What Happened to BlackBerry: Zombie Stock or Comeback King?

Much has been written over the years about what happened to BlackBerry. The company, once briefly the most valuable company in Canada, has effectively been struggling for a long time, with its stock hovering flat around the $10 mark, effectively a zombie stock. The Q2 2019 earnings release has done little to help: the company missed estimates, sparking a new sell-off and another wave of articles. Is the picture painted by the stock a fair one, particularly for a company whose revenues are up 20% YoY? It belies all the changes that have taken place in the company in the last 10 years, including hiring a new CEO, its pivot towards reinventing itself as a software company, and its efforts to become “the world’s largest and most trusted AI-cybersecurity company” and acquiring Cylance, an innovative and successful company in the booming cybersecurity space.

The recent history of the company makes for an interesting case study on how a hardware company can stay alive and become a more modern software company and on how a company that was presumed to be a dead man walking can turn (or perhaps, fail to turn) its fortunes. It is also, in some ways, a cautionary tale about the importance of perception.

BlackBerry Stock Price Evolution

A Brief History of BlackBerry

BlackBerry was once iconic: all bankers and similar professionals clutched one of those smartphones with a keyboard and the little wheel on the side or trackball in the middle. In the famous picture that sparked the Texts from Hillary memes, it was a BlackBerry that Hillary Clinton was using. It was dubbed CrackBerry, hinting at how widespread its use was and how dependent people were on them. Obama famously refused to give his up when he entered the White House in 2009.

Their key functionality was the ability to send emails on the go, as well as its BBM (BlackBerry Messenger) platform—essentially a mobile version of AOL’s AIM. The technology, however, quickly became obsolete with the rise of Apple’s iOS and Google’s Android, with the company going from a market share of over 33% in the UK in 2011 to an insignificant one currently (0.04%). The United Kingdom is a perfect illustration of a trend that has affected BlackBerry globally: its market share declined to 0.

Market Share of BlackBerry Globally

So What happened to BlackBerry? A lot has been written about why BlackBerry lost out to Apple and Samsung for dominance of the smartphone market, so it does not really bear to be repeated in great detail. Fundamentally, the mistakes were linked to an excessive focus on enterprise over consumer tastes and preferences, an OS that nobody was building apps for, and phones that looked clunky and did not have desired functionality: the physical keyboard did not make up for the lack of smartscreen, or the size of it.

Ultimately, the story of BlackBerry is one of failing to keep up with how people interact with a new and rapidly changing technology. It bears many parallels to the decline of email usage: email, once revolutionary and ubiquitous, was considered to be on a rapid decline. Sleeker, faster ways of communicating, many of them mobile-native, were taking over (e.g., Slack and WhatsApp). A lot of communication also became image-based rather than text-based - and email did not lend itself well to that. It had gotten to the point that some were (and still are) predicting the death of the medium in the near future. The tone of reporting, however, has recently become significantly less catastrophic: email is apparently seeing a resurgence but used in a different way. It has now become less of a personal or corporate communication tool, and more of a marketing instrument.

The Wilderness Years: How Did BlackBerry Survive?

BlackBerry survived the darkest years in its history (2011 to 2016) because of geographic and technology peculiarity: its devices were extremely popular in the developing world. While the market share declined significantly in the Western world, demand for BlackBerry phones remained strong in developing countries, particularly in Sub-Saharan Africa and Indonesia. As recently as 2014, Africa and the Middle East accounted for 40% of BlackBerry’s total revenue. The phone maker owned 48% of the mobile market in South Africa and 70% of the smartphone market. Three percent of BlackBerry users worldwide are Nigerian. This was because of technology and access price: BlackBerry’s low data usage made it more accessible, while 3 and 4G technologies had not penetrated developing countries yet at the time. This sustained the company while it tried to retool its strategy and return to viability.

