1. angrybear123's Avatar
    It's late, sorry if my writing makes no sense.... I built a financial model on BBRY tonight, because 75% of the reports that come out about Blackberry these days seem to be from seekingalpha, and both Bull or Bear, most of their analyses.... how can I put this nicely.... lack depth? Anyway, while poring over the numbers I stumbled upon a theory for why BBRY handled the releases the way it did.

    Background:
    1. Almost all the money BBRY makes, is off services revenue (think BIS/BES for BB5/6/7).
    2. Hardware revenue was 60% of BBRY total rev, services 40% (ish). I ran a regression on gross margins of the segments and overall profits, and I estimate hardware margins were pretty much 0%, services like 80% (this seems to align with what analysts have said too, I believe).
    3. Crude numbers show average BIS/BES user generates approx $12 in rev per quarter, and assuming a BB is held for about 2 years, that's about $100 per BB per two years, and $80 in profit (~$12 [avg. svc. fee per Q] x 8 [Q's in 2 yrs] x 0.80 [grossmargin])
    4. We know service fees are much lower in the developing world. We also know BES fees are much higher than BIS fees. Really this means that BES fees in developed markets is really what kept this ship afloat while they built BB10.

    Theory:
    If we assume an ASP of $450 for the Z10, and gross margin of 30%, thats $135 profit (450 x 0.3) for each Z10 sold (niice!), or 135 - 80 = $55 in incremental profit including the lost svc rev (not as nice!). But that 80 we take off is the average, and we know that number is much higher in markets like the US (primarily BES, developed market), and much much lower in markets like Indonesia (primarily BIS, emerging market).

    Assuming that most BES users would opt for the Q10, and BIS users would opt for the Z10, this means that in terms of incremental profit to BBRY:
    New Blackberry User >>> Old emerging markets BIS user > Old developed market BIS user > Old emerging market BES user >>> Old developed market BES user


    So if BBRY wants to get to profitability as soon as possible, and didn't have the capability for a global rollout of everything (which they don't), the "playbook" would be to sell devices that first cannabalize BIS revenue (Z10), and first focus on developing markets (ie NOT USA). You would want to sell devices which cannabalize BES revenue (Q10) absolutely last. This also may explain why BB execs are sooooo happy about selling to non-previous BB users. Those sales carry the highest incremental profit increase, because a new user is sweet hardware profits with no cannibalization of service profits.

    MAKE SENSE? I think it makes sense. It could also be they had a technical reason for this all (Q10 is harder to make - considering how close it is to the 9000/9900 I don't buy it) and it just happened to fit in with the financial strategy.... But either way, I think this strategy will enable them to churn out a very very sweet profit in Q1 (3.5 months from now, the way RIM's Fiscal Year's work is crazy), when they'll have some Z10 profits, weighted towards developing markets, but will not yet have cannibalized their BES service revs in the developed world much. Beautiful. Hence that article about the Bernstein analyst saying they only need 1.3 mil units in Q1 to turn a profit which was discussed a lot here. I ended up with a slightly different figure (higher) but it's in the ballpark, and 1.3mm isn't much. If you've read this far, thoughts?

    tl;dr version of the above - Sell Z10 first because that way you defer killing your uber profitable BES profits, and can absolutely knock the Q1 numbers out of the park. Side bonus: maybe also light that 30% short interest on fire in the process, good fun.
    03-07-13 02:37 AM
  2. Dapper37's Avatar
    Killing your uber profitable BES profits? Really, how so? That one statement alone tells me you know nothing about this company...
    So if I had to guess, the fact is your simply fishing for imformation. Why not just ask? or read any one of many threads on the topic?
    03-07-13 03:17 AM
  3. angrybear123's Avatar
    Killing your uber profitable BES profits? Really, how so? That one statement alone tells me you know nothing about this company...
    So if I had to guess, the fact is your simply fishing for information. Why not just ask? or read any one of many threads on the topic?
    1. How so? After Q3 concall it was clear RIM wasn't going to be able to make as much money on services as they did previously. We know BIS revs are gone. As for BES, we don't know the model (Thor said some sort of "tiered" model) but it seemed clear that this was going to go down with BB10. This alone knocked the stock down 15% if I recall correctly, because all was fine until the concall started.

