BlackBerry (BB 1.97%) often highlights the use of its devices among government employees as a niche market which is defensible against Apple's (AAPL -1.52%) iPhones and Alphabet's (GOOG -1.41%) (GOOGL -1.50%) Android devices. In the past, BlackBerry argued that government agencies wouldn't forsake its "best in breed" end-to-end security for the convenience of using more popular iOS or Android devices.
Unfortunately for BlackBerry, Apple and Android device maker Samsung got better at securing their devices, and relaxed BYOD (bring your own device) policies enabled agencies to let more government employees use their own personal devices at work.
Back in 2013, the U.S. Department of Defense approved iOS and Samsung KNOX devices for unclassified communications alongside BlackBerry devices. In early July, the U.S. Senate went a step further and announced that it would stop issuing BlackBerry devices to its entire staff and replace them with Apple and Samsung devices. Does this government-level abandonment of BlackBerry devices indicate that the end is nigh for the company's struggling hardware business?
An accidental glimpse into the future?
The Senate memo claimed that BlackBerry told Verizon and AT&T that it was ceasing the production of all BB 0 devices (the Q10, Z10, Z30, Passport and Classic), so future orders could no longer be guaranteed. That was a stunning revelation, since BlackBerry had only recently discontinued the Classic.
BlackBerry responded by calling the Senate statement "incorrect," and that it will keep updating BB10 as it supports new Android devices. BlackBerry claims that the Senate staff misunderstood the discontinuation of the Classic as the end of all BB10 devices. Nonetheless, the Senate apparently hasn't changed its mind about replacing BlackBerries with iPhones and Samsung devices.
If the discontinuation of the Classic is a preview of BlackBerry's future, it isn't a surprising one. The company has been pivoting toward Android devices over the past year, and recently announced the development of three new Android devices. The company's first Android device, the Priv, received a lukewarm response due to its high price tag.
What happened to BlackBerry?
BlackBerry only sold half a million phones last quarter and controlled about 0.2% of the global smartphone market. Back in 2009, it controlled nearly 20% of that market.
BlackBerry's rapid decline over the subsequent years can be attributed to its early refusal to switch physical keyboards for touchscreens, its inability to create a popular app ecosystem like Apple and Google, and mismanagement by co-CEOs Mike Lazaridis and Jim Balsillie and their successor Thorsten Heins.
CEO John Chen, who took over in 2013, finally convinced BlackBerry to swallow its pride and partner with Samsung in 2014 to integrate KNOX with BES (BlackBerry Enterprise Service), the core pillar of its software business. This move complemented Chen's mission of transforming BlackBerry into a company focused on cross-platform software growth instead of hardware sales. BES plays a central role in this strategy, because it's a "control panel" for businesses to monitor iOS, Android, Windows, and BlackBerry devices -- thus capitalizing on the growth of BYOD instead of stubbornly resisting it.
Evolving into a software company
I believe that Chen's ultimate goal is to turn BlackBerry into a software company supported by BES, mobile device management services from Good Technology, the embedded OS QNX, and its BBM messaging app for business users.
Software sales rose 21% annually last quarter, but only accounted for 39% of its top line. This means that BlackBerry can't simply abandon its dying hardware business without dramatically reducing its cash flows. Therefore, Chen seems to be gradually reducing its exposure to BB10 devices, which are selling poorly, and offering more Android devices tethered to its services, which might perform better by appealing to BYOD users.
Chen likely knows that BlackBerry's Android devices will never sell as well as Samsung's, but they could buy its software business more time to become the company's main source of revenue. In that regard, investors should notice the silver lining on the government's abandonment of BlackBerry devices -- it might boost demand for its enterprise mobility management (EMM) services like BES, which Chen claims already controls up to 20% of the overall market.
Therefore, investors shouldn't fret too much over the Senate's abandonment of BB10 devices. It was bound to happen sooner or later, and shouldn't hurt BlackBerry's core software growth engine in the long run.