I have long been a BlackBerry (
) supporter (or more recently that might be more accurately
referred to as an apologist), as both a BlackBerry user (since
2004) and a Canadian. Over the years I've been invested on the
short and long side of the company (no material positions in the
company at this time), but regardless of my positions (or lack
thereof) in the stock I've always closely followed the company and
its strategy (or lack thereof). Due to the recent decision to not
hold a conference call and the overall poor quality of management
and board of director decisions, I feel the need to post an open
letter in an effort to get some answers.
First, a bit of history; Research in Motion (RIM, as BlackBerry
used to be called) was the first company to release a smartphone (a
phone capable of browsing the Internet, reading emails, etc.). Its
initial consumers were professionals (i.e. politicians, bankers,
lawyers, doctors, etc.) and government agencies. It rode the
success of its flagship product, the BlackBerry, to a share price
of around $150CDN (summer 2008) a double from its price in summer
2007, the approximate time the first iPhone (the first serious
competitor) was released. Despite the increased competition, RIM
maintained its stranglehold on the corporate market and continued
to grow its user base as it sold older model phones into less
developed economies (i.e. China and India) allowing revenue to grow
until FY2011, when it peaked at $16.4 billion US (handset
Despite dramatically increasing revenue from the time of the
iPhone release through to 2011, RIM (as it was still called) was
repeatedly being told that it was irrelevant and its devices were a
thing of the past.
The Globe and Mail
recently published an article that goes into great detail on the
threat that the iPhone posed and how RIM planned to respond to it.
As part of that response RIM released the BlackBerry Storm in 2008,
an all touch screen device that would subsequently become its
worst-selling form factor (all touch screen) of any that the
company had ever introduced. Despite the poor sales it introduced a
Storm 2 in 2009 to further poor sales, a Storm 3 (which it had
rebranded Torch 9850) in 2010, and finally a Storm 4 (Torch 9860)
in 2011. Despite living in Toronto, which seems to have the highest
per capita BlackBerry usage of any city in the world, I have never
seen a Storm (1, 2, 3 or 4) being used by an actual person. In
2011, the BlackBerry Playbook (which was shipped with several
problems), an all touch screen tablet sized device, was released
to, once again, poor sales.
With their wallets consumers had voted five successive times
and determined that an all touch screen BlackBerry was not
something they wanted.
Bear in mind that all this occurred from CY2008 to CY2011 -
a period where RIM handset revenue increased from $4.9bn US (CY2007
approximately) to $14bn US (CY2011 approximately), so people were
buying (en masse) RIM's keyboard phones.
Mere weeks after the release of its BlackBerry 7 platform, an
announcement was made that the company was changing the operating
system of the BlackBerry phones to a more modern one based on QNX,
a company RIM acquired in 2010. The initial goal was to release a
series of new devices based on this BlackBerry 10 platform (as it
was called) sometime around fall 2012. In the meantime, it would
completely cease development on the old Java based platform and not
release any new phones until BlackBerry 10 was completed.
Importantly, BlackBerry 10 was supposed to be an amazing
upgrade over current BlackBerrys and be available in fall 2012,
heavily incenting a delay in purchasing an existing model
BlackBerry to wait for the new BlackBerrys. BlackBerry 10 was
delayed a couple of times and did not make it to market until April
2013. Accordingly, sales dropped by over 50% in CY2012 versus
Due to the poor stock market performance of the company since
2008, co-CEOs Mike Lazaridis and Jim Ballsilie reduced their
salaries to $1 each until things had been rectified. Ultimately
unsatisfied with the gesture, shareholders and the board of
directors removed the co-CEOs and replaced them with Thorsten Heins
effective January 2012. Mr. Ballsilie, who had been primarily in
charge of sales, subsequently left the company completely, while
Mr. Lazaridis, who had been primarily in charge of engineering the
devices, left in mid-2013. Mr. Heins was tasked with, and paid
handsome bonuses, for bringing BlackBerry 10 to market (albeit
approximately half a year later than anticipated).
