Investors hoping for a quick turnaround at troubled handset maker BlackBerry, formerly known as Research In Motion Ltd (NASDAQ:BBRY), were sorely disappointed recently, after two firms released studies indicating sales for its Z10 handset were soft in the U.K., Canada, and the U.S. BlackBerry’s Z10, a full touchscreen device, is the first of two new smartphones running on the company’s eagerly anticipated BlackBerry 10 operating system.
Research In Motion Ltd (NASDAQ:BBRY) investors had hoped that this was the device to save the long suffering company, which has been bleeding out ever since the release of Apple Inc. (NASDAQ:AAPL)’s seminal iPhone in 2007. The subsequent flood of Google Inc (NASDAQ:GOOG) Android devices, led by Samsung, further reduced Research In Motion Ltd (NASDAQ:BBRY)’s market share.
Two disturbing studies
Analysts at Deutsche Bank surveyed 150 stores in the U.K. and Canada after the Z10’s release, but reported that no stores had sold out of the phone. The U.K. was the first market to receive the phone on January 31, followed by Canada on February 5. Very few customer service representatives mentioned the Z10 without being asked about it directly, with a lower number of representatives in the U.K. recommending the phone than in Research In Motion Ltd (NASDAQ:BBRY)’s native Canada. In addition, two Canadian carriers have already reduced their prices for the Z10, indicating that supply is outweighing demand. As a result, Deutsche Bank reiterated its ‘hold’ rating on BlackBerry, which is oddly paired with a price target of $8 – indicating that the stock could still plunge more than 40% from current levels.
Meanwhile, Hudson Square Research conducted a similar survey of stores in the United States, following the Z10’s American launch on March 22. AT&T Inc. (NYSE:T) released the Z10 on that day, while Verizon Wireless will release it on March 28. Hudson Square’s findings were similar to those of Deutsche Bank, reporting that there were no lines, promotional signs and very few pre-orders.
Waiting for a real keyboard?
Although Research In Motion Ltd (NASDAQ:BBRY) has yet to release initial sales numbers for the Z10, these two studies indicate trouble for BlackBerry this quarter. However, both Deutsche Bank and Hudson Square noted that BlackBerry users may be waiting for the upcoming Q10, which offers a full traditional BlackBerry keyboard instead of a touchscreen. The Q10 is scheduled to arrive on April 26, but initial rumors indicate that its price is fairly steep – an unlocked 16 GB Q10 will cost approximately $800 – more than the $760 Z10. By comparison, an unlocked 16 GB iPhone 5 currently costs $649 on Apple Inc. (NASDAQ:AAPL)’s website.
Although the final cost of the Q10 will depend on carrier subsidies, its rumored high cost is worrisome, since many BlackBerry users had expected it to be cheaper than the Z10.
Some sobering figures
For Research In Motion Ltd (NASDAQ:BBRY), which is currently ranked third in the smartphone race, 2013 may be the end of the road if both the Z10 and Q10 fail to reach an audience. Here are the sobering numbers in the United States.
Source: comScore Mobilens
The U.S. smartphone universe has become a two horse race between Apple iOS and Google Android. While BlackBerry still holds 5.9% of operating systems for smartphone subscribers, a breakdown by brand reveals a different story.
Source: comScore Mobilens
BlackBerry doesn’t even crack the top five positions, four of which are held by Android handset manufacturers. Even worse, three of those companies – Samsung, HTC and LG – also manufacture Windows Phones, giving Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (ADR) (NYSE:NOK) a slight advantage in market presence. BlackBerry, meanwhile, is holding on to the hope that its enterprise users, who have stuck with the brand due to its more robust security features, will help carry it through this tough time.
A tough choice ahead
At this point in the game, I believe that BlackBerry needs to borrow a play from Microsoft’s playbook and partner up with a few Android-based handset manufacturers to strengthen the relevance of its operating system. There was a lot of buzz last year regarding a rumored Samsung-BlackBerry partnership or merger that never materialized. That partnership could have boosted Samsung’s profile in the enterprise world and BlackBerry’s presence in the market for everyday users. CEO
Thorsten Heins has also discussed the possibility of licensing BlackBerry 10 to other hardware vendors.
However, I believe that at its core, BlackBerry still considers itself to be more like Apple Inc. (NASDAQ:AAPL) than Samsung. In other words, it considers its hardware and software to be two parts of a single package, and putting its operating system on a group of handsets with fragmented hardware capabilities could weaken its security capabilities, dilute brand recognition and endanger the brand.
But with that kind of isolationist thinking, Research In Motion Ltd (NASDAQ:BBRY) could wander down the path that nearly destroyed Nokia Corporation (ADR) (NYSE:NOK). During its darkest days, Nokia Corporation (ADR) (NYSE:NOK)’s Finnish executives fought tooth and nail to preserve its aging Symbian OS, and repeatedly denied pleas to release an Android phone. It took a new Canadian CEO, Stephen Elop, and several high profile executive resignations, to discontinue Symbian in favor of adopting Windows Phone as its primary platform.
Therefore, Heins is wise to preemptively offer to license BlackBerry 10 to other vendors. However, the company runs the risk of alienating its long-time customers by offering its operating system to an Android handset maker like Samsung, Sony or HTC, due to Android’s poor reputation for security.
The Foolish Bottom Line
If both the Z10 and Q10 fail, BlackBerry is up the creek without a paddle. Simply look at this chart to understand how desperately it needs these two handsets to succeed.
Both revenue and earnings are plunging, and EPS has been negative for most of last year. On the bright side, its cash position and free cash flow remains stable, and the company surprisingly has no long-term debt. However, both operating and profit margins are negative, and have been since the start of 2012.
If the Z10 and Q10 fail to win a following, I think Heins’ backup plan of licensing its software to other hardware vendors will simply fail. If that happens, then Research In Motion Ltd (NASDAQ:BBRY) is going to have to consider some drastic moves – such as introducing Android phones of its own – to survive. So for now, BlackBerry’s future rests entirely on these two phones – and if they fail, it’s time to finally sell this broken stock – which has plunged 86% over the past five years.
The article It’s Time to Start Worrying About BlackBerry originally appeared on Fool.com and is written by Leo Sun.
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