There are many reasons to be hopeful for BlackBerry Ltd. (NYSE:BB). The new CEO, increased focus on security and new, cheaper phones are starting to draw institutional interest. The BB10 operating system may not have been a good idea but that is behind the company and investors are looking forward instead of in the rear view mirror. There are things to be concerned about though, including dilution and weakening fundamentals that investors need to be aware of though.
Is John Chen the right man for the job?
Over the years, I have covered enterprise software (including Sybase) as well as handsets (including Research in Motion) and have been fortunate enough to meet John Chen. He could potentially be the perfect candidate to get Blackberry off of life support. Mr. Chen started his career as an engineer at Unisys and worked his way up the ladder and into management positions. He isn't just a professional manager, he has been in the trenches. At Sybase he proved that he could take a company with a high quality product that its customers would like to keep using and manage the business profitably. His challenge at Blackberry will be greater because the switching costs are lower and consumer loyalty in the electronics business is non-existent. Just ask Sony, a premium TV manufacturer that is being priced out of a market that it created.
Chen's challenge will be twofold: 1) ensuring Blackberry is relevant in enterprises that are moving more and more to BYOD and 2) selling the company outright. Competing against Apple (NASDAQ:AAPL), Samsung and Microsoft is not a long term option for Blackberry. It just doesn't have the resources to fight a hardware war against competitors who can draw from higher margin revenue streams to subsidize their initiatives. To do this, Chen is playing to Blackberry's strength: security.
Blackberry is the only mobile device manager with the authority to operate on Department of Defense networks. This is more than just a feather in Blackberry's cap -- this could be the company's lifeline. In the last year, we have seen highly esteemed companies like Target and the NY Times come under cyber attack from foreign borders. The vendors who can alleviate or prevent this pain are richly rewarded. For instance, security company FireEye Inc has seen sees its stock price double in the last three months after it acquired Mandiant, the services company that worked on the NY Times issue. Security is one of the few features left in the corporate technology world where companies in most any industry will pay up for the latest and greatest products.
Apple and Nokia (NYSE:NOK) have built substantial market share by focusing on the consumer rather than the enterprise. Neither offers the security offered by Blackberry's infrastructure. Do they need it? Angela Merkel's Nokia phone was reportedly tapped by the DoD but it is still unclear whether these increased data breeches will force a change in behavior. Until this happens, Nokia is likely to continue to benefit from is strength in Europe and emerging markets and Apple will continue to focus on the high end of the consumer smartphone market. Blackberry needs to prove its case: that the increased security should mandate secure handsets for business.
What's in store for MWC?
This is the long term strategy but in the near term, Mr. Chen needs to bring costs down to prevent any further dilution. Blackberry has struck a deal with Foxconn to manufacture its handsets in Mexico and Indonesia . This deal will allow the company Blackberry to focus on the software and handset design without the overhead of manufacturing. When the company was larger, handling the manufacturing internally may have made sense but with unit volumes shrinking, outsourcing is now a better idea. The first phones will be unveiled at Mobile World Congress which begins on Feb. 24 in Barcelona .
A narrower market focus and improved cost structure are starting to attract the heavy hitters. After the close on Friday, Third Point LLC, a hedge fund managed by former Yahoo! board member Dan Loeb, announced a 1.9% stake in Blackberry. Third point bought 10 million shares in the fourth quarter of last year, which seems like a less-than-subtle vote of confidence in the new management and direction. Piggy backing on professional shareholders does not guarantee profits, but with significantly more resources at their disposal, increasing institutional interest is a positive indicator. Now with the initial big moves out of the way, it will be interesting to see if he holds those shares after the new phones are released at Mobile World Congress next week.