Sunday, November 17, 2013

BlackBerry needs a Draghi moment

The Blackberry debacle reminds me of another crisis that has passed by the wayside—remember the eurozone's Target2 crisis? The same sorts of forces that caused the Target2 crisis, which was really an intra-Eurosystem bankrun, are also at work in the collapse of Blackberry, which can also be thought of an intra-phone run. By analogy, the same sort of actions that stopped the Target2 crisis should be capable of halting the run on Blackberry phones.

Target2 is the ECB mechanism that allows unlimited amounts of euros held in, say, Greek banks to be converted at par into euros at, say, German banks, and vice versa. As the European situation worsened post credit-crisis, people began to worry about a future scenario in which Ireland, Greece, Spain, Italy, and/or Portugal might either leave the euro or be ejected. If exit occurred, it was expected that these new national currencies, drachmas, punts, and lira, would be worth a fraction of what the euro was then trading for.

The chance that this future "bad" scenario might happen accelerated what had been a steady outflow of deposits from the GIIPS into an all-out run—after all, why would anyone risk being stuck with a Greek euro that might be worthless tomorrow when they could costlessly switch them into a German, Dutch, or Finnish euro today at rate of 1:1? The resulting market process was a reflexive one. Mounting Target2 imbalances caused by the run increased the likelihood of a breakup scenario, amplifying the run and creating even greater imbalances.

What ended the run? ECB President Mario Draghi stepped to the plate in a July 26, 2012 speech and directly addressed what he referred to as convertibility risk.
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough... [link]
Draghi's comments, as Gavyn Davies then pointed out, amounted to an explicit commitment to backstop the GIIPS to whatever extent was necessary to quell any fears of euro departure. In essence, he took the future "bad" state of the world in which exit occurred and crushed it under his foot. As this chart shows (this one is good too), the massive inflows into German banks and outflows from the periphery were halted almost to the day of Draghi's speech. After all, if the ECB now guaranteed that Greece and the rest were to remain moored to the union, then a GIIPS Euro was once again equally as good as German, Dutch, or Finnish one.

Blackberry is also encountering a run of sorts as Blackberry users flee into competing phones. In normal times, cell phone brands are like euros—they are homogeneous goods that perform the same task. However, just as fears that Greek euros might one day cease to exist inspired a run into German euros, fears that Blackberry's product line might be discontinued (and left unsupported) are causing an all-out run into iPhones and Androids. After all, why risk being stuck with a legacy Blackberry when, come the expiration of your existing contract, you can costlessly switch into a competing phone that has all the same features, the manufacturer of which is sure to exist a few years from now? Take Pfizer for instance, which recently told its employees that "in response to declining sales, the company [Blackberry] is in a volatile state. We recommend that BlackBerry clients use their BlackBerry devices and plan to migrate to a new device at normal contract expiration."

Blackberry desperately needs to have a Draghi moment whereby the future "bad" scenario—firm dissolution and product discontinuance—is crushed and exorcised, thus putting an end to the run. A long-term commitment with a show of muscle is needed. Has this occurred yet? Last month the company came out with an advertisement titled "You can continue to count on us", highlighting the company's formidable stash of cash and clean balance sheet. A start for sure, but no muscle. Last week, however, investor Prem Watsa stepped forward to play the role of Draghi, recapitalizing Blackberry (along with other investors) to the tune of $1 billion. The infusion should give the firm the raw cash to stay in operation for another few quarters. Is Watsa's line-in-the-sand enough to stop phone buyers from fleeing? Or will shoppers continue to spurn BlackBerry on the chance that more billions will be needed, and Watsa unlikely to stump up the cash? The Globe and Mail quotes Watsa, who gives an accurate account of Blackberry's conundrum:
"Why would you buy a BlackBerry system or a BlackBerry phone if you think the company is not going to survive? Well, that’s out. BlackBerry is here to stay,” he said, adding “There’s no question”
There you go, it's a Draghi moment of sort. Substitute "Blackberry" with "Greek Euro" and you have the exact same message that Draghi conveyed to markets last year in his successful halt of the intra-Eurosystem bank run. Like Greek euros, BlackBerries are presumably here to stay.

The difference between Draghi and Watsa is that a central banker can create any amount of money he or she requires—Watsa, who doesn't have his own printing press, is a little more constrained. However, if Watsa has managed to muster up a true Draghi moment, one that is sufficiently credible with smartphone buyers so as to crush the future "bad" scenario out of existence, then the intra-phone run that has plagued Blackberry is probably over and today may be a good time to own shares.

PS: I don't own BlackBerry shares, but am considering it. Dissuade me if you can, commenters.


  1. "Dissuade me if you can, commenters."

    I can't comment on the Euro, but re: BBRY--the hole is too big and the bucket is too small.

    "why risk being stuck with a legacy Blackberry when, come the expiration of your existing contract, you can costlessly switch into a competing phone that has all the same features

    This is BBRY's problem. Android/iPhone aren't homogeneous substitutes, they're superior, and the gap is widening. Orders of magnitude differences in #'s of apps and app developers, continuous OS improvement. Where will the BBRY developer talent come from?

    BBRY's only lifelines have been the enterprise market and developing countries (Indonesia, Africa, Latin America). They are rapidly losing ground in both markets (to Samsung on the high end, the Chinese on the low). Whatever scraps BBRY might have held onto will be taken by Windows Phone (which itself has a shaky future).