He is also primarily responsible for the Z10, an all touch
screen device (the company's sixth), being marketed as BlackBerry's
(the company's name was changed) flagship product.
Finally, Prem Watsa, CEO of Fairfax Financial Holdings, took a
large stake in BlackBerry (approximately 10% of share outstanding)
and joined the board of directors in January of 2012. He
subsequently left the board in August of 2013 when the company put
itself up for sale. It should be noted that the company had hired
) and RBC (
) to examine strategic alternatives for the company a year earlier,
but hadn't officially put themselves up for sale. Despite not
reporting anything material on the strategic alternative front,
both JPMorgan and RBC were once again hired to consult in the sale
My view is that the buck has to stop somewhere, and in this case
it has to rest on senior management and the board of directors at
BlackBerry. With that, and the lengthy preamble, in mind I have
several questions for BlackBerry's senior management and board,
which I have divided into categories:
BlackBerry 10 Product Launch
Why was it decided to announce BlackBerry 10 in October
2011, weeks after the release of your latest BlackBerry 7
While it is known that certain companies will always release new
version of their product, it is highly irregular for them to
declare their newest products obsolete immediately after release
(i.e. Apple (
) has not even mentioned the iPhone 6, despite the fact that we
know it will be released next September). This announcement
definitely impacted my buying intentions, and based on your CY2012
revenue, the buying intentions of most of your customers.
What, if any, market research was done with your existing
Specifically with regard to the ease of use of swiping versus
having dedicated buttons (i.e. the call, hang up, BlackBerry, and
back buttons of previous models). Also was any market research
conducted as to how long it took an existing BlackBerry user to
adapt to the new operating system? Most feedback that I have
received from BlackBerry users is that they used the BlackBerry
because they didn't want to learn something new and they enjoyed
the keyboard. The Z10 removed both of those advantages for existing
Why was the decision made to remove all buttons (i.e. call,
hangup, back, etc.) from the phones in favor of the swiping
Swiping seems far more complex than similar offerings from Apple
and Google (
), and has contributed to the low overall sales. Even the iPhone,
praised for its beautiful and elegant design, has a hard button for
Why was it decided to release the Z10 prior to the
Given the products that have had success in the marketplace (iPhone
and Android), it certainly made some sense to leverage BlackBerry
10 and create an all touch screen phone, however, given
BlackBerry's own poor experience with all touch screen devices this
decision (launching the Z10 first) doesn't make much sense.
As mentioned in the preamble, Z10 was your 6th all touch
screen device, and your 6th straight sales disappointment (to put
How can it possibly take six times to learn one lesson?
BlackBerry users do not like all touch screen devices!
The decision to release the Z30 as your next product also seems to
indicate that BlackBerry management still doesn't get it.
Why was it decided to build so many Z10s?
Once again, given the poor performance history of BlackBerry all
touch screen devices, it seems illogical to risk so much on their
success. The most recent write down of nearly $1 billion,
attributed in the press release "primarily to Z10s", indicates that
BlackBerry ordered several million more than were demanded by the
market. Pre-orders for all devices with all carriers were
available, so a demand picture should have been easy to create.
Further, if you underestimated the number of units you needed and
actually sold out of Z10s (or Q10s) it would only serve as free
advertising (as it does every year with iPhone's newest
Was a Torch (slider keyboard) phone ever considered for
Of the new products released this decade (2010s), I would estimate
that your high end products sold in the following order: Bold
(touchscreen series), Torch (slider keyboard series), Q10,
Playbook, Z10, Storm (Torch series). Given those sales wouldn't it
have made more sense to pursue a slider keyboard form factor for
the Z10 rather than the all touch screen form factor? Not only did
the Torch outsell the Storm, but a slider keyboard would have at
least been a differentiating factor. The current Z10 (other than
the hard to master swiping system) has no differentiating
characteristics between it and products from Apple, Samsung,
Motorola, Nokia, HTC, LG, Sony, etc.
