Shares of Canadian mobile company BlackBerry (BBRY +6.96%) are up more than 20% since the beginning of 2014, as investors see a possible turnaround story in the company, especially after John Chen became its CEO. A former director of Disney and Wells Fargo, Chen is famous in the industry for his crucial role in the turnaround of Sybase, a database company that had been crushed by Oracle, and eventually got acquired by SAP for $5.8 billion.
BlackBerry, which saw huge losses in 2013 as customers abandoned its platform for Apple's iOS and Google's (GOOG +2.53%) Android, recently released new devices (including a five-inch full-touch BB10 smartphone for emerging markets) dubbed the Z3 and the Q20, which is the company's most recent physical-keyboard phone, aimed at enterprise users. Because of the quick commoditization of the smartphone industry and the emergence of new players like Xiaomi (that use very aggressive pricing strategies to capture users), several investors have suggested that BlackBerry could be better off after divesting its hardware division. Will these new devices help BlackBerry improve its top line, or could these devices turn into more losses?
BlackBerry's new strategy
Both the Z3 and Q20 are BlackBerry's first smartphones after the company announced in December 2013 that it is shifting to a new device strategy, which involves outsourcing the manufacturing process for low-end devices to Foxconn. In the medium run, this strategy will allow BlackBerry to enjoy higher margins because the Taiwanese electronics manufacturer, which is also used by Apple, specializes in smartphone manufacturing and enjoys lower production costs.
By outsourcing its manufacturing process to Foxconn, BlackBerry will also transfer some risks related to overproduction, excess inventory, and supply chain. More importantly, the company could benefit from Foxconn's efficient production cycle. Usually, it can take up to a year for a new device to be developed. However, Foxconn only spent three months on the new BlackBerry products.
Back to the roots
The new devices will help Blackberry maintain its presence in Southeast Asia, where it still enjoys its greatest smartphone market presence. In Indonesia, BlackBerry still occupies the first position. This market probably inspired the development of the Z3, codenamed "Jakarta," and is expected to retail for less than $200.
Note that the new Q20 will come with the traditional physical keyboard and will also feature "send" and "end" buttons. These buttons were dropped from the touch-screen Z10 model and the Q10 version, causing disappointment among BlackBerry fans.
From now on
Although the quick release of new smartphones is a positive sign that the partnership with Foxconn is going well, the new devices probably won't have a big impact on earnings, at least in the short term.
The releases are just one component of a big turnaround plan. Under its new strategy, BlackBerry aims to move away from its consumer-centric effort from last year, and instead focus more on software and enterprise services, while building classic devices targeted to markets where BlackBerry is still strong.
This strategy is realistic in the sense that it admits the difficulty of simultaneously building a device and a platform that could compete against Android smartphones. Android is, by far, the world's most popular mobile platform, enjoying a 79% share of the whole smartphone industry in 2013. Any serious attempt to replace Android would require innovation, massive capital to finance an active community of apps developers, and a solid financial condition to afford using an aggressive pricing strategy to sell smartphones at nearly production cost levels for several quarters.
Final Foolish takeaway
BlackBerry's recent device releases are consistent with the company's new strategy, which aims at gradually reducing its hardware exposure while strengthening its software presence. By outsourcing manufacturing to Foxconn, BlackBerry could eventually enjoy higher margins.
More importantly, the company could devote more resources to its software products, which include BBM, a proprietary instant messenger application with more than 70 million users worldwide. Although the new devices may not help to immediately improve the company's top line, they are good steps to becoming a software-oriented company with exposure to both emerging markets and the enterprise segment.
