Ars deathwatch 2014: Companies on the edge of relevance; These five companies won’t die, but they may not escape 2014 in one piece

Ars deathwatch 2014: Companies on the edge of relevance

These five companies won’t die, but they may not escape 2014 in one piece.

by Sean Gallagher – Jan 4 2014, 9:30pm MPST

With all of the holiday cheer now behind us, it’s time to take stock of the year ahead. And while 2013 was a good year for the stock market and a somewhat better-than-recessionary year for the economy as a whole, the ravages of the past twelve months have placed a handful of technology-related companies at a crossroads—one that could lead to a miraculous recovery, an acquisition, or the sort of corporate undeath that turns them into intellectual property zombies that feed on other companies’ brains for survival.Last January, I assessed the chances of five companies. Here’s how they did.

Earlier this week, we reviewed my questionably accurate picks from last year, and I asked for your feedback on who should make this year’s watchlist. I also consulted with the great minds of the Ars staff for a sanity check and revisited financials and other data just to make sure there was some grounding in fact for the five companies that made my final list. The companies chosen meet at least two of the following criteria:

An extended period of lost market share in their particular category

An extended period of financial losses or a pattern of annual losses

Serious management problems that raise questions about the business model or long-term strategy of the company

None of these criteria are necessarily indicators of future corporate health; companies have been turned around to succeed despite the piling on of these sorts of issues—companies like General Motors and Chrysler, for example. Of course, none of the companies on our list are likely to receive a federal bailout, either.

So, in no particular order of direness, here are Ars’ five deathwatch companies for 2014:

RadioShack

I never called it “The Shack.” And neither did many of the other people who have shopped at the original tech supply store. But thanks to electronic commerce, some really bad marketing decisions, and a host of other macroeconomic and management land mines, RadioShack is looking very shack-like.

It’s hard to label RadioShack a “tech company,” despite the company’s roots. But this store chain, which sees its core audience as “do-it-yourselfers” and now proudly stocks an assortment of Arduino shields, has been doing it to itself for the past two years after sales started to evaporate in 2011. And the losses are only accelerating. Apparently, stocking radio-controlled trucks did not bring in the foot traffic to help sell more cell phones and batteries. In the first nine months of 2013, the company lost $208.8 million—$112 million of that in the three months ending in September. A good chunk of the third-quarter loss came as RadioShack purged inventory it couldn’t sell.

Admittedly, RadioShack’s CEO Joe Magnacca has inherited a mess and is trying to undo years of “very ineffective” (his words) strategy. Magnacca came to RadioShack in February from Walgreens—yes, the drug store chain—and has brought on veterans from JC Penney and Under Armour. The company is trying to upgrade its stores to make them hip and fresh and to find a way to draw the technically inclined in with exclusive and limited edition gadgets.

 

RadioShack’s consumer electronics sales have been shrinking. “Signature” got a spike this year thanks to iPhone 5 cables and portable speakers, but everything else sold slower.

That’s probably not enough to fight one simple fact: if you want immediate gratification, you can buy a good deal of what moves at RadioShack at the Walgreens next door—or the AT&T store next door, or Target, or Best Buy. Or you can just order it online—probably at Amazon, because RadioShack’s online presence might as well be on Gopher. But the company is burning through cash trying. Just before Christmas, RadioShack arranged for $635 million in additional financing, adding to its already ballooning debt costs.

RadioShack’s idea of upgrading is apparently (based on a site survey) throwing some Arduino shields in a rack where the speaker wire used to be, improving the lighting, and downsizing from 12 lines of soldering irons to five. And ask a clerk where the soldering irons or Arduino shields are and you’ll get a thousand-yard stare. What RadioShack needs is more than a facelift—it needs a brain transplant.

BlackBerry

At the beginning of last year, BlackBerry was poised for a comeback, with a long-delayed new operating system and a line of new phones based on it that were supposed to take on Android and the iPhone head on. The company had everything riding on the new BlackBerry 10 devices and even renamed itself after its flagship products—dropping the venerable Research In Motion name in an attempt to rebrand and possibly break with the bad juju that had become stuck to it.

