Somehow, the permanent bulls in Research In Motion Ltd (NASDAQ:BBRY) BlackBerry believe that it can stage some sort of magical comeback through its payment services division, specifically in developing markets.
For some reason, though, I’m not completely sold on the future potential of payment services in developing markets like Indonesia. While I can concede to the fact that the company is at least making an attempt to explore future business opportunities, which may help to make it less exposed to the whipsawing trends in technology, that doesn’t change the fact that what Research In Motion Ltd (NASDAQ:BBRY) BlackBerry lacks is economies of scale in payment services. BlackBerry may fall short of what is necessary to remain competitive in the payment technology space.
Visa Inc (NYSE:V) means serious business
In Visa’s 2012 annual report, the company had 2 billion cards in circulation, along with $6.3 trillion in transactions processed on the network for the full year. The reason for why I mention these Visa-based statistics is to come up with an accurate conclusion as to the potential market value of Research In Motion Ltd (NASDAQ:BBRY) BlackBerry’s involvement with Indonesia’s Permata Bank. So let’s start doing the math now shall we?
Upon close examination we can determine that the average GDP per capita in Indonesia is $3,494 (for comparison purposes the European Union has a GDP Per Capita of $34,892). The number of internet users is 18 for every 100, meaning that the number of people who will realistically use internet-based services like payment transfers and payment technology is about 2 in every 10 people.
According to the World Bank the Indian population is approximately 242.33 million people. So if, we assume two in ten people have access to the internet, then we can, therefore, assume that only 20% of the population will use payment-based services. We can conservatively estimate that approximately 50 million Indonesians have access to the internet.
What will BlackBerry earn from 50 million Indonesians?
So with 50 million Indonesians capable of accessing the internet, how much money can Research In Motion Ltd (NASDAQ:BBRY) BlackBerry hope to earn from transaction and transfer payment services? Well, let’s go back and look at the Visa payment services statistics. Visa currently has 2 billion cards issued worldwide, and 53.3 billion transactions were processed on Visa’s network–so we can assume that each card is used 27 times per year. This is the worldwide average demand for payment services in a single year.
Visa reported $9.7 billion in revenue for fiscal year 2012, meaning that if we were to divide the total revenues ($9.7 billion) by the total amount of transaction processed on the network (50.9 billion), we can figure out the average value of a transaction, which is $0.18.
Let’s go back and re-examine Research In Motion Ltd (NASDAQ:BBRY) BlackBerry’s market. Currently there are 50 million Indonesians who have access to the internet. BlackBerry will process 27 transactions per year on average for 50 million Indonesians. Each Indonesian’s transaction is worth approximately $0.18 to BlackBerry. When we multiply the population of internet users x average transaction per year x average value of a transaction we get revenue. After inputting all the values for that formula, BlackBerry is projected to generate at least $243,000,000 in revenue. This is assuming BlackBerry were to run a fully matured payment services network in Indonesia (this will take at least 5-10 years).
Currently Visa has a net profit margin of 21.50%. So if, we factored that into revenue, BlackBerry will earn an additional $52,245,000 in net income. Assuming a ten to twenty earnings multiple and we can assume that this business will contribute $500 million to $1 billion in market capitalization over the course of ten years. BlackBerry has a market capitalization of $7.6 billion, so the impact over the course of ten-years is going to be inconsequential to BlackBerry shareholders.
Will this be enough?
The reason for BlackBerry’s decline in stock valuation was due to its declining market share in the smart phone space. Even if BlackBerry was to steal market share from eBay Inc (NASDAQ:EBAY), Mastercard Inc (NYSE:MA), Visa Inc (NYSE:V), and American Express Company (NYSE:AXP)., it wouldn’t be reflected in the company’s business performance soon enough to make up for the lagging mobile performance.
According to ComScore, BlackBerry reported a 1.2% decline in market share. The company has cut its advertising budget by $500 million in a period when Apple Inc. (NASDAQ:AAPL) increased advertising spending by $2 billion. Apple’s smart phone has had a negative impact on BlackBerry’s market positioning. It is unlikely that BlackBerry will be able to grow alongside Apple, even with the release of the BlackBerry Z10 and Q10.
Apple’s ecosystem has more than just products. Apple builds long-term customer value by making the products interchangeably compatible, allowing for file and program transfers through an Apple ID. This standardizes product upgrades and additions. As a result, Apple is able to price its products at a premium relative to its competitors. Even with Apple’s premium pricing, the company posted 7.4% year-over-year growth in its Macintosh sales.
An Apple MacBook can easily cost 20% more than its Windows 8 counter-parts, yet consumers are willing to pay more to get less in terms of performance specifications. Clearly it takes more than a faster processor, larger storage, faster memory, and better screen resolutions to win the hearts of consumers these days. Microsoft Corporation (NASDAQ:MSFT) and BlackBerry are losing market share because of this key fact.
BlackBerry isn’t likely to make a buck from its Indonesian payment services anytime soon. Likewise, its declining market share position paired with its poor product innovation practices keeps me a staunch skeptic of the company’s forward growth trajectory. It is far safer to buy Apple rather than BlackBerry.
The article BlackBerry May Not Monetize Its Payment Services Soon Enough originally appeared on Fool.com and is written by Alexander Cho.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.