Market Insight

Blackberry reports another loss but the pain is not yet over

June 27, 2013

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Canadian smartphone manufacturer Blackberry has posted its sixth consecutive quarter of loss as it struggles to reassert itself in the smartphone market. Revenue was up 14.7 per cent from the previous quarter to just over $3bn but large increases in costs associated with the launch of its new operation system Blackberry 10. Marketing and sales costs jumped nearly 30 per cent, while the gross margin on sales decreased six points as Blackberry tried to boost sales of its handsets.

BlackBerry shipped 6.8 million smartphones in the quarter of which 2.7m featured the new BlackBerry 10 operating system. Blackberry lost four million subscribers to its Blackberry Internet Service in the quarter as well, leaving 72 million. The company also highlighted currency restrictions in Venezuela which cost it $72m chiefly in service revenue.

The closest point of comparison to the launch of Blackberry 10 is the recent switch of Nokia to the Windows Phone platform. Two quarters after Nokia began selling Windows Phone devices in the fourth quarter of 2011; it had shipped a total of 2.8m Windows Phone devices and its smart devices unit has struggled to break even ever since. Blackberry has shipped 3.2m Blackberry 10 devices so far and so is ahead of Nokia in that regard. It is also ahead in terms of transitioning its legacy business to the new operating system. 40% of its shipments in the quarter used BB10 whereas in Q1 2012, only 18 per cent of Nokia's smartphone shipments were Windows Phone devices.

This does not mean that Blackberry should expect BB10 sales to grow ever higher. Nokia has benefitted from the patronage of Microsoft in marketing Windows Phone. Blackberry has no such partner. Despite Microsoft's help, Nokia has still failed as yet to establish Windows Phone as a serious contender. This does not bode well for Blackberry's prospects. To drive volume for BB10, this quarter Blackberry is releasing the Q5, its first lower-priced BB10 enabled device. As Blackberry has several strongholds of users in emerging markets, IHS believes the success or failure of this device will be central to the company's long term success.

IHS expects teething problems when a company transitions to a new operating system. Anticipation of the new devices can quickly kill sales of legacy products, but supply chain and marketing considerations may slow the rollout of the new product line. The smartphone market is incredibly competitive with multiple manufacturers struggling to grab consumers' affection. This is much tougher again for a new OS that lacks the depth of content available on Apple's iOS or Google's Android ecosystems. This is an uphill struggle and therefore it is unsurprising that Blackberry continues to lose money.

Despite it being only a reasonably sized market (33 million mobile subscriptions at the end of 2012), a currency devaluation in Venezuela caused significant impact on Blackberry's bottom line in this quarter. This underscores how important these strongholds such as Indonesia, Colombia and South Africa are to Blackberry's success at the moment.

As it transitions to higher priced BB10 devices, holding onto this market share in emeging markets is an important priority for Blackberry. This may prove too difficult to achieve. BB10 removes the Blackberry Internet Service which offered cheaper internet access than normal data packages. Blackberry is also planning to launch its proprietary messaging app BBM on Android and iOS which removes another strong tie-in to the Blackberry ecosystem. Blackberry is gambling that the revenue generated from increased usage of BBM in more developed markets will outweigh the almost inevitable losses in its emerging market base.

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