BlackBerry’s unhappy valley

Today, BlackBerry officially launched its latest handset, the BlackBerry Passport. I attended the launch event, because I was keen to see the new, John Chen-led BlackBerry up close and hear what they had to say first hand. So many of the people who read my work are entirely focused on the devices business, and have long since written BlackBerry off as a company because of the performance of its handset business. But my own view is more nuanced. I’ve written about BlackBerry extensively in the past, mostly while with my former employer, Ovum, although one of my earliest posts on this blog was about BlackBerry. But it’s been quite a while, so I thought I’d give an update on my thoughts on the company, using today’s event as a jumping-off point.

BlackBerry was never just about devices

There’s no doubt that BlackBerry has fallen a long way from its peak. Beating up on the company on this point is fruitless — it’s a fact that it’s a shadow of its former self when it comes to its handset sales, which formed the core of the company’s business for many years. Revenue from devices made up the majority of the company’s revenues very consistently from 2003 to 2013, and for much of that time it made up well over 70% (and sometimes over 80%) of the company’s revenues. Thus, in many people’s minds, BlackBerry is first and foremost a handset company, and given the decline in its fortunes in that area, they assume that it’s done for. The company’s device revenues peaked at around $16.5 billion annually in 2013 but have fallen to under $2 billion annually.

Were BlackBerry to have been simply a handset sales company like HTC or Kyocera, this decline would have been terminal (no pun intended). But BlackBerry has always been more than just a devices company. Even when its revenues were dominated by handsets, it derived a significant proportion from service fees associated with BlackBerry subscriptions. Those were directly tied to the number of BlackBerry devices sold, in that both revenue streams derived from the same source. So, to the extent that the number of BlackBerry devices has plummeted, its service revenues have fallen too, from a peak of over $4 billion per year to under $2.5 billion — not quite as dramatic, but still a fairly sharp decline. However, that business, and BlackBerry’s broader foothold in the enterprise, has been its salvation even as device sales have fallen off a cliff.

Current status: a valley between two peaks

As such, the way I like to think about BlackBerry at this point in its history is illustrated in the diagram below:

BlackBerry Unhappy Valley

In case it isn’t clear, the peak on the left represents a mountain, one which BlackBerry slowly and steadily climbed during the period roughly from 2000 to 2010. However, starting in 2010, it reached the summit and quickly found itself falling down the much steeper other side of the mountain, and now lies in the valley to the right of it. On the other side of that valley is another peak, but its summit is shrouded by clouds, and it’s not yet clear how high it is, and therefore whether it approaches anything like the height of the summit BlackBerry previously scaled.

BlackBerry’s next peak — not about devices

What does this other peak represent? It represents the sum of the various businesses BlackBerry is now pursuing, predominantly these three:

  • Messaging, with the BlackBerry Messenger platform at its core
  • M2M, with the QNX platform at its core
  • Enterprise services, with the BlackBerry Enterprise Service at its core.

Note that devices don’t appear on that list, and that reflects a huge change from BlackBerry’s past. Whereas devices were once the core of its business, with services and software ancillary to them, the situation has now reversed to the extent that BlackBerry’s future lies in software and services, with hardware ancillary to those things. For now at least, devices still sit at the core of BlackBerry’s business, in that they’re the focal point for two of the three new businesses — BBM’s base is still largely tied to BlackBerry devices, and BES is too. However, both of those things can now exist separate from BlackBerry handsets as well, with BBM available as a cross-platform app, and BES now serving as a device-agnostic device management platform.

The old question: will BlackBerry make it out of the valley?

For some time, as I outlined in that earlier post on BlackBerry, my biggest question was whether BlackBerry could even make it out of the valley at all. It was losing money and burning cash rapidly, and there was no sign that its new revenue streams would be enough to offset the decline and cash burn from the devices business. The height of the next peak was immaterial because it was not yet clear that BlackBerry would successfully traverse the valley floor. The big question was whether BlackBerry could survive at all.

