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Circling the RIM: BB10 becomes chamber of horrors for BlackBerry

Excuse me - what's a prosumer?

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Analysis Friday's writedown of almost $1bn of inventory confirms the launch of BlackBerry 10 mobile OS as one of the most catastrophic of modern times. Nobody, it seems, wants BB10 in 2013.

BlackBerry has vastly over-estimated the demand for its shiny, modern new platform and announced a retreat from the consumer market. Gone are 4,500 more jobs, 40 per cent of today's work force.

This part of the BlackBerry story is surely only half-told. BlackBerry announced it would be focusing on enterprises and “prosumers” – a demographic that it did not define. Whether a smartphone “prosumer” segment actually exists, in the way it does for digital cameras, is most doubtful.

Apple and Samsung fill this niche with their “consumer” products; the operator subsidy model ensures the most expensive and advanced new devices are leased to punters on hire purchase with a relatively low upfront cost.

If such a thing as a smartphone “prosumer” exists, he or she is likely to be touting a phondleslab, or an iPad Mini. So BlackBerry has, in effect, all but formally withdrawn from the handset business: the media-centric, consumer-centric Z30 model was announced last week without any accompanying marketing events or presentations. Perhaps the “prosumer” story will only last as long as it takes BlackBerry to shift its unwanted inventory.

International decline

In truth, BlackBerry was only hanging onto the consumer market by its fingernails – this had been surrendered some time ago in major markets, like the United States and much of Europe, because RIM/BlackBerry spent so long modernising its platform. BlackBerry bet everything on its brand for the BB10 launch - but this brand had been in decline for some time. BlackBerry® slid from 9th to 60th to 100th in BrandKeys' brand customer loyalty ratings in successive years, from 2010 to 2012, and from 56th to 93rd last year in Interbrands' brand rankings.

Interbrand calculated BlackBerry lost more value in 2012 than any other brand on the planet. This was not an irreparable situation, but restoring the damage required deep pockets, a broad range of attractive products – to restore its battered word-of mouth reputation – and lots of time. None of which BlackBerry had, or could offer in 2013.

The UK was one of the last Western 'Berry strongholds, with 8.5 million subscribers spread across enterprises – including a bloated public sector – and consumers (RIM does not break down the UK enterprise/consumer ratio). UK youth remained loyal to BlackBerry for far longer than other markets: it was ubiquitous among under-25s, giving them flat rate data for well under £20/month, and a social network in hardware.

The delays in launching BB10 were to prove catastrophic, because RIM had no new BB7 product to release in the interim. The groups avidly loyal to BlackBerry because of BBM became splintered. Once one or two group members start to use an alternative messaging service like WhatsApp, the group follows. So by the time BB10 was launched these consumers already begun to peel away.

Shrinking revenues

The revenue picture is clear enough: gross income for Q2 – the period ending 1 September – halved from the $3.1bn in Q1 to $1.6bn. BlackBerry said it had "sold through" 5.9 million BlackBerry devices, but this figure included shipments made in Q2 but not yet "sold". "Most of the units recognized are BlackBerry 7 devices,” said the company's canned statement, “in part because certain BlackBerry 10 devices that were shipped in the quarter will not be recognized until those devices are sold through to end customers."

Good accounting practice demands that a company re-evaluate its inventory when it cannot sell it above cost, the re-evaluation was almost $1bn downwards. So BlackBerry's revenue today appears to be from enterprises buying two-year-old BB7 devices for employees and pockets of loyalty like the Philippines, Indonesia and South Africa.

Other developing markets saw steep declines: in Mexico, market share tumbled from 34.9 per cent to 10 per cent from July 2012 to July 2013 according to Kantar World Panel, while UK market share fell from 11 to 3.5 per cent – a figure BlackBerry disputes. The company bowed out of Japan earlier this year, and was never in contention in China.

Asked what was his greatest regret, RIM founder Mike Lazaridis said it was failing to buy QNX Systems sooner. BlackBerry only acquired the control systems company in April 2009. While the Neutrino OS – a secure, sophisticated and highly reliable real-time Unix – was a good fit for company that valued security, it had no mobile heritage.

RIM was able to drop Neutrino into a tablet, the PlayBook, within six months but developing the cellular stacks took much longer. The demands of the BB10 middleware also grew, to such an extent that BlackBerry broke a promise to PlayBook owners that BB10 would run on their hardware.

More damagingly, it meant BlackBerry was unable to meet the demand of its remaining consumers, by now, a price-sensitive demographic who needed cheaper handsets. A market willing to spend £10-£15 a month was now being asked to pay £30-£35.

Regrets, we've had a few...

Perhaps the story may have turned out differently if RIM had acquired Neutrino two years earlier, and attempted a managed transition: bringing new high-end smartphones to market in 2010, while using its legacy OS to build up its subscriber base. Instead it saw no reason to panic, as sales and revenue were growing anyway, from $15bn to almost $20bn between 2010 and 2011, as it squeezed the value of its ancient OS.

That was just when the market turned en masse to full touchscreen smartphones – and at the time, RIM had nothing modern to offer the market in that segment. (The less said about the Storm, the better). People love us, executives must have mused, so what's the rush?

Hints from CEO Thorsten Heins suggested BlackBerry may have hoped for a graceful exit from the hardware business. Once the new platform was successful, it could license it to selected hardware partners (like Sony), focusing on the enterprise. Instead it looked incomplete; a radical design that missed many features BlackBerry users take for granted – and for all the delays, it still hadn't been debugged.

Given that BB10 has now vanished into a void, it's hard to see BB10 as any kind of asset to a potential acquirer of the business. ®

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