BlackBerry Ending Its Smartphone Production

As BlackBerry announces a $372 million loss for Q2 2017, the company says it will now look to license its flagging smartphone business to others.

BlackBerry, smartphones, John Chen, iPhone, BlackBerry Classic, BlackBerry DTEK50, licensing, Alcatel

After a dramatic nine-year fall from market leadership in the mobile phone business, BlackBerry will no longer design, build, distribute and sell smartphones, but will instead outsource its hardware operations. While the ending of smartphone production by the company has been rumored for at least two years, the move finally arrived after BlackBerry was hit with a $372 million loss for the second quarter of fiscal 2017, along with revenue that came in under expectations.

BlackBerry announced the end of its internal smartphone hardware business and its disappointing Q2 results on Sept. 28, along with the first licensing deal with an Indonesian company that will continue to build and sell the company's phone models in that market.

Over the last several years, BlackBerry has been repositioning itself as a mobile application and security software company, while continuing to try to salvage its declining smartphone business, but those plans appear to finally have succumbed to reality.

"We are reaching an inflection point with our strategy," John Chen, BlackBerry's CEO and executive chairman, said in a statement about the company's transition, noting that "our pivot to software is taking hold."

To complete that move, BlackBerry "plans to end all internal hardware development and will outsource that function to partners," said Chen. "This allows us to reduce capital requirements and enhance return on invested capital."

From here on, the company will seek partners to design, produce and sell future BlackBerry smartphones while allowing the company to focus on its core software businesses, he said. The first deal, which was also announced on Sept. 28, is through a newly formed joint venture called PT BB Merah Putih that will license BlackBerry software and services for the production of handsets for the Indonesian market.

BlackBerry reported a net loss of $372 million on GAAP revenue of $334 million for the quarter, which ended Aug. 31. That compares with net income of $51 million on revenue of $490 million for the same period one year ago. Non-GAAP revenue for Q2 totaled $352 million.

The company's loss per share for Q2 was 71 cents, compared with earnings of 10 cents per basic share a year ago.

BlackBerry did not immediately respond to an email request for additional comment on the announcements.

Avi Greengart, an analyst with Current Analysis, told eWEEK that BlackBerry's move away from smartphone production has been simmering for quite a while. "When Chen took over at BlackBerry, he was very clear that if he couldn't profitably sell phones he wasn't going to continue to sell phones," said Greengart. "He's clearly there. He says what he's going to do and does it. Kudos to him for thinking about this rationally and not emotionally."

What the move doesn't mean, he added, is that BlackBerry phones will disappear from the market. Instead, he expects the company to pursue more licensing deals for its secure Android applications and operating system without having to build the devices internally. "We've already seen them partly implement this strategy with the DTEK50 smartphone [which BlackBerry unveiled in July], which is an Alcatel Idol 4" with a plastic back and additional customization. "It's largely the same phone, with Alcatel doing the design and engineering rather than BlackBerry."

That could mean a licensing deal with Alcatel could come in the future, since the companies have already worked together, added Greengart.

But even dropping smartphones doesn't mean that BlackBerry is out of the woods yet, he said.

"The big challenge is their margins on software are obviously very good, but the revenues just haven't been there," he said. "Without hardware, those revenues could fall further. At what point do their finances stabilize where they are growing both the top line and the bottom line based on their software? It's going to have to be soon because they can't rely on the software losses indefinitely."

Another analyst, Rob Enderle of Enderle Research, said BlackBerry ironically ended up in this position by trying to copy Apple, which "accelerated the move to Apple's platform because Apple always will build a better iPhone."

Instead, after the iPhone debuted in 2007 and found success in the marketplace, BlackBerry should have found "a way to partner with Apple to secure the phone than to try to compete with them."

By not following such a strategy, said Enderle, BlackBerry "effectively repeated the same mistake IBM made with client server computing, which almost killed the mainframe. They didn't defend their model aggressively but instead tried to compete with Apple using Apple's model. This is like challenging someone to a duel and choosing to use the weapon they are expert with. It ends badly and this did."