Last Friday, BlackBerry (NYSE:BB) reported worse-than-expected results for the company's fiscal Q1. While sales of the company's flagship Z10 and Q10 handsets fell short of most analysts' expectations, CEO Thorsten Heins also had discouraging news to relay regarding the company's PlayBook tablet.
BlackBerry had planned to upgrade the PlayBook's operating system to the BB10 OS, which powers the company's latest smartphones. However, Heins determined that the user experience was not up to par and therefore stopped these development efforts. This more or less marks the end of a turbulent two years on the market for the PlayBook.
BlackBerry's decision to jettison the PlayBook is a good one. The device never had a chance at replicating the user experience Apple (NASDAQ:AAPL) created with the iPad, because of a lack of developer support. With Android vendors including Amazon.com (NASDAQ:AMZN) and even Google (NASDAQ:GOOGL) itself selling high-quality 7-inch tablets for $200 or less, it became virtually impossible for competitors (aside from Apple) to make money in this market.
While BlackBerry faces long odds in its attempt to climb back to relevance in the smartphone market, its tablet efforts were already doomed. It was high time for the company to cut its losses and throw its resources into the areas where it still has a chance: productivity-focused smartphones and enterprise software and services.
History of a failure
In early 2011, BlackBerry -- then called Research In Motion -- released the PlayBook tablet, its response to Apple's runaway success with the iPad. The PlayBook was the first BlackBerry device to use the QNX operating system, which is also the basis for BlackBerry's new BB10 OS. The PlayBook's QNX OS is relatively snappy (especially compared with the legacy BlackBerry OS that powered the company's smartphones at the time), and the PlayBook tablets were well-made.
However, the price point was a killer. RIM decided on a starting price of $499 for the 16 GB Wi-Fi PlayBook, identical to the iPad's starting price. However, there was nothing particularly compelling about the PlayBook to justify paying iPad prices. The PlayBook didn't even include a native email client, one of the key features of BlackBerry's smartphones.
It took just one month for rumors of disappointing sales to hit the market. When RIM ultimately reported results for the first quarter of PlayBook shipments, the company had sold just 500,000 units. The worst part was that this was the best result PlayBook ever produced, with shipments quickly dropping off to just 200,000 in the following quarter.
Price cuts: the beginning of the end
The PlayBook took another blow when Amazon began selling its Kindle Fire tablet that autumn for just $199. While the original Kindle Fire was a lower-quality device and lacked features like a camera, its use of the Android OS and integration with Amazon made it a better choice for most casual users.
The introduction of this "bargain tablet" forced RIM to lower the PlayBook's price. In fact, the company briefly matched Amazon's pricing by cutting the entry-level PlayBook price from $499 to $199. That decision allowed the company to move stale inventory off store shelves, but it didn't provide much of a sales boost beyond that. Moreover, the price cuts undermined profitability, forcing the company to take a $485 million inventory writedown.
By the end of 2011, it was clear that RIM's strategy with the PlayBook was a failure. While the company has continued to tinker with its tablet, it was high time for management to admit that BlackBerry is just not cut out for the tablet market.
Google really raised the bar in the "budget tablet" market last summer with its Nexus 7, and Amazon responded with a significantly upgraded Kindle Fire lineup in the fall. With those two well-capitalized companies willing to sell high-quality tablets at or near cost, BlackBerry couldn't hope to earn money in the tablet business, even as a niche vendor.
By contrast, there's a lot of profit to go around in the smartphone market. Right now, Apple and Samsung have a virtual duopoly in terms of profit share, but BlackBerry still has some chance to make money as a niche player there. The situation in the tablet market was hopeless, and so shareholders should be glad that BlackBerry finally put the PlayBook out of its misery.