How The Cellphone Market Is Transforming | CNBC Marathon

How The Cellphone Market Is Transforming | CNBC Marathon

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The consumer electronics world was really never here. And so it's not a matter of bringing it back. It's a matter of starting it here. In light of supply chain issues highlighted by the Covid-19 pandemic, a push to bring manufacturing home to America returned. BlackBerry stock peaked at nearly $150 in 2008.

Now it's sitting pretty at around five bucks. January 2022 marked the end of an era. 85% of Americans have a smart phone, and that percentage has grown every year since their inception. But some think the dumb phone industry will grow as well. I'm never going back to a smart phone. Made in China.

It's a common phrase we see on everything. From clothes to electronics, China controls the market. And while that's today's reality, it has not always been the case. The United States used to be a global

leader in manufacturing, but in 2010, China passed the U.S. in manufacturing output and has seen massive growth ever since, going from 3.5% in 1990 to 30.5% in 2021. With the U.S. now ranking behind China at 16.8% of global manufacturing output.

However, in light of supply chain issues highlighted by the Covid 19 pandemic, a push to bring manufacturing home to America returned. Stamping products "Made in America." Made in America. Made in the U.S.A. The revitalization of American manufacturing.

While some industries like the semiconductor industry and the battery market are scrambling to build new factories across the U.S., tech giants are not making the same effort to do that. CNBC wanted to find out why tech giants aren't making smart phones in America.

We visited one company, which is manufacturing a phone in the U.S. to explore what it would take for more phones to be made in the States. The history of manufacturing technology in the U.S. dates back decades, way before smart

phones even existed. The whole concept of manufacturing in the U.S. was very strong. Through about the mid 1960s, we

fundamentally gave manufacturing away in the '60s and '70s, and in that timeframe Japan expanded, China expanded, a lot of the other Asian countries expanded. Today, the supply chain for smart phone manufacturing lives outside of the U.S. and big tech companies are heavily involved.

Apple and Alphabet hire and send thousands of employees abroad to oversee manufacturing. Prior to Covid, it was very common to send engineers like myself, maybe 10, 20, 40 engineers at a time to the factory to support prototyping builds, to do that learning and finding and fixing of issues and be in the right place at the right time. In fact, in 2019, Apple was United Airlines' biggest customer, buying 50 business class seats from San Francisco to Shanghai daily, accounting for $150 million in annual revenue for United. This is one reason Anna-Katrina Shedletsky founded Instrumental. The startup aims to reduce waste in the manufacturing process by making it easier to oversee production remotely.

I started instrumental with my co-founder Sam because we felt like data provided an opportunity to be leveraged to solve these problems much faster. And maybe I wouldn't have to, as an engineer, go to China every several weeks for many weeks at a time to find these issues and try to be in the right place at the right time. As new technologies like Instrumental emerge to make it easier to manufacture abroad, there isn't much incentive for companies to move factories to America.

Apple has moved some iPhone production to India amidst Covid lockdowns in China and rising tensions between Washington and Beijing. One estimate predicts one out of four iPhones will be made in India by 2025. So why not move some production to the U.S.

as well? Back in 2012, Apple CEO Tim Cook made this point. The consumer electronics world was really never here. And so it's not a matter of bringing it back.

It's a matter of starting it here. Then in 2017, he followed up telling Fortune it's an issue of highly skilled labor. There's a confusion about China that, and let me at least give you my opinion. The popular conception is that companies come to China because of low labor cost.

I'm not sure what part of China they go to, but the truth is China stopped being the low labor cost country many years ago, and that is not the reason to come to China from a supply point of view. The reason is because of the skill and the quantity of skill in one location and the type of skill it is. With a population of 1.4 billion, China does have the most undergrads getting science and engineering degrees globally, but in reality there is still a difference in the cost of labor. The U.S. federal minimum wage is $7.25. And while China has no set national minimum wage and the city of Zhengzhou, where Foxconn's largest iPhone plant is located, the hourly minimum wage is 19.6 Yuan or less than $3.

We don't know exactly how much the factory workers are making, but in the early days, they had a wage that was much better than they were making out in the fields. Now, as the demand for their products and their talent has, because they've gotten more experience, their wages have gone up even more. And many of the workers who are in the factories are moving into what we would call their version of what we would call middle class now. Foxconn did not respond to a request for a comment, and Apple did not provide a comment on iPhone worker wages either.

