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Investing in the Smartphone Market

Blackberry's Fall from Grace

Written by Jon Carter
Posted September 25, 2013 at 2:38PM

Is Blackberry (NASDAQ: BBRY) officially dying a slow death?

A saving grace could come in the form of an acquisition of the former telecommunications giant by Canadian insurance firm Fairfax Financial (TSX: FFH), which holds ten percent of Blackberry. The proposed buyout would cost $4.7 billion, or $9 per share.

blackberry pearlHowever, the stock is performing just under the buyout price, opening at $8.40 on Wednesday morning. And now there is uncertainty over whether or not the deal will even take place.

By any other standard, the proposed buyout price is an insult compared to Blackberry’s historical value of $83 billion. Fairfax is getting quite a steal, with a near 80 percent discount compared to the $11.3 billion in revenue Blackberry generated this year, Bloomberg reports.

But if Blackberry is going to make it, the company will need to return to private status to regroup and avoid further public pressure from investors.

Blackberry will be forced to lay off 4,500 workers, and it suffered a billion dollar loss in the previous quarter. Shares plunged 20 percent upon word of the disappointing financial results.

The company is in emergency management mode – forming a special committee to directly tackle the financial issues as it attempts to brave the storm.

But the problem is that there just aren’t that many buyers lining around the block. So far, the Fairfax deal is the best offer on the table, but Blackberry does have a six week time frame to seek other bids.

Analysts are confident that a bidding war would ensue should other buyers be interested, and this could ultimately benefit Blackberry in the long-run. But Blackberry would be wise to stick with this deal after it put off a buyout when the company was still riding high.

If Blackberry waits any longer, it stands a risk of an even lower offer in the future should value of the company plunge any further.

Where Blackberry Went Wrong

Blackberry announced last week that it would drop efforts to win over entertainment consumers and focus on its core corporate base. But this is the very strategy that landed Blackberry in trouble in the first place.

By focusing too much on corporate clientèle, the company missed the entertainment-driven aspect of the smartphone market, while competitors Apple (NASDAQ: AAPL) and Samsung (KSE: 005930) were at the top. Blackberry failed to see smartphones as entertainment devices, and it did not expand its consumer base at the height of its success.

By the time Blackberry caught on to this trend, it was too little too late. Apple had virtually dominated the market, and Blackberry was left in the cold.

The telecommunications giant also failed to stay innovative and ahead of the curve as the smartphone reached its peak.

The Blackberry 10 was released this year, but sales have been disappointing. Nowadays, Blackberry only holds three percent of the smartphone market.

If Blackberry seeks to tighten its grip on business-oriented individuals, it must think of innovative ways to do so, such as venturing deeper into developing markets or coming up with an eye-catching product.

Where is the Smartphone Market Going?

There is currently an oversaturation of smartphones on the market, and this is affecting the sales of newer models out there. That's why American companies like Apple are looking to developing economies for future growth.

Apple has received the same criticism as Blackberry for its lack of innovation as of late, but expansion into developing markets could be a spearhead of creativity and profit.

Apple recently debut its cheaper model iPhone 5S – a phone that has sold well in developing economies like China.

But Apple will have some competition from Samsung, which has a much more established presence in China – not to mention local companies that offer cheap yet high-quality feature phones that cater to domestic populations.

Blackberry’s problems are not specific to the company; the entire smartphone industry is going through a transition.

Let’s take Microsoft’s (NASDAQ: MSFT) recent buyout of Nokia Devices & Services for $7.2 billion as an example.

This purchase gives Microsoft several advantages because the company can easily make a killing from servicing, content, and software, and it will give Microsoft access to the hardware portion of the smartphone market.

But while Microsoft has access to the smartphone world through the Nokia Lumia across Europe and North America, the American company has yet to make a splash in developing economies. According to Mobile World Live, mobile market penetration in the developing world is just under 50 percent, with smartphone penetration just under 10 percent.

Of all places in the developing world, China is the place to be for smartphones. The Middle Kingdom is the fastest growing market for smartphones in the world.

Within the telecommunications world, this translates into new horizons and unexplored territory ripe for the picking.

It explains why big companies like Microsoft are gearing up for a play in developing countries and why Blackberry would do well to follow suit.

In fact, Blackberry could use its acquisition to position itself as a more internationally friendly company to developing markets across Asia, Africa, and the Middle East.

As incomes are rising in the developed world, it is a great time to capitalize and come out with an innovative product. Blackberry could very well do more in catering to a high-society business crowd in Shanghai – or another part of the world – with the right product.

It is possible for Blackberry to rebrand itself, though the company will never come out in full swing as it once did back in 2009.

For now at least, Blackberry has to gather its bearings and decide what type of smartphone company it wants to be in the future.


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