Why was app availability so poor?
The Z10 was the flagship product and, as such, BlackBerry was
making a concerted push toward the consumer market (arguably at the
expense of the corporate market). Given this push toward the
consumer market, it was/is absolutely necessary to ensure that
"key" apps are available to users. For example, Instagram is
arguably the most popular non-gaming app among the key consumer
demographics (teenagers and twenty-somethings). Facebook, Twitter,
etc. can be accessed by any mobile device through the browser and
do not require a dedicated app. Instagram, however, requires an app
in order to be able to upload photos. Without the ability to use
Instagram, BB10 products are dead in the water for that
demographic. On the professional side, one of the most popular apps
for BlackBerry, Bloomberg, just became available in the past few
weeks (6 months after launch).
Why was corporate roll-out so poor?
BlackBerry's initial success had come from large corporate
customers. These are generally the best customers because they are
more performance sensitive than price sensitive. However, in Canada
(where BlackBerry adoption is highest), some of the largest
institutions still have no approved BB10. Logic would seem to
dictate that months prior to the launch of BB10 and BES10 that your
largest corporate customers would have been given access to devices
and test servers so that your initial rollout could include as many
corporate customers as possible.
Why was the marketing of the devices so bad?
Specifically the initial ads that aired surrounding the release of
the Z10 were incomprehensible. As a Z10 owner (at the time) I was
not sure what a man gymnastic tumbling through various scenes while
holding a Z10 had to do with the phone and neither did your
potential customers. To me this speaks to the misunderstanding of
Apple's general success. They were successful because they are a
brilliant marketing company disguised as a technology company.
Their ads (similar to BlackBerry's more recent ads) have always
clearly depicted what their device does well and how you can use it
in your life. Also using Alicia Keys as "director of corporate
creativity" or whatever the title was, was an unusual move. Would
it not have made more sense to get a Justin Bieber or Taylor Swift
(as distasteful as either option may have been) as they both have
extremely large followings amongst the most impressionable
What was the marketing budget of the Q10 versus the
By quarter if possible.
What are your actual unit sales in North America and Europe
for the Q10 and Z10?
And how many did you build of each and at what time?
Why did you bother to change the company name?
Most consumer product companies are not named for the product.
Apple sells iPhones, not iApples, Dell sells Optiplex workstations,
HP sells Envy laptops, etc. It seems like a needless distraction
that accomplished very little in terms of brand awareness. The only
logical reason for changing the name would be some remote hope that
users wanted to invest in the company but were too confused to
determine that the ticker RIMM corresponded to BlackBerry
Do you feel compensation at the C-level was commensurate
Mr. Heins, the CEO, received compensation of approximately $10mm in
each of Fiscal 2012 and Fiscal 2013 (basically CY2011 and CY2012
respectively). The other C level executives, some brought on by Mr.
Heins, averaged approximately $4mm in total pay during Fiscal 2013.
FY2013 was arguably one of the worst in company history as it
experienced its first loss in years, a drop in revenue of over $7bn
US, its first ever drop in total subscribers, and delays on its key
Do you feel that Mr. Heins' interests were adequately
aligned with shareholder interest, specifically with regard to his
From what I can see in public filings, Mr. Heins has generated the
majority of his wealth as an employee of BlackBerry, having gone
from a job that would likely pay low six figures in 2007 to a
multi-million dollar job ((COO)) in 2011, and finally CEO in 2012
($10mm/year). His original deal as CEO would have seen him earn
less than 2x his annual salary and bonuses in the event of a
takeover, however, his new deal sees him earn over 5x his annual
salary and bonuses in the event of a takeover (and his
termination). This amount does not seem to be based on the takeover
price, but simply that a takeover occurs.
The easiest way for a takeover to occur would be for the
share price to be as low as possible, aligning Mr. Heins' best
interest directly opposite that of shareholders.