    2. Yeah, I *AM* "fishing for information", 100% right. I am doing so by publically posting my idea, in a public fourm, and telling you what you think. If you don't agree, don't agree, that's fine, I expect and respect that. But I find your wording, "fishing for information", a little odd. It's like I am doing something unethical, or wrong. Or if I regard someone like Dapper37 = Mr. Thor himself, and thus saying something like "soo, what are your thoughts" is akin to asking (aka FISHING) for insider information. This is crackberry.com bud, there is nothing to fish for here, except random viewpoints on BBRY, generated by BB fans based on public information available in the media. So what's the problem?
    Grumblegrumble and AT_Nepal like this.
    03-07-13 04:08 AM
  4. Zarpan's Avatar
    I'm not sure the difference in profitability from keeping a BES user at the current service revenue rate for a couple months is enough to justify building a strategy around it.

    Selling a BB10 unit to a BES user in February instead of April would mean that two months of service revenues are lost. At $9/month and an 80% margin, that's $14 less per user in gross profits, even with no BB10 service revenues. If service revenues per BES user decrease 50%, then it is only $7 less per user.

    Then there is the risk of losing that user to a competing platform in those couple of months. If that risk is greater than 3% or so (based on the lifetime value of a BB10 BES user at $135 + $96 = $226), then BlackBerry is in a worse position by doing that.

    There are reasons why the Q10 would come out later, but I don't think these financial considerations would play a large part in it.
    03-07-13 04:43 AM
  5. Sqoon's Avatar
    I'm sure they would want all their products on the shelf right now if they could.
    They clearly wanted the z10 first because it does have that ability to get back customers from the other platforms, no one is going to switch to the q10.

    Posted via CB10
    03-07-13 09:10 AM
  6. Marc_Paradise's Avatar
    I'm a little unclear.

    If the user is an enterprise user, BES revenue doesn't go anywhere. So Q10, Z10... makes no difference, if they're connecting it to BES.
    Dapper37 likes this.
    03-07-13 09:16 AM
  7. joe.miller's Avatar
    They clearly wanted the z10 first because it does have that ability to get back customers from the other platforms, no one is going to switch to the q10.
    Posted via CB10
    This is the answer. BlackBerry needed to woo back all the people that left for big touchscreen devices. They needed to prove they could build a quality touchscreen device that people would want to use.

    If they had launched the Q10 first, the market's reaction would have been "Same old BlackBerry. Looks just like the 9900. Who cares?"
    Grumblegrumble likes this.
    03-07-13 09:19 AM
  8. 3hb78ftg's Avatar
    The needed to put the Z10 to the test in markets other than the US so that when it does come they will have the bugs worked out. Remember...BB can't afford to fail in the US and were still short on major Apps which have now come on board.
    03-07-13 09:27 AM
  9. StormieTwo's Avatar
    I'd add that, in addition to wooing people away from other platforms the Z10 was released first to get some loyalists to try the virtual keyboard, which is clearly the current UX favourite (and less expensive to produce, I assume). The Q10 is aimed at the real diehards and other special-interests groups (ie non-tactile touch screens are useless if you are blind). these groups (while small) are not serviced at all by apple or samsung.
    03-07-13 09:41 AM
  10. BBNation's Avatar
    Theory:
    If we assume an ASP of $450 for the Z10, and gross margin of 30%, thats $135 profit (450 x 0.3) for each Z10 sold (niice!), or 135 - 80 = $55 in incremental profit including the lost svc rev (not as nice!). But that 80 we take off is the average, and we know that number is much higher in markets like the US (primarily BES, developed market), and much much lower in markets like Indonesia (primarily BIS, emerging market).

    Assuming that most BES users would opt for the Q10, and BIS users would opt for the Z10, this means that in terms of incremental profit to BBRY:
    New Blackberry User >>> Old emerging markets BIS user > Old developed market BIS user > Old emerging market BES user >>> Old developed market BES user


    So if BBRY wants to get to profitability as soon as possible, and didn't have the capability for a global rollout of everything (which they don't), the "playbook" would be to sell devices that first cannabalize BIS revenue (Z10), and first focus on developing markets (ie NOT USA). You would want to sell devices which cannabalize BES revenue (Q10) absolutely last. This also may explain why BB execs are sooooo happy about selling to non-previous BB users. Those sales carry the highest incremental profit increase, because a new user is sweet hardware profits with no cannibalization of service profits.