I left BlackBerry off of our deathwatch list last year because it seemed like things were looking up just a bit. Then the OS and product launch happened. And after flooding retailers with the new keboardless Z10, the new phones didn’t sell. A comically bad marketing campaign (including a jaw-droppingly bad Super Bowl commercial) did nothing to help, nor did the hiring of Alicia Keys as “creative director.” The company was forced to take a $1 billion loss on unsold Z10 handsets in September. That’s billion, with a “b,” as in BlackBerry.

As the company continued to restructure—slashing 40 percent of its remaining payroll—BlackBerry CEO Thorsten Heins and the board started shopping the company around for sale and eventually tried to cobble together a leveraged buyout to go private like Dell—a strategy that ended up collapsing and costing Heins his job.

BlackBerry is not going to cease to exist, at least not any time soon. Interim CEO and executive chairman John Chen has $3.2 billion in cash to work with, thanks in part to a $1 billion loan-convertible-to-stock by Fairfax, the private equity firm that was supposed to buy the company for $4 billion. Chen is refocusing the company on business customers, pumping up BlackBerry’s position as an enterprise mobile device management software provider, and it’s looking to keep the phone business going as a player in its biggest growth market—Indonesia—with a manufacturing deal with Foxconn.

But with rapidly diminishing overall sales (down to $11 billion from 2012’s $18 billion) and a $4.4 billion loss for the company’s last quarter ending in November, just how relevant BlackBerry will end up being if it does survive is a huge question mark. Chen and his team are now looking at a future where BlackBerry is facing increasing encroachment on the enterprise front from other mobile device management players, Apple, and Android device makers (Samsung in particular, which now also has permission to play in the sandbox of BlackBerry’s biggest customer, the Department of Defense). Now surpassed in market share by Windows Phone—with just a 1.7 percent market share in the third quarter of 2013—BlackBerry faces a future as a footnote in the mobile device marketplace.

HTC

To say that 2013 was a bad year for Taiwanese handset maker HTC is probably something of an understatement. The year was capped off by the indictment of six HTC employees on a variety of charges such as taking kickbacks, falsifying expenses, and leaking company trade secrets—including elements of HTC’s new interface for Android phones. Thomas Chien, the former vice president of design for HTC, was reportedly taking the information to a group in Beijing that was planning to form a new company, according to The Wall Street Journal.

On top of that, despite positive reviews for its flagship HTC One line, the company has beenstruggling to sell the phone. Blame it on bad marketing, bad execution, or just bad management, but HTC has been beaten down badly by Samsung.

The investigation of Chien started in August, but it was hardly the worst news HTC had last year as the company’s executive ranks thinned and losses mounted. There was reshuffling of deck chairs at the top of the company as CEO Peter Chou handed off chunks of his operational duties to co-founder and chairwoman Cher Wang—giving her control over marketing, sales, and the company’s supply chain in the wake of a parts shortage that hampered the launch of the HTC One. The Wall Street Journal reported that HTC couldn’t get camera parts for the One because suppliers believed “it is no longer a tier one customer,” according to an unnamed executive.

That’s a pretty dramatic fall from HTC’s peak, when the company vaulted from contract manufacturer to major mobile player. Way back in the heady days of 2011, HTC was second only to Apple in US cell phone market share, and it held 9.3 percent of the global market. Now it’s in fourth place in the US, with just 6.7 percent market share based on comScore numbers—behind Google’s Motorola and just ahead of LG Electronics by a hair. Its sales in the last quarter of 2013 were down by 40 percent from last year, and revenues for 2013 were down by 28.6 percent from 2012. With a patent infringement suit from Nokia over chips in the HTC One and One Mini still hanging over its head in the United Kingdom, the company could face a ban on selling some of its phones there.

Executives insist that HTC won’t be sold, especially to a Chinese buyer—the politics of such a deal being toxic to a Taiwanese company. But ironically, the Chinese market is perhaps HTC’s best hope in the long term—the company does more than a third of its business there. The company’s best bet may be going back to manufacturing phones with someone else’s name on the faceplate and leaving the marketing to someone else.

Zynga

The giant of social gaming lives on in spite of a horrendous 2013. But despite changes at the top,significant layoffs, and a bunch of other things I mentioned in our roundup of last year’s predictions, Zynga remains a company on life support—support provided by the huge pile of cash produced by its obscenely successful IPO. Somehow, the company still has a market capitalization of $3.14 billion.