I would say that there is still a cost of labor concern for building here in the U.S. But I do agree with what Tim Cook is saying, that there is also an expertise that makes China very attractive. There is a lot of skill and a lot of local supply chain for where all the parts are going to come from, to build such a complex product, that makes it a very appealing place to build.

Apple said in a statement to CNBC that "All of our products are designed and engineered here, and they all include components manufactured in America. For example, iPhone glass is made in Kentucky, and lasers that enable Face ID are built in the U.S. too." It also said, "Just last year we announced $430

billion in new investments across the country, including our work with more than 9,000 suppliers across all 50 states." In 2012, Google purchased Motorola for $12.5 billion. A year later, it opened the U.S.'s only smart phone

manufacturing plant in Fort Worth, Texas, with plans to make the Moto X. The factory was part of Motorola's plan to build an American-made low cost smart phone. But about a year after it opened, the plant shut down, citing high domestic operating costs and low consumer demand. Google sold Motorola to Lenovo for a multibillion-dollar loss. Some experts say, Motorola's U.S.

failure shows that the cost of labor and the lack of skill in the U.S. is why manufacturing in the country is not cost-effective. Alan Yeung, a former Foxconn executive and author of the book, Flying Eagle, brought up this point during a visit to the White House in 2017 with then chairman of Foxconn, Terry Gou. Foxconn is Apple's largest supplier and the world's largest electronic manufacturer. Chairman Gou, Terry made it very clear. The core skills and the capabilities of making phones, manufacturing electronics have moved to Asia. And for it to come back to U.S, it would be

difficult, though not impossible, but it would take a while. It won't be easy. That's the reality. However, Purism is one American company that has been able to do what many are calling the impossible. So this is actually where we're going to do a manufacturing for the Librem 5 U.S.A. We're going to do the printed circuit board to printed circuit board assembly. We started the

company in 2014 doing manufacturing in the United States of America. Purism is hardware manufacturer as well as software. So we do laptops, mini PCs and also a phone that run the same operating system that we authored. Purism offers a range of consumer electronics, including the Librem 5 U.S.A phone, which costs

$2,000. It's the only smart phone in the world with the Made in U.S.A stamp. The FTC actually has a very strict definition of what Made in U.S.A is or Assembled in the U.S.A. The Librem 5 U.S.A. is manufactured in the United States of America. We actually have a label and a sticker we put on there Made in U.S.A Electronics so that we're

actually showcasing that we are indeed qualified by the FTC definition of Made in U.S.A. for a full phone. The phone is assembled here and its Carlsbad, California factory. Purism sources all components of the Librem 5 U.S.A. phone domestically, with the exception of the

chassis and the Wi-Fi card. Overall, what we're looking at is all the electronics are manufactured at our facility, the chassis, the specific components are called integrated circuits. Those can come from outside of the country. As one example, our NXP CPU is manufactured in South Korea and then we import that specific chip and then we use it on our board that we do all the manufacturing.

But the company also sells the Librem 5 phone, which is mass produced in China. For $1,300, it's $700 cheaper than the American-made model. Weaver says he hopes to expand the line of products the company makes in the U.S. For us, obviously the U.S. is the one we're expanding most and it's going to even spill over to doing other products in the United States as well, like our laptop and mini PCs and potentially even servers. There is also a potential for us to even get into chip manufacturing.

Weaver said the company is profitable, but we asked how this is possible with the higher labor cost for the U.S. made model. Actual physical labor costs are clearly more than in China. We're able to sell at a price point where we don't have to cram our costs so far down.

So that allows us to pay people really well and take care of the employees and have secure supply chain and everything else. Purism initially started through a crowdfunding initiative. Now the company says it's sold tens of thousands of phones.

Overall, we're a multimillion-dollar company. We've seen growth, triple digits year over year since we started. Our margins are healthy, which allows us to continue to pay people really well and also allows us to scale up the business.

Purism said almost one third of its revenue comes from the American made Librem 5 U.S.A model. But Weaver said labor hasn't been an issue for the company. The key piece that you're looking at is there's actually not a lot of physical labor that goes into producing a phone.

It's more mechanical labor, the actual machines. And so machine versus machine, it's equal to do us manufacturing on the same machine in the U.S. versus a machine in China. So in the end, you're looking at a number of U.S. jobs that can be that assembly line operator final fulfillment, but machine versus machine, it's still equal.

