Blackberry’s latest foray – the Blackberry 10 operating system and the touchscreen Z10 phone – are off to a good start. The response in UK and Canada has been better than any Blackberry launch has ever seen, and it seems like sales are on a positive graph so far. There is also an increased potential for Blackberry’s QNX OS and secure network, as smart technologies are integrated more deeply with cars, homes, health care, utilities, etc.
Blackberry also has a large band of loyalists that rely on its software and hardware. This group may have been dwindling, but winning them back is not impossible. On the face of it, Blackberry looks like it is in a good place after this launch. But, the new OS comes with its set of caveats – mostly because it divorces Blackberry from its Internet Service revenue.
Currently, Blackberry earns monthly revenue from all users of Blackberry 6 and 7 operating systems. This amounts to an average of $4 per phone per month. Then there are corporate consumers that subscribe to Blackberry Enterprise Service and pay a fee for that. It is unclear right now whether the new products would affect the enterprise customers, but for every consumer that migrates from pre-BB10 to BB10 the company is losing a future stream of revenue.
It is a good estimate that Blackberry has a 35% gross margin on the Z10 and the upcoming Q10. This estimate reasonably assumes that the company sells the phone to operators at $500, thus making a $175 gross profit per phone. While this is a good margin, it does not sufficiently cover the losses made by the elimination of BIS revenue. Assuming a subscription of 24 to 36 months, BIS makes the company $90-130 per phone. Even though the gross profit is made in the present, it is important to account for this loss made in the future.
At a macro level, the company currently earns $4 billion annual revenue from Services. This could be cut in a half as it aggressively pushes consumers towards Blackberry 10. Therefore, they would have to sell an additional 13 million phones in order to offset that cut. On the other hand, costs are not likely to reduce at all since Blackberry must maintain the infrastructure for BBM and BES. The only way out of this fix is to create newer streams of revenue, like MDM software.
February 14, 2013 at 10:20 am
Good article, fair from all sides. I agree that the loss of service fees will pinch cash flow but I don’t think that blackberry had any choice. If they didn’t drop the fees carriers would not have supported the platform. It’s a catch 22 but if blackberry refused to drop the fees the they would have been dead in the water. I think Blackberry has a few big secrets coming down the pipe. The phone was the obvious first step and now the “internet of things” that Heins refered to at the launch will begin to appear