According to research by Vodacom, BlackBerry had more customers in Africa than Android and iOS combined. In fact, BlackBerry said at the time that its devices account for half the smartphones in Nigeria. In Indonesia, on the other hand, the company retained market share to some extent, particularly through BBM users. Despite healthy sales in emerging countries, which effectively held the company afloat, in 2013 BlackBerry was desperately trying to find a solution for its problems, reducing its workforce by 40% and going as far as putting itself on the market and trying to find an acquirer, attracting interest from the likes of Lenovo and its large shareholder Fairfax Financial, the Canadian Berkshire Hathaway in a move that was ultimately unsuccessful.

The hardware part of the businesses, however, was consistently loss making, reflecting the changes in consumer preferences and the very thin margin on the sector, particularly when compared with software. Not only, but the total contribution of hardware sales on revenues was steadily declining: from 80% in 2011 to less than 45% in 2015.

What was the company to do? It had survived so far in the absence of a clear and simple strategy purely because of a historical fluke. A clear strategic refocus was absolutely necessary, as, effectively, by failing to find a buyer, the company was as good as dead.

The Software Years: Transitioning Away From Zombieland

In 2013, after the CEO was ousted for failing to sell the company, BlackBerry nominated John Chen to be its new CEO in a very strategic appointment. Mr. Chen, in fact, had a long history in the world of software, having served as the CEO of Sybase, a company that was then acquired by SAP and that he had been instrumental in turning around. This move was a clear signal that the company was seriously intending in trying to right the ship and refocus, going back to its roots of services and security rather than trying to compete for a market it had already effectively lost.

The choice of John Chen as the top executive appeared to be an inspired one, and probably what had the greatest impact on the course of BlackBerry’s history: he was able during the course of his tenure there to, at least partially, reverse the fortunes of the ailing company. Firstly, he vowed to refocus the company on its core customer base (and strength), enterprise. Then, he announced that the company would cease to make mobile phones - an announcement that was met with considerable nostalgia. Instead of producing its own hardware, the company would design phones, some of which would use Android OS, and then licence their production to local companies in the markets where it still had some traction: India, with Optiemus, TCL, in the US and globally, and Merah Putih for Indonesia.

BlackBerry Revenues by Quarter and Source Up to 2015, $Million

Under Chen’s leadership, the company started focusing more and more heavily on software, particularly in the security space and in what is also dubbed “Enterprise of Things”, effectively an evolution in the concept of Internet of Things, referring to all those smart objects that are connected to each other and to the Internet, and thus require securing and are vulnerable to cyber attacks. Under this strategy, the acquisition of Cylance made perfect sense for BlackBerry.

Cylance Acquisition: A Strategic Change

Cylance has been the largest acquisition by BlackBerry to date. BB acquired the company for $1.4 billion, utilizing its cash resources. It was not the first acquisition in the sector, but a useful one: BlackBerry had extensive expertise in secure communications and tended to work with large enterprise clients. Cylance, on the other hand, provides threat preventative software to SMEs, complementing the existing offering. It is clear from the latest earnings releases that the company will be heavily reliant on the recently acquired company for growth: ESS (enterprise software and services) has been underperforming for 3 consecutive quarters, while growth at Cylance was up 31% in Q1 and 24% in Q2.

What Next?

So why was BlackBerry so battered by investors, despite still showing growth in the double digits? Investors have lost patience with the speed of change and are acutely aware of how difficult it is to pivot such a large business (and for the second time, at that: BlackBerry started out as Research in Motion, making software for secure communications, and briefly became the most valuable company in Canada).

Pivoting a company is notoriously hard, and while there are illustrious examples of companies that have done so successfully, like YouTube or Slack, there are similarly many, like Fred Wilson, that do not see pivoting as a strategy that is always sound.

After what happened to BlackBerry over the years, now seems like a better time for recovery than it has been in many years. There are certainly a lot of strengths in the strategy pursued by BlackBerry, such as understanding the client base that it is best positioned to serve, as well as where those strengths could play in the future, such as the IoT and EoT space. The sheer size of BlackBerry, however, certainly makes it even tougher to execute a reinvention of this magnitude successfully. We will be watching alongside market participants.