But do Americans want these jobs? Any time we post a job at all, we get 100 applicants. So from line operators to assembly workers, right? We're talking well over $10 over minimum wage for a lot of those positions. However, not everyone agrees this business model will be successful in the States. Baizhu Chen, a professor at the USC Marshall School of Business, says these jobs are not coming back. I don't see in the U.S.

there's rows and rows of workers sitting in front of the desk, assemble the small phones. I don't see that happening. These type of jobs are not coming back to the U.S. I'm talking about the labor-intensive manufacturing job. There's actually lots of manufacturing jobs that are being made here in the U.S., they're just not assembly jobs. They are data analysis jobs,

engineering jobs. I definitely think there are compelling cases where you can build highly complex products, here in the U.S., it's usually at much lower volumes. It's not a million a day. Smaller companies are often deciding to build locally. So what will it take to bring phone manufacturing to the U.S.? Not only you will need to rebuild the human infrastructure, you also need the components to be made nearby.

Somewhere in the ecosystem, needs to be there. America doesn't have this ecosystem here because we have not been manufacturing phones for years, and so the supply chain doesn't exist here in the U.S. They are in Asia, in China, in Vietnam and other countries. So to rebuild those things will take time and take cost.

Very expensive. It doesn't make any sense. But in light of recent support from the U.S. government to transform the American manufacturing ecosystem, the U.S. is taking steps to restore some manufacturing jobs. In August 2022, President Biden signed the CHIPS and Science Act. The bipartisan bill includes $52 billion to

U.S. based companies to produce semiconductors, with $39 billion in manufacturing incentives. America finally is making policy at the federal, state and local level to level the playing field. Beforehand, it was just difficult because regulations and red tape were plenty. Taxes were high and cost is very high.

I would say it would be very challenging to build a complex electronic device like a phone here in the U.S. It absolutely can be profitable to build products here in the U.S., but it's got to be the right product and have the right technology support around that product. In 2017, the White House announced Foxconn's plan to open a massive LCD screen manufacturing facility in Wisconsin. I led the project Flying Eagle, which was slated to invest up to $10 billion and creating 13,000 jobs in the state of Wisconsin.

But Foxconn has massively scaled back on that promise. In 2021, the company anticipated creating less than 1,500 of the initial 13,000 jobs promised and cut its investments to $672 million. Foxconn bit off more than it could chew at that particular stage of their history dealing with everything from the regulatory side, the environmental side, the actual building of the facilities, and then even possibly getting the right kind of people needed to do it.

That was just not reality, in the short time frame they promised. Two key elements that actually affect the project were the market condition and also the investment climate. In our case, for LCD manufacturing, the prices drop and got cut by half.

And if you ask manufacturers, would they still build the project or build a factory if the end product now sold 50% off, I think they have to pause and really take a long, hard look strategically to do that. But if the world's largest electronic manufacturer couldn't succeed in Wisconsin with LCD screens, and if Motorola failed at making phones in the country after only a year, it seems highly unlikely that we will see any other attempts to make smart phones in the U.S. any time soon. I can't comment on whether Apple asked Foxconn to manufacture iPhone in the United States, but I'm sure when the clients of Foxconn ask the company to consider manufacturing a particular product in the United States, the company will be ready. As to why it's necessary to build phones in the U.S., Purism's president Kyle Rankin says it's largely due to security concerns and data protection.

At Purism, we think data is uranium, so we treat it like a radioactive substance where we collect as little of it as humanly possible. Manufacturing things in the U.S.A. avoids risks from some other government or overseas or something tampering with it. Every extra link you add to the supply chain is an extra opportunity for someone to inject themselves in that supply chain and tamper with things. If China continues to be a security threat, more and more of the U.S.

companies and the international companies are going to move manufacturing outside of China and we're already seeing that happen. But Professor Chen says it's really not necessary. We eat strawberry, we eat tomatoes, but we don't grow tomatoes, we don't grow strawberry. It's the same thing. We can consume iPhone or any smart phone without manufacturing the smart phone. These phones can be manufactured in Vietnam, in China, in different other countries.

Regardless of where it happens, the need for manufacturing phones is only going to grow. Other companies, they continue to fall back on, "It's just too hard to do in the United States," as almost a talking point as opposed to actually looking into how it would be able to get done. It can clearly get done, and there's a huge market opportunity and it's just cheaper for those companies to offshore those jobs and continue to import from other countries.

There is a reason why those companies manufacturing product in China. By combining the labor cost and the supply chain and productivity, China is still the most efficient place to produce. Whether a phone or TV or computer should be made in the U.S., it's going to be up to the companies, meaning the supply chain, including Foxconn and the clients, to decide. But ultimately it's the end user customers who is going to decide. And the customer is going to decide when go to the shop or go online and make the purchase and make the decision with their credit cards.