With the influx of cash the company received from Fairfax after the failure of its acquisition attempt, BlackBerry’s short-term future was secured, allowing it to begin to look up at the peak on the other side of the valley. At the same time, the cost-cutting plan put in place by Chen’s predecessor Thorsten Heins has been hugely important in right-sizing BlackBerry’s cost base for the shrunken revenue line it now faces. Without that cost cutting it’s unlikely even a significant investment from an outside firm would have saved the company. Though still unprofitable on an underlying basis, the company’s finances now are in much better shape than they were a few quarters ago and it’s no longer looking like it’s in imminent danger of going under.

The new question: how high is that next peak?

In my previous post on the company, I posed a question for John Chen: how much revenue does BlackBerry expect to generate from its new revenue streams? I proceeded to estimate the potential from BlackBerry’s three new businesses, but it was tough to do because its plans for those three areas were still unclear at that point. I also asked it somewhat rhetorically because it was already clear that they would come nowhere near reaching the heights of BlackBerry’s device sales at its peak. Having cut costs significantly, however, BlackBerry no longer needs to reach those heights again in the near term. Rather, it needs to transform its business such that it can pursue those new opportunities on a sustainable basis.

None of them are generating significant revenue for the company yet, as evidenced by the fact the company hasn’t begun breaking out results from those businesses in its financials. But Chen has clearly identified the areas he wants to go after, and has put a new leader clearly in charge of one with the biggest short-term potential: M2M. But with the company on sounder financial footing, it has time to get things right and to build up those new revenue streams slowly but surely. Though less urgent, the question still remains: how big can these businesses grow? Will BlackBerry ever approach its past size in terms of revenue and profits? I think that’s extremely unlikely in the short term, but it is tapping into three hot markets with significant potential for growth in the long term.

The role of devices

I’ve so far largely ignored the role of devices in BlackBerry’s future, which may seem ironic in a post triggered by the company’s latest handset launch. But the fact is that devices will be much less central to BlackBerry’s future than they were to its past. And the devices business will be very much smaller, serving niche markets in government and highly-regulated private firms, but not the mass market of smartphone users it once served. The company sold through just over two and a half million smartphones in the last reported quarter, down from a peak of 14.5 million in 2011. It will never again approach anything like that scale. But its sales will likely stabilize soon and may even start to grow again slightly as it refocuses on its core base of customers and starts to serve them better.

Outside of a handful of markets (including Indonesia and South Africa among others) BlackBerry will likely never again achieve mass-market consumer appeal with its handsets. But I think it understands that now, and has to some extent stopped trying to regain that position. It knows its role, and is focused on it. And more importantly that role is a good fit with the enterprise services business it needs to grow around it. But BBM and BlackBerry’s M2M businesses need to be able to stand alone, separate and independent of the devices business, if they are ever to drive significant revenue for BlackBerry.

Having said that, the devices business is still critical for two reasons, even though it won’t drive growth for the company:

  • Providing a substantial base of revenues while the company is in transition. Yes, it’s a shadow of its former self, and now represents less than half the company’s revenues, but it’s still a substantial revenue stream and very important for that reason
  • Although the long term for BlackBerry has to be independent of its device business, in the short term both its MDM business and BBM are heavily dependent on BlackBerry devices, and until it can built up the device-independent messaging and MDM businesses, this base is critical as a starting point.

All that is why the Passport makes a lot of sense. It’s a great fit for BlackBerry’s newly-focused target market — productivity-centric users who mostly use the device for work. It makes several advancements over previous BlackBerry devices and further sets itself apart from competing devices on key fronts. For example, the BlackBerry Assistant (the company’s Siri / Google Now competitor) has access to corporate data which might be hidden in containers on iOS and Android. This kind of thing is crucial if BlackBerry is to appeal to enterprise end users and not just IT departments. And importantly, it’s long since abandoned its ambitions of competing to the consumer market as a whole.