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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.”
BlackBerry Ending its Smartphone Production
Jan Dawson, chief analyst with Jackdaw Research, said BlackBerry got stuck by focusing on a specific vision of smartphones and what they should be as the iPhone invasion began “and was never quite able to react effectively to the fact that smartphones became something very different from 2007 onwards.”
Complicating that was that the company’s “enterprise focus likely blinded them to what really needed to be done, and although it certainly wasn’t clear 10 years ago that BlackBerry would end up here, it’s been fairly clear for at least the last five years,” said Dawson. “It would have taken an enormous sea change in BlackBerry’s strategy post-2007 to have achieved a different outcome, but there were multiple steps along the way where even a slight course correction likely would have left it in better shape.”
In the end, “the biggest impact the iPhone had on the smartphone business was that consumers and not IT departments started making purchasing decisions, [and] BlackBerry never responded adequately to that,” he said.
In July, the company dropped the production of its Classic QWERTY keyboard-equipped smartphone just a few days after the U.S. Senate unveiled its plans to stop offering BlackBerry phones to members once its existing supplies of the company’s handsets were distributed. The moves, though unrelated, offered more support for the widely held industry beliefs that BlackBerry would eventually drop smartphones altogether. The BlackBerry Classic had debuted in December 2014 with a 3.5-inch square touch-screen HD display, a 2-megapixel front- and an 8MP rear-facing camera, a 1.5GHz dual-core Qualcomm Snapdragon processor and 16GB of internal storage.
Earlier in September, BlackBerry announced price cuts of up to $250 on its Priv and Passport phones, according to an eWEEK story.
BlackBerry’s fall from dominating the enterprise smartphone market has been swift and stunning. In early 2006, before the first iPhones appeared from Apple, half of all smartphones sold were BlackBerry models. By 2009, though, its share of the global smartphone market was down to 20 percent.
BlackBerry also has been having a tough time financially for some time. In late June, BlackBerry reported a fiscal 2017 first-quarter net loss of $670 million, compared with a net loss of $238 million in the fourth quarter. The company’s GAAP revenue was $400 million, while its non-GAAP revenue was $424 million for the first quarter.