So while yes, you can find an OG flip phone, some of the relics on eBay, we're seeing companies develop new models to— Flip phones are hot right now. Flip phone! While it might seem like dumb phones are a product of the past, they've actually remained prevalent around the world and still make up about a quarter of phones actively being used. And yes, this is in large part due to their affordability in developing countries, but it's also becoming a movement among younger generations. So it's been an official week on this guy. The crappy dumb phone. And I'm never going back to a smart phone.

We're going to be talking about my dumb phone. Today, we're going to talk about the Light Phone II. It's been three years since I've had this device. I had been thinking about getting a dumb phone or a flip phone for a while, but then I kind of involuntarily adopted one. My iPhone broke and I loved it so

much, I just, I decided to keep it. Despite this, smart phones are still king. Even in developing nations where flip phones are still widely used, smart phone usage is growing.

Developing countries are definitely some of the places where Nokia has not just as a brand but also with both feature phones and also smart phones, has a very, very strong presence. Worldwide, the feature phone market is expected to decrease by about 10% over the next five or so years, largely attributed to developing countries making the switch to smart phones. And older generations refusing to use smart phones could be phasing out as there is a 48% increase in smart phone ownership among those 65 and up from 2012 to 2021. But the amount of dumb phones being used by young people in Western countries is growing. CNBC wanted to explore what the dumb phone trend is all about and see if it can compete with the massive smart phone industry. Within the dumb phone market, there are essentially two avenues most consumers take.

One being a classic flip or slide phone, similar to what was commonly used in the early and mid-aughts, like a Motorola or Nokia. Two being a modern minimalist phone from brands like Light or Punkt. whose phones are in a way purposefully dumb. And these brands are also labeling their phones as feature phones, which is like a flip phone with some additions, like a hotspot or a GPS. How do you feel about the term dumb phone? Well, we're trying to do with the Light Phone isn't to create a dumb phone, but to create a more intentional phone, a premium, minimal phone, which, you know, isn't inherently anti-technology, but it's about consciously choosing how and when to use which aspects of technology add to my quality of life versus tempting me with all sorts of vulnerabilities of the smart phone.

In Europe, for instance, you have a culture. Here in Switzerland and Germany, they don't call it a dumb phone or a digital minimalist phone, they call it the weekend phone. One of the biggest reasons some Gen Zers are reverting to a dumb or minimalist phone is the concern with smart phones effects on mental health. We all know that what people convey through social media, they only convey the best of their life, which makes others falsely believe they live a lesser life by social comparison, which in turn negatively affects their self esteem and well-being. The U.S. Surgeon General even recently stated that 13

is too young to be on social media, so some are taking the initiative and switching to a dumb or feature phone incapable of browser and social media use. It's definitely a trend that we've noticed that people have been very occupied with digital social media for a while, and a lot of people want to take a step back and get a bit more detached from that part of their life. I take my smart phone with me absolutely everywhere.

So I decided to jump on the dumb phone bandwagon and test out a couple different devices. This is the Punkt. NP02 phone. It's my first dumb phone ever, sent over from Switzerland in this mysterious box. It has a T9 layout which I've never actually used before for typing. So we'll see how that goes.

A study found that Americans in their 20s are on their phones for about 29 hours a week, equaling about four hours a day. That was in 2021. Just for reference, my own screen time trends about at two and a half to three hours, which is a little bit less than average. The vast majority of my time is spent on messages. Now I'm going to swap out the SIM from my iPhone to the Punkt. phone. The Punkt .

phone retails for about $380 or $400 if you want it in light blue. You can call, you can SMS. You can call and message through signal and you can make it use as a hotspot for connectivity. There are other purposefully dumb phones, like the Light Phone, which allows for a little bit more leeway, I guess, on what you can do. Retailing for about $300, the light phone has a few more built in tools. We kind of set these guidelines of let's create things that have a real utility purpose.

So something like an alarm or directions or a calculator or even, you know, a voice memo and notes tool. These things have like a really clear use case. There's nothing about Punkt . that is against technology. It's about intentional technology. Right now I'm actually waiting on a call from somebody who I've been dating for about a month and we've never actually called before, but we're trying to set up our plans for tomorrow, and texting is just so inefficient on a phone like this, so we're going the old fashioned way, doing a little call.

