are always following the latest hardware innovations.

That same mistake felled much larger companies than BlackBerry, including Nokia and Motorola, which each were sold for a fraction of their once-mighty worth, to Microsoft and Google, respectively.

When it was still called Research in Motion, BlackBerry failed to see the key change in its market: the emergence of software capability — trumping hardware features — as the driver of consumer handheld purchases.

When it led the smartphone market almost a decade ago, BlackBerry was sold primarily to corporate customers who liked its reliability and security – and the fact that if there were a problem, the user usually had a corporate IT service guy to fix it.

But the time is long gone when we bring our smartphones to an IT department to fix, or use them mostly to read business emails.

The reason consumers buy the devices now is for what they can do with the hundreds of thousands of apps that are written for them, which means much of their use is for pleasure, not business.

Earlier this year, BlackBerry was touting the fact that consumers had access to 100,000 apps that ran on its operating system.

Yet as we told you in that previous column, that was a small fraction of the software applications being written for Apple and Android phones by third-party developers.

That difference in what you couldn’t do on a BlackBerry that you can do on other devices sealed the company’s fate.

It’s also a reminder of how difficult a time the new Microsoft-Nokia combination is going to have competing with the market leaders, and what their primary task should be.

What kind of software capabilities a consumer can add to a smartphone after buying it is now much more important than the features packed into the phone by its maker.

In the end, there wasn’t enough for consumers to do on a BlackBerry.