Disclosure: I am long BBRY.
Six years ago I paid $3,000 for a 42" flat screen TV. It was the latest technology, and sales were booming. Last year I bought a similar sized TV. It has lots of features that the first TV did not have, and I paid less than $1,000 for it. I didn't care what brand it was because they all seemed to be the same. I made my selection based on price.
When the flat screen TV first hit the market, there was enough of a difference to make consumers give up their old cathode ray tube TVs and buy the new technology. The market has now matured, the new features are not sufficient to encourage consumers to ditch their old flat screens for a new one, and next year, worldwide sales are expected to fall for the first time. Many of the flat screen TV manufacturers are losing money.
At some time in the not too distant future, we will reach the same point in the development of the smartphone.
The last two new phones from Apple (AAPL), the 4s and 5, did not make any great technical advances, or provide any real reason to ditch the old phone and run to the store for a new one. The iPhone 6 is due out later this year. No doubt the launch will be accompanied by great fanfare, and a few Apple addicts will line up outside the store all night to be the first ones to have the latest gadget. However, it will still be a phone, just like dozens of others competing for the same customers.
Last week, with lots of publicity, Samsung (SSNLF.PK) launched their new offering, the Galaxy S4. It remains to be seen whether or not it will catch on with the phone buying public. Its new technical features such as auto-scrolling based on sensing the users eye movements seem destined to be more annoying than useful. The biggest impact on Samsung's market share may well come, not from sales of the S4, but from a drop in price for the old S3.
Microsoft has entered the contest with Nokia and the Windows 8 operating system. The Nokia (NOK) phones have received some great reviews, but they don't include any "must have" features that make them stand out from the competition.
Then we have LG, Sony, Huawei and several others, all chasing their own share of a growing but increasingly overcrowded market. All use Android based products that are hardly distinguishable from each other.
We are quickly reaching the point where all smartphones are essentially the same, and price will become the determining factor in consumer choice.
Smartphones retailing for less than $100 have already hit the market in Asia. How long will it be before we see no-name smartphones on sale at Walmart for $49.99? Quality won't be a big issue, if the phone breaks, or if your wife drops it in the toilet (as mine did), you simply go out and buy another. Similar to what happened to the flat screen TV, price based competition will eventually squeeze most of the profits out of the smartphone business.
Apple is a company that has always prospered by being the first to market with great new products. In the early days of the PC, Apple was first to develop a mouse driven, drag and drop operating system. However, Microsoft won the PC operating system race because they allowed their software to be used by any manufacturer, and cheap PC clones flooded the market. Android will win the smartphone race for the same reason.
Apple's real growth has always come from the development of new products. The iPod, iPad and iPhone have been tremendously successful because when Apple brought them to the market, they were trendy new products, and were better than anything on the market at that time. Apple's profit margins are high, they manufacture cheaply in China and sell at American prices. They could compete in a lower price environment, but somehow I don't think they will have the stomach for it. I see iPhone sales gradually declining in the face of intense competition, and Apple focusing its attention on the next big "must have" product. Apple shares have fallen from over $700 to around $450 in the last six months. That is a big drop, and the shares seem like a bargain. However, I won't be buying, because I don't think their profit margins are sustainable long term, and I don't see the next big product on the horizon.
Samsung knows that the trend in smartphones, at least in the consumer segment, will be towards lower pricing, and is making a move to penetrate the enterprise market. However, its Knox security system, presumably named after Fort Knox, is still based on the Android operating system. It will be an uphill struggle to convince security conscious enterprise users to take the risk.
BlackBerry (BBRY), however, is one smartphone supplier that can differentiate itself from the pack and carve out a profitable niche market for itself. BlackBerry does not need to be a major player in the intensely competitive consumer sector. It can focus primarily on the business enterprise customers who value the extra security of the BB10 operating system. As long BlackBerry has a phone which is at least equal in features and performance to those of its competitors, it will be able to sell into the high end of the market. Based on comments from users, there is little doubt that the BB10 operating system is the best on the market right now. Sales of the new Z10 phone have exceeded expectations, and the phone is taking customers away from Apple and Android. The Z10 will no doubt contribute significantly to revenue and support the share price in the next few quarters.
However, 40% of BlackBerry revenue, and most of its net income comes from services and software, and this is where BlackBerry can make significant gains in the future. I wouldn't be surprised to see a licensing deal which gives another company (Lenovo perhaps?) the rights to use the BB10 operating system in lower priced consumer oriented smartphones. At the same time BlackBerry would retain the high end enterprise business, and expand its services and software revenue. The recent announcement that BlackBerry will open its BES10 system to users of iOS and Android is further evidence of its intent to focus on services, rather than manufacturing. The price war in the smartphone market has not yet begun. It is not too late for BlackBerry to cash in on its new BB10 line of phones for a while, but services is where BlackBerry will generate most of its profits in the long term.
I am long BlackBerry, I believe higher than expected sales of the Z10 phone will support the share price in the medium term and revenue from services will provide a long term boost once all of the hoopla surrounding the launch of the new operating system has died down.
I am also long on BlackBerry call options for May, because I think there will be more upside surprises in the next few weeks, and a short squeeze is likely to cause a sharp increase in the share price in April.