Hello. Hi. So far, I actually haven't run into too many issues. It's actually kind of nice to be able to just sit with the uncertainty of things instead of looking them up. And I'm still able to text just, like, kind of poorly. I'm a little bit more reliant on calling, but I'm about to have about an hour and a half commute up to our office in Englewood Cliffs because I live in Brooklyn, so I'm not going to be able to use music or podcasts, which I usually do the entire time. Instead, I'll have to, doing some reading, but maybe that's for the best, you know? Sit with my thoughts a little bit more.

One sort of weird issue that I'm running into is directions. The phone does not have any sort of map or directional indicator on it, so I'm having to look up directions before I go for certain places. It's no problem, like, getting to work just because I have that memorized. But for places that I'm not as used to going, I have to check before I leave and then just try to remember everything, which can be a little bit of a challenge. Okay, so I did have to briefly cheat. I was trying to meet my friend at a coffee shop and couldn't find it. Got a little lost, so I just

swapped my SIM just to pull up the map. Now I've got my hands on the light phone, so I'm going to swap my SIM and see how this one goes. So the Light Phone has an actual keyboard on it, which makes it a little bit easier to use for me, but everything on it is a little bit delayed because of the type of screen it is. So I'm still struggling a lot. One of the tools that they added to the

Light Phone II, which I think is actually really nice, is voice-to-text and it works pretty well. You have to go a little slow for it, but overall, very convenient. This is the home screen and you actually have to go on your computer to their online dashboard to add any additional tools past the alarm. So I went in and added directions, hotspot, music, notes, podcasting. The directional tool actually works really well. I expected to have to put in the actual address, but you can actually just type in the name of something or most of something and it'll figure out the rest from there. The Light Phone music tool only allows you

to upload basically MP3's. You're using it as an MP3 player, so you have to download music, you can't actually stream it. So I'm actually going to buy an album for the first time and I want to say like 10 years. So I mean, it is working. It's not like the best listening experience, but I am listening to music, so it counts for something. While I don't really use my phone that much to begin with, compared to most people my age, I decided that a dumb phone really isn't for me.

And honestly, one of the biggest negatives for me was not being able to listen to music and get around super easily using something like Google Maps. On average, over half of kids in the U.S. received their first smart phone by age 11, and that percentage has continued to grow, making Gen Z the first generation to entirely grow up with social media and smart phones. And about half of teens in the U.S. said they feel addicted to their mobile devices, which can have adverse effects on mental health.

This is why parents should be encouraging healthy device habits. It's not about prohibiting or banning totally devices from being used, maybe like encouraging their children to take some regular breaks. A recent study found that decreasing teen smart phone-based social media use by 50% improves issues with emotional distress. But I think you can see it with certain Gen Z populations. They're tired of the screens. They don't know what is going on with mental health and they're trying to make cutbacks. And from 2019 to 2022, over a billion feature phones were sold globally.

I think this trend, starting in the United States, could very easily move, I would say first, to Western Europe and Australia, and then after that, places like Eastern Europe and even places like China. This trend is largely a result of mental health concerns and in part why companies like Light and Punkt. said its devices are popular among younger audiences, despite having simple and intuitive designs. A study connecting mental health and the rise of social media from 2008 to 2018 found that 18 to 23 year olds who reported experiencing a depressive episode increased by 83%.

So I wanted to change my lifestyle, you know, kind of like get into a slower lifestyle instead of like the fast pace of the internet. We kind of had this hypothesis that taking a break from smart phones and the internet at large from time to time would yield a really refreshing and positive experience for users. And brands like Light and Punkt. that are geared toward younger audiences have found success and increasing device sales. From 2021, for example, to the last year of 2022, we did grow 50% year over year.

You know, we have five fold compared to 2018. As for this way, so, but you know, we are not in the millions, we are in the hundreds thousands. But I think this Light Phone, Punkt. and brands that are new, I think could make a much bigger impact, particularly in the Western world, because it's not apologizing for being not a smart phone.

In 2021, just 61% of Americans 65 and up were using smart phones, while 29% were using a dumb or feature phone. The biggest question that I wanted to figure out is will they age out or will they move to something different? And as with most technology, older generations were slow to adopt smart phones. In 2012, when smart phones had picked up some serious steam, only 13% of those 65 and up had a smart phone, compared to 66% of 18 to 29 year olds. What's assumed is that older generations are still using feature phones because it's what they're used to and have no need for the updated tech.

And just 45% of them said they ever use social media. I do believe we'll see higher adoption of dumb phones even when folks like I age out. If nothing else, the dexterity that it takes to touch the screen of a smart phone when you get older is tough.

