BlackBerry: Priv "Marketing Ploy" Could Be A Stroke Of Genius

It is nearly impossible to please BlackBerry BBRY bears. In March Mark Hibben excoriated the company, noting how "Almost everything in the Android or iOS device worlds outclasses BlackBerry's best." The company responded by introducing the BlackBerry Priv, a premium phone that runs on Android. The Priv has access to Google/Alphabet GOOG ,GOOGL apps and is receiving carrier support - that alone gives it a leg up over other BlackBerry phones. However, Seeking Alpha author KIA was unimpressed by what he described as the Priv's weaker security:

In an effort to garner much needed market share, BlackBerry has moved away from its own security-focused operating system and instead decided to tap into the install base of the most popular smartphone operating system on the planet - Android.

The problem with this move by BlackBerry is that much of BlackBerry's core customers are governments and enterprises where security is everything. And while Android is known for a lot of things, "security" isn't one of them.

The Situation

I have been a loyal BlackBerry customer for over a decade. I became attracted to the stock due to its revenue diversification, and the fact that management's new focus on consumer tastes would spur smartphone sales. However, neither thesis has played out.

With SAF fees in runoff, BlackBerry's revenue for FQ2 2016 was down 47% from the year earlier period. Hardware sales have been a bigger disappointment. Neither the BlackBerry Classic or Passport, which were launched in the second half of 2014, have jumpstarted handset sales. In November of last year I thought BlackBerry had a chance to sell 8 to 9 million smartphones to meet its previous $2.5 billion FY16 revenue bogey.

After the company reported handset revenue of $464 million on 1.9 million unit sales in the first half of FY 2016, my unbridled optimism turned into a pipe dream.

It all begs the question, "If consumers do not value the security features of BlackBerry handsets, does security really matter?"

Priv Could Be Ingenious Marketing Ploy

My BlackBerry works just fine. However, we live in an app world. Years ago my friends and I mocked kids for playing games on their iPhones, and laughed at how the iPhone would never cross over into the business world. However, those kids are now grown ups, working in business. They are wedded to the iPhone and probably place apps as a higher priority to security.

"New Coke" Effect

One thing that would make security features sexy again is an important data or security breach. Changing consumer tastes have practically forced BlackBerry to develop an Android-operated phone. In doing so, it may end up giving consumers the gift of missing its security features. In that vein, the failure of "New Coke" comes to mind.

After losing market share to Pepsi in the early '80s, Coke assumed it was due to the fact that Pepsi had a sweeter taste; blind taste tests seemed to confirm Coke's suspicions. In 1985 Coke took one of the biggest marketing risks of all time - it replaced its original soda with a new formula that became known as New Coke. The change created outrage among loyalists that even Coke was unprepared for:

What these tests didn't show, of course, was the bond consumers felt with their Coca-Cola - something they didn't want anyone, including The Coca-Cola Company, tampering with. The events of the spring and summer of '85 - pundits blasting the "marketing blunder of the century," consumers hoarding the "old" Coke, calls of protests by the thousands - changed forever The Coca-Cola Company's thinking.

After about three months Coke brought back the old coke - Coca-Cola Classic. The reintroduction led to a surge in sales. The old coke was so successful that some assumed the entire episode was a marketing ploy; Coke was in effect "giving consumers the gift of missing it."

Conclusion

While KIA believes BlackBerry may have shot itself in the foot, I believe the Priv is a stroke of genius. If the Priv is a hit, it helps BlackBerry jump start its handset division. If consumers long for the most secure OS on the market, it could spur sales of the old BlackBerry devices. Either way BlackBerry wins.