BlackBerry Focuses on Emerging Markets With Q5

BlackBerry is counting on growth in emerging markets such as Brazil and Indonesia with a cheaper smartphone and a plan to expand the popular instant-messaging system that helped drive growth in those countries.

The Waterloo, Ontario-based company yesterday said it will bring BlackBerry Messenger, a free service that generates more than 10 billion messages a day from its 60 million users, to Apple Inc.’s iPhone and devices powered by Google Inc.’s Android platform this summer. The plan risks loosening the company’s grip on one of its most valuable services, while helping expand the BlackBerry 10 platform and sales of the lower-priced Q5 against cheaper Android devices, said Kevin Stadtler, a BlackBerry investor.

“The Q5 is clearly an emerging-market play,” said Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 70,000 BlackBerry shares. Giving the BBM application away allows more devices to communicate with BlackBerry handsets, removing an obstacle to sales, he said. “They actually have a better shot of selling BlackBerry devices by giving away the BBM app than not,” said Stadtler.

BlackBerry sales in Latin America, South Asia, Africa and parts of Europe have held up better than in North America in part because BBM offered a free way for consumers to communicate in countries where the cost of Internet data and text messaging is typically higher. Chief Executive Officer Thorsten Heins is betting that widening the reach of BBM to users of rival devices will outweigh the short-term risks of losing the exclusivity on BBM.

Losing Exclusivity

Sales from Europe, the Middle East and Africa accounted for 46 percent of sales last quarter, up from 37 percent three quarters earlier. Before then, BlackBerry didn’t break out sales by those regions. Latin America was stable at 14 percent and Asia slipped from 21 percent to 18 percent.

“We now believe that BB10 is so convincing that we can let BBM grow on its own merit,” Heins told reporters yesterday at the annual BlackBerry Live conference in Orlando, Florida.

The move is a gamble for the smartphone maker, Steven Li, an analyst at Raymond James in Toronto, said in an interview at the conference yesterday. While it increases the reach of the service, it’s not clear how BlackBerry will make money given that Apple and Android users won’t have to pay to download the BBM app.

Getting Paid

“They are losing exclusivity, but counting on the fact that the BBM experience is much better than any of the other messaging apps,” said Li, who has the equivalent of a hold rating on BlackBerry. “I’m still not sure how they monetize it.”

New BBM channels -- essentially chat rooms focused on specific themes -- will eventually create opportunities for advertisers to target users by sponsoring posts, said Andrew Bocking, BlackBerry’s executive vice president of software product management. It’s too early to say when BBM channels might begin to generate revenue, he said.

“With BBM channels, it will be the core set of brands that users most care about,” Bocking said.

The stock fell 1.6 percent to $15 at 4:16 p.m. in New York today. It fell 4 percent yesterday, the biggest decline in a week.

Analyst Downgrade

Pierre Ferragu, an analyst with Sanford C. Bernstein & Co. in London, today cut his rating on the stock to the equivalent of a hold from a buy and lowered his price target to $15.

“With BlackBerry Live behind us, we see few additional positive catalysts coming through in the next six months and see a danger that the company misses more optimistic expectations,” Ferragu said in the note.

Shares of BlackBerry had climbed 142 percent through yesterday from a Sept. 24 low, fueled by optimism over the company’s comeback plan. Still, the stock remains 90 percent below its 2008 high, and though Heins returned BlackBerry to profitability last quarter earlier than analysts expected, sales still fell 36 percent year over year. Nine analysts recommend buying the stock, 13 rate it a hold and 21 call it a sell.

BBM will be available as a text-only application for the competing smartphones in the next few months, before a voice feature is added, Heins said yesterday.

Emerging Markets

The BlackBerry Q5, available in four colors, will go on sale beginning in July. Heins also said the updated BlackBerry 10.1 operating system will roll out this week, featuring a Skype phone application.

“We have reached solid ground with this company,” Heins told software developers, suppliers and corporate customers at the BlackBerry Live event. “Not only are we still here, we’re firing on all cylinders.”

In the year since the company’s 2012 gathering, Heins has worked to streamline the business and return it to profitability, surprising analysts. Heins now faces the challenge of reviving sales growth.

The Q5 Heins showed off yesterday was cherry-red and resembled a more basic version of the Q10, a model that went on sale in Canada and the U.K. about two weeks ago.

The Q10, which has a physical keyboard designed to appeal to the BlackBerry faithful, has been faring well in other markets, said Mark Sue, an RBC Capital Markets analyst. Heins told Bloomberg News last month that the phone should sell in the “several tens of millions,” without giving a time frame.

‘Healthy’ Sales

Sales in the U.K. and Canada, where the Q10 is already available, “remain healthy,” Sue wrote in a report this week. He has a neutral rating on the stock.

A bigger test of the Q10’s appeal will be when it goes on sale in the U.S. BlackBerry faces a battle to win back market share it has ceded to Samsung Electronics Co. and Apple in recent years.

The Q10 will debut in the U.S. in early June, Heins said at the event, pushing back the target from late May.

Samsung, which makes devices that use Android software, accounted for a third of global smartphone sales last quarter, while Apple had 17 percent, according to research firm IDC. BlackBerry saw its share fall to 3.2 percent in the fourth quarter, before the company dropped out of the top five in the first three months of this year.

Expanding BBM’s reach may help win over reluctant developers, claw back some market share and open up new sources of revenue, said Stadtler in an interview at the conference yesterday. What BlackBerry needs most is scale to compete with Samsung and Apple, he said.

“If they’re going to monetize that app, scale is the name of the game,” Stadtler said.

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