Throwing in the Towel on Hardware

A Tough Call for BlackBerry Management

BlackBerry_lLast week, BlackBerry announced its fiscal 2Q17 financial results for the three-month period from June 2016 to August 2016. The company reported mixed numbers, showing continued weakness in hardware and related access fees, but with growth in its software and services unit. It stated revenue of $334 million, down from $490 million a year ago, and an operating loss of $372 million (see Instant Insight: BlackBerry Results, Fiscal 2Q17).

However, the figures were overshadowed the company’s confirmation that it would soon leave the smartphone hardware business. This news followed proclamations by BlackBerry CEO John Chen that the firm would exit the market if smartphone volumes failed to reach 3 million units over a 12-month period. BlackBerry shipped 400,000 smartphones in the most recent financial quarter, and 2.2 million units in the past 12 months.

The departure from hardware is part of a slow shift. BlackBerry’s report outlined a new licensing strategy for smartphones, enabling third-party companies to use the BlackBerry brand and a BlackBerry-coded version of Android to create hardware.

BlackBerry — known as Research in Motion for much of its existence — was instrumental in sparking the modern smartphone market. The company’s first phone, the 850, was released in 1999 and offered a functional keyboard with strong e-mail features, and the firm’s proprietary operating system was recognised for its near-watertight security and role in extending the workday to commuter trains, restaurants and homes. BlackBerry devices became an instant hit with business executives and even heads of state.

The company made a considerable compromise in early 2015 when Mr Chen announced a move away from BlackBerry 10 OS and a shift towards its own build of Android. BlackBerry began shipping its first Android device, a vertical qwerty touch slider called the Priv, in November 2015 (see Daily Insight: Privacy, Security, Qwerty). CCS Insight described the Priv as a solid piece of hardware, but questioned whether there was room in the market for a device whose audience had, for the most part, moved on to other things.

The Priv sat alongside flagship smartphones from Apple and Samsung, in what other manufacturers recognise as an uncomfortable position in the market. We expected BlackBerry’s hardware future to be closely linked to the Priv, but sales have been disappointing despite the company’s best efforts.

BlackBerry recently released the TCL-made DTEK50 — a full-touch Android phone aimed at mid-range consumers focused on privacy and at enterprises looking for affordable security devices. This was a sensible move, but BlackBerry’s limited marketing budget made it challenging to provide adequate market awareness about the device’s credentials in mobile security support and other BlackBerry-specific features. The company’s management has now decided to rely on third-party partners to develop and market BlackBerry hardware to keep its name afloat. It remains unclear whether this approach is sustainable, but there’s little doubt that partners will face many of the same problems that BlackBerry failed to overcome.

The handset market is notoriously difficult, and many former leading brands including Ericsson, Motorola, Nokia, Philips and Siemens have met a similar fate. BlackBerry is ultimately wise to set emotion to one side and recognise the reality of its situation, dedicating itself to software and services.