Canadian smartphone maker BlackBerry (BBRY +13.17%) has been on the ropes for a long time. For nearly two years, CEO John Chen has been trying to put together a turnaround for the company after Thorsten Heins failed quickly and miserably to do so. BlackBerry has incredible strengths in software and security, while its hardware operations continue to drag on results.
We have to ask the obvious question: Will BlackBerry ever give up on hardware?
You could if you tried
BlackBerry has historical roots in smartphone hardware, pioneering the physical keyboards that remain a differentiating feature even today. Throughout his tenure, Chen has remained publicly committed to the hardware business. He has made sure to discredit any report suggesting otherwise, but that steadfast resolve is not necessarily a good thing.
Just this month, Chen reiterated to Business Insider that he eventually plans on making BlackBerry's hardware operations profitable again. It is no surprise then that BlackBerry just announced another round of layoffs in the hardware segment. His rationale for sticking with hardware was that even though BlackBerry can make other smartphones secure, he can make a BlackBerry device even more secure:
I can only make iPhone so much more secure, but I can't make it as secure as a BlackBerry device. If you look at the US Army, they're still rolling out all BlackBerry. If I tell them there are no more phones, I lose that account. The question is how do you make phones profitable at the volume those people represent?
That may be true, but it is also probably true that if BlackBerry really devoted all of its resources into security-oriented software and services, it could make those Apple iPhones and Google Android devices just as secure.
You cannot turn a company around without breaking a few eggs
Even now, hardware represents a significant portion of BlackBerry revenue, 44% of fiscal 2014 sales to be precise. The remainder was service and software. However, gross margin for the hardware segment leaves a lot to be desired, especially when compared to the lucrative software and services segment.
Fiscal years shown. Source: Annual Report
To be sure, it is a tough call to kill a division that comprises nearly half of revenue. But tough calls are par for the course when you are trying to engineer a turnaround for a company struggling to stay relevant. Its most promising product is no longer a smartphone but the software and security that it brings to the table.
Catch-22
BlackBerry may be holding on to its hardware legacy purely for the sake of its loyal but shrinking base of hardcore fans. Meanwhile, the company has also made it clear that it is focusing efforts on enterprise customers, while placing less emphasis on the consumer market. You cannot have it both ways.
In the first quarter of 2015, BlackBerry market share shriveled to a measly 0.3%. That is down from 6.3% during the same quarter of 2012. What is BlackBerry really chasing after in the consumer market at this point? If it is a matter of pride, BlackBerry needs to admit defeat and give up hardware once and for all. Investors will thank it for doing so.
