Yesterday CNBC Asia’s “Squawk Box” had an interview with former Apple CEO John Sculley. Those of you reading the tech news may have already seen an article (or a thousand) quoting Sculley in reference to BlackBerry. Here’s what he said:
"The challenge is you can't sell a phone for $700 in most of the world, so there has to be some real rationalization on the device side of the business...If you can strategically separate the device side of the business, it can be under the same ownership, but operationally separate from the enterprise service business, there's a terrific chance to turn BlackBerry around.”
Despite the fact that Sculley is widely recognized as the guy who almost killed Apple, I think there is a lot of truth to what he said. As a guy who isn’t intimately tied to BlackBerry’s past, we should look at his comments as a neutral third party with a lot of experience (success and failure).
It’s true that you can’t sell a phone for $700 in most parts. Apple and Samsung might be the only two companies who can really get away with this right now. Apple is ... well ... Apple. They always price things above the comparables. Samsung has also built up a very powerful brand with the Galaxy series, and now with the Note series.
BlackBerry had that brand power at one time. But today they’ve lost the power. They also face the threat of a shrinking audience. Given Metcalfe’s law, which states that the value of a network is proportional to the square of the number of users, it should be obvious that BlackBerry’s core focus must be on increasing the user base.
BlackBerry had that brand power at one time. But today they’ve lost the power.
Without brand power, they can’t have their cake and eat it to. If they are to accelerate adoption they need to put out high quality hardware and sell it without an expectation of making a lot of money. The goal of the hardware business should be to get the numbers up without burning cash. That’s it.
HTC might serve as a good example of a company that has also lost brand power in the last couple of years. HTC used to be highly respected and very profitable. Now, thanks to Samsung, this is no longer the case. They currently make about 20% gross margin on their hardware, and they lost about $100 million last quarter because they had a tough quarter (they call it a transition), and their operating expenses are higher than they should be given the sales figures.
I think BlackBerry needs to target sub 20% margin on hardware also. The last time I dug into manufacturing costs was back in December, and it seemed to me at the time the average total manufacturing cost for BBOS devices was $240. This factors in the bill of materials, manufacturing, fulfillment, and whatever else goes into the “cost of goods sold” (COGS) line. It seems logical to assume BB10 device cost a bit more, but probably not higher than $300.
One year ago I didn’t think they’d need to ... but today I think BlackBerry needs to put out hardware at $350 retail. They need to sell devices unlocked on their website, and seed the written-down Z10 inventory to enterprises in return for a continued commitment to the BlackBerry platform.
Later, and I mean much later, if this company can solidify its position in the market again, it can think about raising prices. But for now? Early adopters of a new platform need to be rewarded with more attractive pricing.