When Mr. Heins' "new deal" was announced, it was done to
"retain and reward" him. Given the poor financial performance of
the company, was this necessary?
As the terms of his deal were laid out just a year prior, it seems
odd that such a large increase in pay (and parachute) was required
in order to retain his services. The poor performance of
BlackBerry's products in the marketplace and the general
consolidation of the wireless handset industry also makes it
seemingly less likely that a competitor would be interested in his
services (at least in a position that would pay $10mm/year after
easily achievable bonus targets were met).
When did the board decide to materially change how it
accounts for handset sales?
By changing handset sales from sold to channel to sold to users,
this quarter appeared to have particularly low sales relative to
previous quarters. This could dissuade other potential bidders or
prevent investors from making an informed decision when they vote
on Mr. Watsa's takeover proposal.
When did the board decide to write off the Z10
How many units does this write off include and to what
price were they written off to?
Also how many units remain in channel inventory versus in
When did the board become aware of Mr. Watsa's take-under
I will refer to this as a take-under bid, as prior to the
announcements listed above, the share price was materially above
the $9.00 per share bid price.
Were any of these releases made with an eye to reducing
share price in order to make Mr. Watsa's bid more palatable to
If the board was unaware of Mr. Watsa's intention to bid for the
company at $9 per share prior to pre-announcing the bad news, why
was that particular date and time (September 20th after 3pm)
chosen? Optically it was a bad time to release bad news as Mr.
Heins had sold shares (11,494 @ $10.5366), at a materially higher
price, earlier in the day as part of his automatic share sale
If the board was aware of materially bad news or the
take-under, do you feel ethically responsible in suspending C-level
automatic share sale plans?
It is not the amount of money involved in these plans, just the
principle of the CEO selling shares hours before releasing news
that would definitely send the share price lower.
Why was no earnings conference call held after the most
Due to the significant changes in accounting for sales, the large
write-down of inventory, and the close nature of Mr. Watsa's
relationship with BlackBerry, a call could have allowed investors
an opportunity to better understand the situation. Most
specifically, it is very difficult for analysts to value the
company or know the sales trajectory of the BB10 products when they
are unable to ask questions about the recent significant
Do you feel it is a conflict of interest that Mr. Watsa was
involved on the compensation committee that increased Mr. Heins'
payout in the event of a takeover (regardless of price), just
months before he placed a bid?
It should also be noted that the enterprise value of the bid is
just $2.4 billion, an amount that represents just 150% of revenue
in even this most disappointing recent
(even after the accounting changes).
Why has no one fallen on the sword, especially considering
the mass layoffs?
Given the over-abundance of evidence that several things involved
with the Z10 (in particular) were unmitigated disasters, why has no
one fallen on the sword or been terminated? Specifically, those
that championed the Z10 introduction over the Q10 were directly
responsible for a $1 billion write-off. The marketing campaign was
also universally derided, at the minimum that should mean a new
Chief Marketing Officer.
Here is my final, and most important question: given all of
the above information and questionable decision making made by
senior management and the board of directors of this company, in
just the past 18 months, do you feel that the board of directors is
adequately positioned to provide advice to shareholders on
accepting this offer?
It appears that the board reviewed and accepted the offer in a
matter of hours (the share price didn't drop below $9.00 per share
until Friday September 20th, and by Monday September 23rd the board
had reviewed and approved Mr. Watsa's offer). The decision to make
the Z10 the flagship product should automatically disqualify anyone
(who voted to make it the flagship product) from the board of
directors, or senior management, from being employed at BlackBerry
let alone participating in any future strategic planning
As an aside: please do not make the same mistake with the Z30
that you did with the Z10. If it's at the point that it's finished,
you might as well release it. Just don't build millions of them.
They aren't going to sell well… and even if by some miracle they
do, you can build more then. In a future article I will outline
some ideas that could help turn the company around, as I hate
always being so negative.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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