Your eyes go and directly you cannot operate a smart phone without having some reasonable eyesight. Older generations are sticking with Nokia phones and still doing that. But I think that's also where we really try to bring on top of that innovation. So they can still function in a modern society.

Older generations are clearly shifting away from dumb phones. And despite the growing movement among younger generations, 85% of Americans have a smart phone. And that percentage has grown every year since their inception. But some think the dumb phone industry will grow as well. In North America, the market for dumb phones has pretty much flatlined over the past four or five years, but I could see it getting up to 5% increase in the next five years, if nothing else, based on the more public health concerns that are out there. The problem is that humanity is not yet ready for this fast evolving software.

Children are not yet ready because they are going through a very important developmental age, so they are not yet prepared to face all the challenges that are currently available on the internet, video games or even the social media platforms. I think in the next five years we will have major CDC warnings about the dangers of smart phones and collectively that the smart phone industry wasn't able to manage on its own, and I could see there being some restrictions. And that alone, I think, will bring out likely parents not giving kids smart phones, but more dumb phones into the future. There's a reason why there is 15,000 subredditors on the dumb phone subreddit.

Like, that's not a small, I mean it's small when you compare it to like Android subreddit or Google or iPhone, but it's a trend that is catching on and a lot of people are really interested in for sure. This is actually one of the best things I've ever done for my mental health because I've decreased the stimulation, I've created more space to feel my own ideas and to touch in with my emotions and just to kind of feel like what's going on with me without all of the noise. The smart phone market in emerging or developing countries has grown rapidly. The global smart phone market was valued at about $485 billion in 2022 and is expected to reach nearly 800 billion by 2029. And the Middle East, Africa and India made up about 80% of feature phone sales in 2022. But these countries are also becoming concerned about the mental health impacts of increasing smart phone usage. A survey conducted in 11 developing

countries found that 63% of adults were concerned that mobile phones were having a bad influence on children. But despite this, mental health isn't really the reason people in developing countries are opting for dumb phones — price is. That has very little to do with capability and parents watching their kids. It has everything to do with the the price point and the reliability.

In that same 11-country survey, 70% of respondents said that mobile phones have been overall good for society. A lot of folks in areas like India, they'll run their entire business on a smart phone. And therefore, I do see the numbers going up for a country like India.

And the makers of Nokia phones said they're still selling millions of feature phones globally every month. However, the U.S. is one of few markets where they noticed growth in feature phone sales last year.

While feature phones do make up most of the cellphones actively being used in India, new phone sales are heavily in favor of smart phones. Of the roughly 200 million mobile phones shipped in India in 2022, only about 57 million were feature phones. And while feature phones are decreasing in developing nations, the industry does have a steady following elsewhere in certain niche markets and could see some growth as mental health concerns associated with social media and smart phones rise. While my experience wasn't terrible and I really don't use my phone that much to begin with, it's definitely something that I decided isn't really for me, and it remains to be seen whether it'll be more than just a trend in the U.S.

For much of the mid to late-2000s, Research in Motion's BlackBerry was the most popular smart phone brand in the U.S., and it wasn't close, making up about 43% of smart phone users at its peak. Even after touchscreen phones from Apple and Google became mainstream, BlackBerry still maintained a strong user base for several years. RIM is now worth about $66 billion. That's with a B.

Some couldn't imagine using a phone without a keyboard. Others wanted the advanced cybersecurity that BlackBerry phones offered. Something that BlackBerry is known for is not getting hacked and having security and privacy, something that is near and dear to our DNA. And the company's stock peaked at nearly $150 in 2008. Now it's sitting pretty at around five bucks. January 2022 marked the end of an era.

A moment of silence for dear departed BlackBerry. Starting today, the BlackBerry classic device once a go-to for millions, including then-President Barack Obama, will no longer work. After over two decades of servicing mobile communication devices, it established software and cybersecurity as its sole business. Because they are trying to stage what would be a tremendous turnaround for a company that once used to make smart phones. So they are playing it cautious, but playing it cautious, on the other hand, is limiting their growth potential as well. But the margin is going up and one of these days the switch will flip. So we are hiring and growing and

spending. Overall, it was a tough transition and I'm proud of the way we're pivoting. So what made this iconic brand have such a meteoric rise and catastrophic fall and what is it up to now? BlackBerry was founded in 1984 as RIM, short for Research in Motion. Its first product was Budgie, which allowed information to be displayed on a screen wirelessly. While Budgie did have some initial success and was even used by General Motors, it didn't last. It made several other products, including DigiSync, a device used in film post-production, which won an Academy Award for technical achievement.

