BlackBerry (NYSE:BB) recently teamed up with Samsung (NASDAQOTH:SSNLF) to beef up Android security on BES (BlackBerry Enterprise Service) 12 server, a "control panel" which helps manage employees' Android, iOS, Windows Phone, and BlackBerry devices. Starting in early 2015, Samsung will add BES 12's end-to-end encryption service to its KNOX mobile security platform.
The partnership is an odd move for BlackBerry CEO John Chen, who ridiculed KNOX after Google (NASDAQ:GOOG) (NASDAQ:GOOGL) announced the integration of KNOX features in Android 5.0 in July. Chen stated that Google and Samsung might "talk the security talk" but BlackBerry has "proven repeatedly that it can walk the walk."
What prompted BlackBerry's sudden change of heart? Let's look at three key things investors need to know.
Desperate times call for desperate measures
BlackBerry's global market share in smartphones fell from 20% in late 2009 to less than 1% today, according to IDC and Gartner.
The arrival of Apple's (NASDAQ:AAPL) iPhone in 2007, followed by Android devices the following year, turned smartphones into consumer-facing devices. BlackBerry believed that its renowned security features would help it retain its top spot in enterprise, but relaxed BYOD (bring your own device) policies allowed more employees to use their iPhones and Android devices at work. This disruptive shift forced BlackBerry to make BES compatible with iOS and Android devices.
At first, BlackBerry didn't take Android seriously as an enterprise competitor due to its poor reputation for security. But that all changed when Samsung rolled out KNOX for a handful of its flagship devices. KNOX allowed users to seamlessly switch between personal and work accounts on a single device -- a feature BlackBerry offers with BlackBerry Balance. Since Samsung devices were more popular than BlackBerry ones among consumers, KNOX represented a more natural way for employees to use their own smartphones at work.
In June, the U.S. Department of Defense approved KNOX devices for "sensitive but unclassified use" at the Defense Information Systems Agency. In October, the NSA also approved the use of KNOX devices. In the past, both agencies primarily used BlackBerry devices and a smaller share of iOS devices. Google recognized Samsung as its ticket into the mobile enterprise market, and integrated some KNOX security features (including the separation of work and personal data) into Android 5.0.
Why BlackBerry values BES over BB10
Suddenly, BlackBerry wasn't dealing with just Apple and Samsung anymore. It was facing the possibility that a large part of the Android market, which accounts for 84% of global smartphones, could enter the enterprise market via the 5.0 upgrade. That's why BlackBerry partnered with Samsung, the world's largest Android handset maker -- the combination of two secure platforms would seem more attractive than stand-alone iOS or the combination of Android 5.0 and KNOX features.
BlackBerry considers BES to be one of its three pillars of growth, alongside BBM and phones for emerging markets. Making BES compatible with rival smartphones ironically fuels the rise of BYOD, which hurts BlackBerry's own smartphone business, but it makes more sense to strengthen BES than to save its fading BB10 devices.
Last quarter, revenue at BlackBerry's hardware (BlackBerry devices) and service (BlackBerry subscriptions) respectively plunged 45.8% and 41.4% year-over-year. Together, those two segments accounted for 91.8% of BlackBerry's top line. Only 6.4% came from its software business, which includes fees from licensed BES software. Revenue at that segment only fell 6.3% to $59 million. BlackBerry expects to generate $250 million in software revenue by the end of the year, then double that figure next year from BES, tech support, and other value added services.
To achieve that goal, BlackBerry made BES compatible with rival platforms and teamed up with Samsung.
Giving away BES 10 for free
It's a long shot for BES growth to offset BlackBerry's hardware and services losses, but there are still glimmers of hope. BlackBerry's EZ Pass program, which is active through Jan. 15, 2015, allows customers to either upgrade from BES 5 or a competitor's Mobile Device Management (MDM) software to BES 10 client licenses for free.
Last quarter, BlackBerry reported that effort resulted in 3.4 million new licenses being issued for BES 10 -- a nearly three-fold increase from the previous quarter. 25% of those licenses came from competitor's MDM platforms. That's encouraging, but we'll have to see if that growth continues after the EZ Pass period expires.
The bumpy road ahead
Collaborating with Samsung reveals a humbler side of BlackBerry that investors should embrace. With BES and BBM, Chen is salvaging the parts of BlackBerry that are still worth saving, although he arguably wasted time on hardware products like the BlackBerry Passport and Q20.
BlackBerry has bought some time for itself with the Samsung deal -- but it's still unclear if BES can grow fast enough to become a meaningful contributor to its top line.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.