Stop trying to make hardware happen, BlackBerry

BlackBerry announced its first quarterly earnings on Thursday for fiscal year 2017, and although the results themselves were fairly flat (which was actually better than Wall Street was predicting), its hardware sales continued to flatline.

Wait, BlackBerry still makes phones?

Yes, yes it does – though according to the results, not that many. BlackBerry sold just 500,000 devices in the first quarter of its 2017 fiscal year (BlackBerry kicks off its first quarter in March). That was down from 600,000 units sold in Q4 2016. The company sold 700,000 phones in Q3 2016.

That means that in just six months, BlackBerry has lost nearly 30% of its already abysmal hardware market.

Android couldn’t save hardware

Last fall, BlackBerry released its first Android phone, the BlackBerry Priv. It was called the best BlackBerry device in a decade.

But on Thursday’s earnings call, BlackBerry CEO John Chen admitted that the product hasn’t sold well, largely because of its price.

In the answer to an analysts question about Priv, he had this to say (edited for clarity):

Well, the Priv is really a great engineering product. And it’s done well for people who bought it. But it’s too expensive for enterprise. And so we’re a little bit on the higher – too much of a higher end. So this is why the enterprise [customers] have been asking as well as the carriers who represent the enterprise, when they – and the B2B group— have been asking for more of a mid-range. They like everything BlackBerry represents in terms of security and the ability to run our software with the Android systems. But unfortunately, the Priv itself, [is] only kind of being affordable by the executive or the higher entity of the organization.

On Bloomberg, Chen said that a lower-priced all-touch Android handset is in the works.

A lower-price is great, but I still question whether enterprise customers (even those who already subscribe to BlackBerry’s security management services) will be tempted to buy BlackBerry-branded handsets over devices from Apple or Samsung.

Moreover, it now seems abundantly clear that BlackBerry hardware as a consumer proposition is over.

BlackBerry hardware is DOA

Back in January 2015, I argued that BlackBerry should just get out of hardware altogether. And that was at a time when BlackBerry was selling 7 million handsets a year.

Chen has said in the past that he’ll exit the hardware business if he can’t make it profitable. That deadline is tentatively scheduled for this fall, but Chen keeps changing sales goals for what will constitute whether the company actually exits hardware or not.

Frankly, I can’t understand why he even bothers. Based on its balance sheet and its future projections, BlackBerry is now a software company. It happens to make a few handsets, but those phones have no customers.

In interviews with CNBC and Bloomberg, Chen has admitted that he will do right by the shareholders and if that means getting rid of the hardware business, so be it.

Chen was asked directly on the earnings call why he even bothers with hardware.

His answer, while long, is telling (edited for clarity).

The customers, many customers especially in the government world, they’re still relying on us to provide a secure handset for them. That’s number one. Number two, I really, really believe that we could make money out of our device business. And to make sure to augment that so we don’t put too much emphasis on that, we started the software business, started licensing our technology which we spoke about earlier. So let’s see how we could develop this. As I told everybody, I think within a couple of quarters we will be making profit in the whole Mobility Solution Group and definitely device losses has been pared down quite a bit. As you pointed out we de-risked a lot of stuff already.

I was pretty much burdened by the fact that we have not only the infantry but the legacy IP. I guess James used the word ‘in-bound royalty,’ some of the contracts and stuff, we either [have] written it off or renegotiated a lot of those. So we are at the point where our business is extremely efficient and we [are] no longer really making any hardware. We are really a hardware design house. I do design, I don’t really make hardware. I do design hardware, and as I pointed out earlier, and with the new manufacturing arrangement, that we made, we don’t really carry too much of the risk to our balance sheet. And then we just have to manage the bottom line from the expense side of the equation.

So let’s see whether we can make a run of it… [If not], then we already started our software part of that business and maybe that transition will be smoother.

It’s important to note that this “hardware will become profitable” mantra has been one Chen has repeated for the last few quarters. And although BlackBerry has managed to shift much of the risk on hardware to outside manufacturers (Chen says he “designs” hardware but doesn’t make hardware), that also means that any margins from the hardware business go away for BlackBerry as well.

Moreover, most of BlackBerry’s software customers do not use any of its hardware at all. In fact, when questioned by analysts about what impact BlackBerry exiting hardware would have on its software sales, Chen replied, “I would say some, but very little.”

So why even bother with hardware at all? It’s not helping grow the software bottom line. Software customers don’t buy BlackBerry hardware. Is this just about ego? Is this about the optics of the company that helped make the smartphone a thing accepting reality that hardware really is dead?

Because here’s the truth: Barring some sort of huge miracle, BlackBerry will never sell hardware in quantities that will be statistically significant. Moreover, as the Priv has shown, the market for a high-end (and high-priced), secure Android device isn’t very large. Smaller niche shops like Blackphone might be able to make a go at it, but a multi-billion dollar company?

Again. Why even bother.

BlackBerry is doing well in software

The bleak hardware news actually overshadows some of the better news coming out of BlackBerry: It’s turnaround strategy regarding software is working.

Software and services revenue grew 131% year over year. Moreover, software revenue actually eclipsed hardware revenue. And the margins on software are much better than those on hardware.

The company is very close to meeting its goals for software growth and the acquisitions BlackBerry has made over the last few years have given it a solid portfolio of products.

Still, make no mistake, being a successful enterprise software company in the mobile space is very different from being a consumer hardware company.

At its peak, BlackBerry had a market cap of more than $80 billion. Today, its market cap is about $3.65 billion.

Chen should be commended for much of the work he has done at BlackBerry. The company could have met the same fate as Canada’s other big tech company, Nortel. It didn’t, and much of that is because of the work Chen has taken to shift BlackBerry into the enterprise.

But let it go man. The BlackBerry hardware business is dead.