BlackBerry on the brink as new boss tries to reinvent smartphone firm

This month Bloomberg Businessweek magazine's cover showed a range of archaeological objects – a flint arrowhead, a skull – and a BlackBerry handset. The label? "Relic".

On Friday BlackBerry's interim chief executive John Chen outlined a new strategy for the Canadian company in which he acknowledged that making smartphones was a thing of the past. Instead, the company will focus on intangible services such as offering cyber-security for businesses and not making physical handsets.

Making smartphones has not been a good business for anyone who isn't Apple and Samsung recently, as they have squeezed the profits out of the rest of the industry. BlackBerry has been crushed. On Friday it announced a loss of $4.4bn (£2.7bn) on revenues of just $1.2bn; only a tax rebate of $624m saved its net figures from being worse.

Those three months to the end of November marked a turning point: for the first time, BlackBerry now gets more money – 53% of revenues – from selling "services" such as sending data including email and web pages, than it does from selling handsets, which generated 40%. Software made up the other 7%.

But that has come as the company's revenues have shrunk to levels smaller than at any time since May 2007, and the number of phones shipped, 1.9m, is the smallest since December 2006. BlackBerry, whose founders laughed at the iPhone's lack of a keyboard, is out of the smartphone race. In future Foxconn, which makes the iPhone, will co-design and manufacture BlackBerrys too, and hold the stock. BlackBerry will effectively become a reseller of its own phones.

"The smartphone business is brutal," says Kevin Restivo, global smartphone analyst at the research company IDC. "It's one where the big players – Samsung, Apple, and a few Chinese companies – are going to have success, and the others are scratching for crumbs."

Andy Perkins, an analyst at Société Générale, told Bloomberg: "At some point it becomes uneconomic to make handsets in such small quantities."

Chen is a turnaround artist. He was brought in to the software company Sybase, where he executed a successful reorganisation. Since taking over 45 days ago (following the ejection by the board of former chief executive Thorsten Heins) he has overseen a number of departures of existing senior executives, and hired some former colleagues. The obvious conclusion is that he is reshaping BlackBerry as a services and software company.

Unlike other struggling smartphone makers, BlackBerry can fall back on tens of millions of customers in large businesses, who rely on the security of its products. Chan said that 80% of Blackberry users were business customers. That could be anywhere up to 50 million users worldwide, offering a substantial base for rebuilding any corporation, even the struggling BlackBerry.

But the data also confirmed that BB10, the operating system launched in January by Heins, has been a flop. Since March, BlackBerry's customers have bought a total of around 17m phones, but only 5.6m have been BB10 devices.

The new products have fared poorly with consumers and the large businesses that rely on BlackBerry. Consumers have been turned off because the BB10 functions differently from the old BB7 model, while businesses have backed away because BB10 devices can't be hooked up to the older BlackBerry Enterprise Server (BES) systems so many big customers use.

So while consumers have dumped them in favour of other makes, BlackBerry-using businesses have taken one of two paths: either sourcing old BB7 handsets to keep their existing users happy, or abandoning BlackBerry altogether. Even Goldman Sachs, once a BlackBerry fortress, has begun letting some executives use iPhones for email, a move that would have been unthinkable a few years ago.

Chen has an answer to both. For consumers, BlackBerry will try to somehow make money from the millions of people who have downloaded the BBM messaging software and installed it on to iPhones and Android phones. "Revenues might come from a per-user per-month model, or rolling out advertising," he said on Friday. "We're a long way from knowing how to do it."

For businesses he will offer "mobile device management" software that will be able to control not just BlackBerrys, but also iPhones and Android phones. But there are plenty of rivals there, and it's not a big business – worth only about $560m (£343m) this year globally for all vendors, and growing at 12% annually, according to ABI Research. Even if a reshaped BlackBerry captures more than half of that, it would still look tiny compared to what it was.

That means, says IDC's Restivo, that "BlackBerry's not out of the woods yet." He explains: "First and foremost, Chen needs to figure out how to make money from products that have a significant customer base and are growing. The handset business isn't growing. And how they're going to generate significant revenue from BES and BBM, and create a company driven by those two parallel paths – right now, the path isn't clear."

Powered by article was written by Charles Arthur, for The Observer on Saturday 21st December 2013 09.17 Europe/London © Guardian News and Media Limited 2010


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