Blackberry (i.e. RIM) may not be Canada’s most valuable tech company (especially after the last few days) but it is still by far the most visible. And that’s unfortunate. Because its troubles continue to mask a sector we think is in full revival. If we look at the three month performance of the many other Canuck tech names [See chart] you can see this clearly.
And at Difference, we play at one layer lower than these large public names – mostly in the world of private (but later stage) technology and media companies where we think the revival is even more pronounced.
But since I used to cover Blackberry in my last gig, and on and off during my 20 year sentence as a Sell-Side tech analyst, I can’t resist a few comments on the current situation.
- TTAH – Tech Turnarounds are Hard – Don’t we know it from Nortel and now Blackberry! The Technology sector has what a geeky engineer (like me) would call “positive feedback loops”. By this I mean that when a company pulls ahead of its competitors and achieves greater scale, it can then outspend them on R&D and marketing and as a result achieve even greater market share and scale and then spend even more on R&D and marketing, etc. etc. until it has crushed its competitors. This is what Apple has done, this is what Google is doing, this is the history of Microsoft, Intel, Cisco, etc. Once a leadership position has been established it is very hard to break the loop – unless the leader stumbles or completely misreads the market. Blackberry misread the market when the iPhone was launched and now has lost the battle for scale.
- Ecosystems are what people buy, not products – the other more specific lesson, in this case, is that the best product doesn’t always win. I tried the Z10 for several months. It’s a better device than my iPhone, but after a few months I went back to the iPhone. Why? Because I missed some unique apps, my iTunes, my podcasts, my integration with iPad and Apple TV, etc. The device is just the portal to the services of the ecosystem. And the Blackberry ecosystem doesn’t have scale – see above.
- Software and recurring revenue rules – As a former hardware analyst, it’s hard for me to say this, but software, content and recurring revenue are where it’s at man! Especially Software as a Service (SaaS). And while someone has to do the hardware, it’s increasingly commoditized out of Asia. Let them do it. Blackberry is still trying to be a hardware company. Its hope and salvation probably rests in its software and services businesses.
And of course, we carry these lessons in to our thinking on our investments at Difference. We look for leaders that can scale that are part of leading ecosystems, and we do have a bias to software, services and recurring revenue.
Tom Astle, CFA, P.Eng, Head of Investment Strategy, Difference Capital