Massive risks for operators, consumers as BlackBerry faces a death spiral

The only certainty about BlackBerry’s future is that it’s completely uncertain. Yes, there’s a buyout offer on the table from Fairfax Financial Holdings under Canada’s ‘Warren Buffett’ Prem Watsa, but that bid itself is filled with questions.

The problem is not whether BlackBerry is going to be taken private or not. Rather, its whether it’ll exist at all in its current state in 12 months time.

First, the facts. Watsa and Fairfax are insiders. He was on the BlackBerry board until a month ago!

And aside from the nearly $1bn write-down of unsold Z10 devices, there are some serious questions about the actual number of devices sold in the most recent quarter. See, BlackBerry’s decided to change the way it recognizes revenue. So devices in the channel (ie. not in the hands of actual customers) are no longer being accounted for in the way they used to be. This appears to suggest that only 2.2-million devices were sold in the quarter.

It would seem that precious few Z10 and Q10 (BB10) devices are actually being sold to customers globally. For example, both are being seriously discounted by operators in South Africa (a key market for BlackBerry). This is a very worrying sign.

Of course, mobile operators in emerging markets (BlackBerry’s last remaining ‘strongholds’) are addicted to the service revenues that (legacy OS7) BlackBerry devices guarantee. African and Middle East mobile giant MTN reported nearly R1-billion in revenue from BlackBerry Internet Service from just South Africa and Nigeria in the first six months of this year. That’s a massive number.

Four out of the first five pages of Vodacom’s (the largest mobile operator in South Africa) spring deals booklet list BlackBerry devices and postpaid offers. And well over half of the devices run on the legacy OS7 platform.

It says a lot about a handset maker when customers don’t want your next generation devices. And surely serious questions have to be asked of operators who will willingly and aggressively sell devices on a legacy platform into a market.

We’ve seen this movie before, except we haven’t. Palm flamed out shortly after its WebOS launch. We saw Motorola reach the edge of the cliff and then get bought out by Google. Ditto with Nokia and Microsoft. BlackBerry is different, though. What happens if BlackBerry implodes, taking its BlackBerry.net APN infrastructure (the technology behind ‘unlimited’ BlackBerry Internet Service) with it? Here we have tens of millions of devices active in the market worldwide that could become nothing more than bricks with keyboards if the house of cards collapses.

Make no mistake, there are valuable parts inside the sprawling BlackBerry business. The services business which allows corporates to manage email and mobile devices through BlackBerry Enterprise Server remains attractive (and probably profitable). But, of course the question of how valuable this business is sans scale and devices forced onto end-users remains to be answered. The patent portfolio is worth something.

So too, the QNX platform unit (the core of BB10) extends into all sorts of industries including automotive (in-car infotainment systems for some Audi, BMW, Chrysler, Hyundai vehicles), as well as medical, industrial and defence. This in itself is a tidy business. Oh yes, and there’s a $2.6bn pile of cash on the balance sheet.

Google search trends, while not at all scientific, provides some insight into what consumers are thinking about. And it correlates with anecdotes in the market.

Even if doubts in a brand and platform are only starting to creep in, its not long before any confidence evaporates completely. They don’t call it a death spiral for nothing.

There are big risks for operators who’ve flooded markets with old-generation BlackBerry devices tied to the promise of all-you-can-eat, cut-price mobile internet. With the golden goose nearly terminal, and all sorts of doubts around how long a legacy platform can last, regardless of BlackBerry’s corporate continuity, operators are in a corner. They simply have to find a replacement. Cheap Androids (and low-end Nokia Lumias) will do the trick on the device side. But how are operators going to replace the BIS proposition? That’s near impossible. Prepare for chaos in the months ahead.