BlackBerry Ltd Won't Abandon Handsets

CEO John Chen changes his tune on handsets

Mar 31, 2014 at 6:30PM

BlackBerry (NASDAQ:BBRY) released its fourth-quarter earnings on Friday, beating earnings expectations but missing on the top line. The market shrugged off the weak revenue, but turned sour when CEO John Chen emphasized that he sees the company's handset business as an important part of its future.

Chen refuses to admit defeat on handsets, despite the duopolistic dominance of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) and his previous indications that devices were his lowest priority. Microsoft (NASDAQ:MSFT) has taken over as the third player in smartphones, and BlackBerry's market share has been reduced to almost nothing.

BlackBerry may find a niche in low-end devices, but with limited resources compared to its competition, it should just focus on its strengths.

BB10 is a flop
Despite all the hype, BB10 phones have barely moved the needle in terms of commercial sales. Its BB7 phones continue carry the division accounting for more than two-thirds of handset sales last quarter. BB7 took a similar share in the third quarter. Clearly, BlackBerry is unable to appeal to high-end phone purchasers.

Apple and Samsung dominate the high-end, capitalizing on the rich iOS and Android ecosystems. The high-end is where the profits are, too, which is one reason why BlackBerry's profits have declined since 2011.

Chen announced a new plan to make the BB7 devices profitable, tapping Wistron for a new run of BB7-powered Bolds. Chen iterated on the conference call that the new run will not be sold at a loss, which might be helpful in making the division profitable. The Wistron announcement comes after the company announced a deal with Foxconn to manufacture is low-end phones for the next five years.

The problem with selling handsets
In low-end handsets, BlackBerry is entering a fiercely competitive market. Margins are thin, and the competition is abundant. Android OEMs rule the roost, and not even the deep pockets of Microsoft have been able to make a significant dent in the market.

Samsung, in particular, will make it hard for BlackBerry to do well in low-end phones. The Korean tech giant benefits from scale, supply chain efficiencies, and a giant marketing budget. At the same time, Chinese OEMs that sell dirt cheap Android devices will make it hard to carve out a niche at any price.

But a bigger problem with selling handsets is that it undermines BlackBerry's biggest strength. BlackBerry's enterprise services is its biggest asset. The company generated 56% of revenue from services last quarter, and it's the best shot BlackBerry has at turning things around.

BlackBerry could very well drive away customers that would otherwise be interested in their enterprise solutions because they're being sold a phone they don't want. Moreover, BlackBerry's software may favor its own devices, leading potential customers to look elsewhere -- even if it's just a perceived bias. There's a conflict when BlackBerry tries to sell you software you want and hardware you don't.

BlackBerry currently controls about 60% of the mobile device management market. The company sees opportunity to gain share in the business because many of its competitors (about half according to Chen) are not meeting their clients' needs. But BlackBerry needs to examine why it wasn't chosen in the first place, considering that enterprise management is what it's known for.

Focus on its strengths
Chen had previously indicated that handsets were no longer a priority at BlackBerry. His comments on Friday, however, sent another message, and the market didn't like it. The handset business has tanked, and it's no longer a strength. Instead, BlackBerry should focus on its enterprise software and inter-operability with other OSes, and stop trying to sell phones to people that don't want them.

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Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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