But it wasn't until it developed the RIM 900, one of the first wireless devices that could send and receive data, when Research in Motion really started to pick up steam, it used an early wireless data network to send and receive messages, and it set the groundwork for what would eventually become a BlackBerry. The earliest iteration of the BlackBerry phones we all know began in 2002 with a 5810. It could send and receive messages and also allowed for use of a simplified browser. It was really interesting to go from small volumes of these interactive pagers to huge volumes of smart phone handsets. BlackBerry's popularity peaked in the late-aughts.

At the time, the brand and its products were quite simply a cultural phenomenon, coined the CrackBerry by many. The phones were seen as addictive. One of the first glimpses of how smart phones would eventually take over our lives.

It was a really exciting time. I mean, we as a company had a really strong product. That's Sarah Tatsis, who joined BlackBerry when it was still known as Research in Motion in 2001. President Obama was the first high-tech president and was adamant about keeping his BlackBerry while in office. But I'm still clinging to my BlackBerry.

They're going to pry it out of my hands. In 2007, it was the most valuable company in Canada, surpassing Royal Bank, which held that spot for about two years. In 2010, it acquired an operating system called QNX. While BlackBerry was still largely focused on smart phones at the time, this move has since proven to be a massively important acquisition for the company. I was very excited to be part of the charter to help BlackBerry in the next generation initiative and also as QNX was now on a world scale platform.

Charles Eagan joined BlackBerry in 2011, largely because of its acquisition of his former workplace, QNX. BlackBerry's fiscal peak was in 2011 when it did nearly $20 billion in revenue, with over 80% of that being from hardware. Even Kim Kardashian was an unofficial brand ambassador, using the phones until 2016 when her last BlackBerry devastatingly died. BlackBerry. It's my heart and soul like I love it.

I'll never get rid of it. And she wasn't alone with her devotion to the brand. Well past its prime era, many people held out from switching over to a completely touchscreen smart phone, seeing keyboardless phones as undesirable. But in 2007, everything changed. And we are calling it iPhone. Today, today, Apple is going to reinvent the phone.

BlackBerry began making efforts to change up its tech in 2008. Its first fully touchscreen phone was the Storm, which had major hardware issues. It quickly returned to its former button-filled glory before again trying out a touchscreen device called the Z10 in 2013.

See, at this point it was trying desperately to keep up with touchscreen smart phones like the iPhone that were becoming more and more popular. But device sales were plummeting. In 2011, it sold 50 million phones. But just two years later, after the release of the Z10, that number plunged to fewer than 30 million phones. And in the years following, sales continued

to fall rapidly and its stock had a meteoric descent. I think we saw as we were getting closer to our BlackBerry 10 launch and seeing the headway that Apple and Android were making in this space, so I would say around that timeframe is when I think the the company realized that, yeah, we would need to make some significant changes. BlackBerry desperately tried to stay afloat by flooding the market with products.

In the same time period it took Apple to release four iPhones, BlackBerry released over 30 unique devices. It made an effort to keep up with competition by switching to a QNX operating system, which it acquired the year prior, but to no avail. In 2012.

Longtime co-CEO and founder Mike Lazaridis, along with co-CEO Jim Balsillie, parted ways with BlackBerry. By 2013, 4,500 jobs were cut and John Chen took over a CEO with a desire to turn BlackBerry's trajectory around. When I came in we're losing market share, we're writing off a lot of stuff, and we were losing money like crazy. We're talking billions of dollars every quarter. And so I have to put a stop to that. And that was kind of the state of it, just really more of a survival state at that time.

You know, the fact that John Chen recognized early the pivot to software. I remember the day he appeared in Ottawa and spoke and I thought, okay, here's a leader with a plan. John Chen brings strong credentials to BlackBerry, as someone who has already successfully done turnarounds historically. Initially, Chen hoped to keep the iconic phones, turning them into a stable source of revenue.

But after a few years, we realized that we would never get the volume up; it's a volume game. The moment had came and gone, so to speak. And so we made that pivotal shift to a software only company and focused on security and cyber and things of that sort. See, this pivotal shift Chen is referencing was largely dependent on a few key acquisitions that BlackBerry had made, one of which being QNX in 2010. The operating system that was later integrated into BlackBerry devices.

