A consortium of investors led by Fairfax Financial this week emerged as a potential savior for BlackBerry, inking a letter of intent to acquire the once-iconic smartphone vendor for roughly $4.7 billion. Fairfax, which already owns about 10 percent of BlackBerry, has lined up funding for the deal and has six weeks for due diligence before an agreement is expected to be finalized.
Fairfax thus far has been pretty tight-lipped about its plans if and when the deal closes. As Quartz summed up nicely, investors will acquire four primary assets:
- A substantial patent portfolio
- BlackBerry Messenger
- $2.8 billion in cash
- The handset business at the heart of it all
Simply taking BlackBerry private won’t solve the company’s problems, as The Inquirer observed, and there’s no shortage of opinions about what Fairfax Financial should – or will – do. Some analysts believe BlackBerry should be broken into pieces, with Fairfax perhaps holding on to one or two components and pocketing as much as it can on the rest, while others claim the company’s best hope is to remain intact and regain its footing in an ultra-competitive smartphone market.
It’s unclear whether selling off piecemeal would enable Fairfax Financial would even recoup its investment, though, much less turn a profit. BlackBerry’s patents are said to be worth anywhere between $1 billion and more than $5 billion, and BlackBerry Messenger continues to lose value every day with the emergence of third-party mobile messaging apps and BlackBerry’s inability to expand the offering to Android and iOS. So Fairfax is likely gambling it can turn BlackBerry around.
Handset manufacturing is a brutal industry
The problem with BlackBerry remaining intact, though, is that building mobile phones is a costly endeavor that all too often isn’t profitable. Apple and Samsung account for nearly all the profits among handset manufacturers, according to recent data from Canaccord Genuity, while vendors like HTC, Nokia and BlackBerry either scrape by or lose money. In fact, Raymond James Ltd. has said BlackBerry’s hardware and services business would have zero value in a breakup, and shutting down the production unit is expected to cost roughly $800 million.
And while Apple has thrived by controlling development of both its own operating system and the mobile devices that run it, Michael Mace a few weeks ago documented how that strategy has failed for many others. BlackBerry, Danger, Palm and others have all failed despite making their own devices to run their own software. Google and Microsoft hope to replicate Apple’s success with their acquisitions of Motorola and Nokia, respectively, but it’s far too early to predict whether those efforts will be successful.
The importance of partnering with manufacturers
If Fairfax can close the deal and opts to keep BlackBerry intact, then, it could increase its prospects by expanding its hardware lineup. And because manufacturing is so expensive, it should consider partnering with other vendors willing to build BlackBerry handsets. It’s highly unlikely others would pay to license BlackBerry 10, of course, because sales are so slow. And while BlackBerry could conceivably take its OS open source, doing so would give rise to platform fragmentation and other problems that have slowed Android’s penetration in the enterprise market that has long been the company’s bread and butter.
Rather than going open source or trying to license its platform, BlackBerry could increase its (admittedly long) odds by giving away it away to manufacturers willing to build smartphones and tablets that support it, at least for a limited time. The mobile manufacturing business is more competitive than ever – just ask HTC or any other struggling vendor – so BlackBerry might be able to convince one or two to gamble on BlackBerry 10. Doing so would not only allow BlackBerry to expand its hardware portfolio with minimal expense, it might also result in devices that are substantially less expensive than its current lineup even as it retains complete control over the software. Such a move isn’t without risk, of course – it could sound the death knell for the manufacturing operation that is an underpinning for BlackBerry– but the company’s future is clearly in software and services. If Fairfax Financial truly wants to move forward in the smartphone business, it’s a risk worth taking.