    I've heard that new BBRY OS's are getting better at supporting Android apps--sort of like ensuring convertability in your Euro analogy. But this is a dead end, too. One only need look at HTC's struggles. HTC has been focused on Android from the beginning and had great brand loyalty at one point. If an Android specialist like HTC can't survive the Huawei/ZTE/Lenovo/Xiaomi onslaught, BBRY's doesn't have a prayer.

    1. You're right that if Blackberry, Android, and iPhone are not homogeneous substitutes, then my analogy has a problem. After all, if German euros are capable of doing things that Greek euros can't (say German euros are also edible, Greek euros taste bad... admittedly, a silly example but the first one that pops to my mind) then everyone will convert over to German euros, even if the future existence of Greece within the European Union is assured. No Draghi moment could halt the rush into higher-quality edible German euros.

      I suppose you could make the case that if we confine our analysis to the business user, then Blackberry's inferior support for apps is somewhat counterbalanced by its superior security. If Androids and iPhones were to catch up on the security front, wouldn't it be just as likely that Blackberry catches up on the app front? Which once again restores the homogeneity argument, the analogy to the euro run, and the ability for a Draghi moment to have some sort of dampening effect on the run on Blackberry.

    2. Put differently, I'm trying to tease out how much of the move away from Blackberry is based on quality issues (yours and Squarely Rooted's points), and how much is due to run-causing "bad" futures states of the world. Up till now, probably both. But if the second has been removed, one would imagine the downward trajectory leveling off to a degree. Perhaps not enough to buy the shares, though.

    3. Right, I get what you're saying, and it's a neat analogy. However, the analogy breaks down in another way. Draghi said he's willing to do whatever it takes. If BBRY's performance doesn't turn around in the next few quarters, I doubt any more cash infusions are forthcoming. At best, it looks like it'll just prolong the pain.

      I don't really see how Blackberry can catch up on apps. The shrinking consumer and business markets discourage native BB10 development, and as porting Android apps becomes smoother, there will be even less incentive to develop Blackberry specific apps. As the Nexus 5-type iterations become even cheaper and more powerful, Blackberry will be at a hardware disadvantage, too.

      Blackberry's advantage in security--real or perceived--will be a somewhat tough nut to crack. But its market share in business devices is already in single digits, and with the competition (GOOG, AAPL, MSFT, Samsung) all sitting on veritable widow's cruses of cash, I wouldn't bet on BBRY. I can see a limited dampening effect on the "run," but where's the upside?

    4. Incidentally, this discussion underlines why I only believe in weak EMH. Even if the exact same info is available to all market participants, the interpretations of that info will never be the same. Superior interpretation w.r.t. a few specific stocks might give an occasional, limited edge.

      One instance that comes to mind is when NFLX was around $27 and Blockbuster came out with its own online rental service. Analysts seemed to be unanimous that Blockbuster would win, or at least take significant market share, but I truly felt the analysts were wrong (unfortunately, I was just learning about stocks and didn't pull the trigger). Ditto for Elop's decision not to support Android for Nokia--I foresaw disaster (again, I didn't short--perhaps I need more guts).

    5. Your skepticism has encouraged me to wait for an actual sign of an end to the run on Blackberry, say a few months of steady/rising market share. On the EMH, I agree. If the world was perfectly priced, no one would gather information to invest in anything, but observation tells us that people willingly engage in this behavior.

  2. So...why? BlackBerry has three main competitors: iPhone, Android, and Windows Phone. And the latter is the best example of why BlackBerry will fail. It is a combination of inertia, network effects, and status. Basically, the newest Windows Phones are extremely highly reviewed and have very cool features that no other phones have. Yet nobody is buying them because it is really hard to dislodge someone who has committed to iPhone or Android, especially the former. I have probably spend hundreds of dollars on iPhone apps over the past four years or so; why would I throw that all away in favor of Windows? Additionally, until a mobile OS reaches a certain critical mass of user base, the money isn't there to incentivize app development, even porting existing apps over to that OS.

    So why would BlackBerry succeed if Windows can't? The only reason it still exists at all is legacy clients that have yet to switch, for example the US Federal Government, and even that hold is slipping and the current product is widely loathed and socially associated with undesirable things like the creeping hand of one's boss stretching into your personal life. At this point one has to wonder why even if BlackBerry releases a truly excellent product where the latent customer base is?

    1. Apps definitely change the equation. See my comment above to John.

  3. I don't think the cash situation at BBRY is as dire as portrayed. It would only cost $650M to lay off the rest of their entire staff (post-recent layoffs). As the company retrenches, it's capex requirements will go to 0, although their cash flow for "intangibles" is somewhat murky. Their market cap was last at this level in mid-2004. With the recent NSA issues, BBRY could resell their software for private clouds and sell licensing and management services. Like Greece's niche, there will and always will be demand for Corfu vacations, but the glory days of the mass-market are long gone.

    1. Ok, first semi-bullish comment on Blackberry. Next dilemma: if Blackberry sticks around does it bottom at $6 with an upper range of $20, or does it bottom at $1 with an upper range of $6?

    2. Based on recent EV/S~1 of Mitel/Aastra deal, and BBRY's revenue falls 80% to $2B and burns all their cash, then the common (post-new-debt) is worth where it is today, if they can be modestly profitable. Looking at the recent convert deal from FFH's standpoint, their break even on their BBRY investments would be $12 over 3 years. Ignoring patents, and (modest) value of businesses which could easily be carved out or relicensed (QNX, Certicom). Bullish, I don't know. Again, this is based on becoming primarily an enterprise player and emerging market player (where wireless internet is a premium). John Chen seems like the kind of guy that will make that hard call, but history is littered with companies that sat on the fence.