And this was viewed as one of the silver bullets that BlackBerry needed for its portfolio moving forward. One thing we did was we took out security software, which used to be designed for the operating system or the new phones and moved that back into the auto. The others being the $1.4 billion acquisition of Cylance, an antivirus software firm and the $425 million acquisition of good technology, a device management software company. These moves helped BlackBerry more swiftly alter its focus from hardware to software. QNX had previously been fairly well established as a software company dedicated to the automotive industry.

And the fact we supported our devices for many years after we announced the exit of us manufacturing and designing our own smart phones. And now over the last number of years have fully transitioned into the enterprise and the foundational IoT software space. So once BlackBerry decided phones were not the future of the company in 2016, these acquisitions quickly became central to its business model.

Currently, BlackBerry has two main business units: a cybersecurity business unit and an IoT business unit. These are two fast growing markets. I would like to think of BlackBerry as a company that can actually grow if they play their cards right. The main focus within the IoT business unit is automotive, and the BlackBerry IoT business unit features the QNX operating system, which is iconic and the de facto standard in automotive.

So the QNX technology that we have in this vehicle before we even outfit it with any of our additional sensors, this is running a Ford Sync. So the infotainment is being used in the vehicle and this is prevalent in quite a few of the Ford vehicles. We now have the lion's share of embedded software in most of the cars. So this is really, is an offshoot of the result of the strategy shift in 2016, which is where we went from phone to non-phone. Now BlackBerry software is in 215 million cars. It could be powering your car's infotainment system or securing its connected and driver assist features.

So what we have here is the MKZ concept vehicle. We use this for autonomous drive demonstrations. We have integrated a lot of varying hardware and equipment and sensors from various manufacturers. A lot of these embedded boards would be the size of a deck of cards. They'd be very inconspicuous in the

vehicle. BlackBerry works with numerous automotive companies and all but one manufacturer. We work with all major automotive automotive OEM's, Audi, BMW, Ford, GM, Toyota, Volkswagen, Volvo, just to name a few that you may recognize.

In the automotive IoT industry, BlackBerry says its QNX software is the market leader. The demand is actually strong for these advanced security and infotainment solutions because of a few reasons. Now, for example, there is an increasing demand for advanced driver systems and for advanced camera systems and also for advanced safety features. If we look at the industry opportunity itself, it's our expectation that the auto software industry is going to roughly triple in size from 2020 through 2030. And its cybersecurity unit is securing the back end of things like mobile banking apps and patient portals. So there's quite a rich cyber portfolio within BlackBerry, and that's securing banks and governments and large organizations and small and medium businesses.

While the cybersecurity industry is lucrative with a market size of over $200 billion, it's also competitive. It's taking on tech giants like Microsoft, Snowflake and CrowdStrike. And in 2021, BlackBerry was only able to get a thin slice of that pie. Just under $500 million worth.

The competition is very intense with the likes of Microsoft spending billions of dollars a year for product innovation. And BlackBerry so far has not been able to build any competitive advantages because of one major reason: they primarily cater to regulated industries such as government entities, financial services companies and the health care sector. But in my opinion, if BlackBerry were to become a well-recognized, fast-growing cybersecurity company, they have to focus more on their go-to market approach to come out of these regulated industries and to capture market share in the broad market, the mass market opportunity. BlackBerry has recently received more revenue from the cybersecurity side of its business, but analysts are more confident in the growth potential of the automotive IoT sector.

I think that the company can reach a likely a lower peak than we've seen in the past, but a more sustainable growth trajectory and potentially more profitable future as well. The margin percentage basis. While it was a major shift to go from manufacturing cellphones to cybersecurity and software, it was also a shift that made sense for BlackBerry. Even when they used to be a smart phone manufacturer, they always, the BlackBerry had a good name, a good recognition among consumers for a company that prioritized security features. So BlackBerry is not new to offering high grade, high quality security features.

Its reputation for being secure was easily transferable to part of its new enterprise in the automotive industry. Keeping the internet of things and cars safe from cyber attacks is increasingly important as cars become more autonomous. Security researchers have hacked into vehicles and proven that they could take over control of the vehicle. And I do think that there's the potential for payment systems to be compromised or personal information to be taken. And when you think of a car, it's more like ten plus computers than one computer.

I do not necessarily think that you're going to see the likes of returns that BlackBerry enjoyed at their peak, when they were a smart phone manufacturer, at least for the next decade. But then again, if BlackBerry plays their cards right, they might be able to turn profitable. So while there's a chance BlackBerry hasn't been on anyone's mind in nearly a decade, it's possible that you interact with something it helped develop almost every day.

2023-07-27 22:51

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