FURTHER READING

ZYNGA, FROM ZENITH TO SLIDE: HOW MARK PINCUS’ GAMING POWERHOUSE CRASHED

Gaming giant has been on a wild ride in just 5 short years—it’s also lost $600M.

Zynga is still bleeding, though the company may break even this year. Yes, it lost substantially less in the first three quarters of 2013 than it did under the leadership of founder Mark Pincus in 2012. But part of that is because the company cut 20 percent of its workforce—and almost none of it has to do with the company’s games.

Where the company continues to lose ground is in its quest to find people willing to spend real money on virtual things. The number of people playing Zynga’s games on a monthly basis has dropped by 57 percent from last year—as older games lost players, newer games failed to make up the difference. That means fewer farmers buying virtual things, and in the first three quarters of 2013, Zynga’s revenue was only 64 percent of what it brought in during the same time period in 2012.

Part of the problem for Zynga has been managing the shift from Web-based games on social networks like Facebook to mobile games, which grew from 16 percent of Zynga’s revenue in 2012 to 23 percent in 2013 (while Facebook dropped from 84 percent to 77 percent). And other companies, like King, have come along to challenge Zynga.

In the end, Zynga may well be profitable—but it will probably come with a bigger body count as the company trims its expenses further. More layoffs and a smaller stable of games may make the company viable again, but it probably won’t be the household name that Pincus envisioned it would be.

AMD

Advanced Micro Devices is still on deathwatch. Yes, AMD reported a quarterly profit of $48 million in September thanks to a gift from the game console gods (and IBM Power’s fall from grace). But that was hardly enough to jolt the chip company out of what has been a really bad year—and AMD is trying to manage expectations for the results for the final quarter of 2013.

THE RISE AND FALL OF AMD: HOW AN UNDERDOG STUCK IT TO INTEL

Remember when AMD could compete with Intel in both speed and price?

AMD is caught between a rock and a hard place—or more specifically, between Intel and ARM. On the bright side, it probably has nothing to fear from ARM in the low-cost Windows device market considering how horrifically Windows RT fared in 2013. AMD actually gained in market share in the x86 space thanks to the Xbox One and PS4—both of which replace non-x86 consoles. And AMD still holds a substantial chunk of the graphics processor market—and all those potential sales in Bitcoin miners to go with it.

But in the PC space, AMD’s market share declined to a mere 15.8 percent (of what is a much smaller pie than it used to be). And in a future driven increasingly by mobile and low-power devices, AMD hasn’t been able to make any gains with the two low-power chips it introduced in 2013—Kabini and Temash. Those chips were supposed to finally give AMD a competitive footing with Intel on low-cost PCs and tablets, but they ended up being middling in comparison.

All that adds up to 2014 being a very important year for AMD—one that could end with AMD essentially being a graphics and specialty processor chip designer. The company has already divorced itself from its own fabrication capability and slashed its workforce, so there isn’t much more to cut but bone if the markets demand better margins.

Dishonorable mention: Bitcoin, Litecoin, and the cryptocurrency market

Really. When the Winklevoss twins revealed that they had cornered about 1 percent of the Bitcoin market, you knew where this was leading, didn’t you? Cryptocurrencies became the financial equivalent of the pet rock in 2013—or perhaps of Pokemon cards, for those not old enough to remember the craze for geological companions. And now, with the restraints built into the BitCoin algorithm to limit the supply of the currency now pushing processing requirements higher and higher for miners, the race to mine them has become almost comic.

Your picks for corporate oblivion

So that’s my watch list. I’ve put these companies on here not because of any hidden agenda or grudge, but because, of all the publicly traded technology-related companies that we at Ars brush up against every day, they seem to be the most in peril.

Of course, you may have your own opinions about which companies should really be on this list, and there were a number of interesting nominees in the comments on my roundup from last year. In the interest of gaining wisdom from crowds, this is where you get to cast your ballot on the issue. Voting will be open until I return from CES on January 10, when I’ll post the final results and we’ll highlight some of your comments.

Until then, stay bearish!