    MAKE SENSE? I think it makes sense. It could also be they had a technical reason for this all (Q10 is harder to make - considering how close it is to the 9000/9900 I don't buy it) and it just happened to fit in with the financial strategy.... But either way, I think this strategy will enable them to churn out a very very sweet profit in Q1 (3.5 months from now, the way RIM's Fiscal Year's work is crazy), when they'll have some Z10 profits, weighted towards developing markets, but will not yet have cannibalized their BES service revs in the developed world much. Beautiful. Hence that article about the Bernstein analyst saying they only need 1.3 mil units in Q1 to turn a profit which was discussed a lot here. I ended up with a slightly different figure (higher) but it's in the ballpark, and 1.3mm isn't much. If you've read this far, thoughts?

    tl;dr version of the above - Sell Z10 first because that way you defer killing your uber profitable BES profits, and can absolutely knock the Q1 numbers out of the park. Side bonus: maybe also light that 30% short interest on fire in the process, good fun. [/QUOTE]

    I think this was all due to fill the APP gap before US launch, managing the production, cost, inventory of global launch, cash, BIS revenue transition and earning report consideration this month..makes sense.
    03-07-13 11:28 AM
  11. GTiLeo's Avatar
    BB10 devices will not kill off BES revenues, for each device on BES services tehre is a fee the same as theres always been, as right now i do not think there is a fee for BIS on current consumer phones but services will later be teired for those that want the service. BIS is still around it just doesn't do soem of the things it used too. our interwebs still goes throug hBIS as does BBM and BB World. there was a blog from James Richardson that a south african carrier explained will happen, tehre is one year of free BIS then for those that want the services will have a fee
    03-07-13 02:35 PM
  12. njblackberry's Avatar
    What about those that will use ActiveSync and not use BES? What happens to the revenue there?
    03-07-13 02:38 PM
  13. Dapper37's Avatar
    1. How so? After Q3 concall it was clear RIM wasn't going to be able to make as much money on services as they did previously. We know BIS revs are gone. As for BES, we don't know the model (Thor said some sort of "tiered" model) but it seemed clear that this was going to go down with BB10. This alone knocked the stock down 15% if I recall correctly, because all was fine until the concall started.

    2. Yeah, I *AM* "fishing for information", 100% right. I am doing so by publically posting my idea, in a public fourm, and telling you what you think. If you don't agree, don't agree, that's fine, I expect and respect that. But I find your wording, "fishing for information", a little odd. It's like I am doing something unethical, or wrong. Or if I regard someone like Dapper37 = Mr. Thor himself, and thus saying something like "soo, what are your thoughts" is akin to asking (aka FISHING) for insider information. This is crackberry.com bud, there is nothing to fish for here, except random viewpoints on BBRY, generated by BB fans based on public information available in the media. So what's the problem?
    No Problem. I simply stated it as I saw it.
    1. After the 3rd quarter con call, the stock dropped from being up 10% to down over 20%, So yes there was concern. This means nothing in reality! as the stock was back up and past those leves within a weeks time.
    2. Those uber profitable BES service fees are not going anywhere! its the BIS fees that had people worried! So how this translates into witch phone gets released first, I'll never know?
    3. Clearly many people are unaware, BIS fees no longer require a added package but BlackBerry is still getting a SUB fee from each device, from the carriers. A reduced one yes!
    4. Its been talked to death, why the US came behind so many others. Its basicly so inventories could get up + The US would not be happy with beta testing the device the way the rest of the world is willing. In addition it was good to get the positive buzz going before the US launch.
    5. the Z came before the Q so BlackBerry could prove to the world they can produce a high end touch device. This plan has work well. Everyone knows who builds the best qwerty devices on the market and the people in that market arent going anywhere. they will wait for the Q.
    If you have any Questions feel free to ask.
    Rough day yesterday, sorry for jumping on your post
    Last edited by Dapper37; 03-08-13 at 01:35 AM.
    AT_Nepal and Grumblegrumble like this.
    03-07-13 06:04 PM
  14. BB10BelieveIt's Avatar
    Nice thread. I agree that releasing later in the US was the right move for many of the reasons above. I think that the new CMO Frank probably has had alot to do with this go to market strategy. In a nutshell, I agree that they needed to build up the buzz in their stronger smaller markets first to allow them to break through the negative stigma they have in the US. The well orchestrated global rollout, complete with timely and headline generating positive (but vague) updates on sellouts has been spectacular. Heins has given the media just enough to keep momentum going, give the shorts reason to be scared, and keep everyone in suspense about February sales. Everyone is holding their breath. They are crafting the turnaround story of the decade. By not releasing the numbers, those in the US can only go on the reports of global sellouts, and it is very hard to say that BlackBerry is dead or that the Z10 is a flop. And that perception is turning the tide around in the US.

    I agree that building enough product for a US launch would have been more risky and difficult for February as well. By releasing in small countries one by one they could ramp up production gradually.

    Q10 fans will wait. Z10 market is like a whole new segment for BlackBerry since they did not so so great with previous full touch devices.
    03-08-13 01:25 AM

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