BlackBerry CEO details survival strategy

BlackBerry's new chief offered up specifics on how he plans to turn around the beleaguered smartphone maker after the company reports worse-than-expected earnings.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
6 min read
The Z30's keyboard is both comfortable and fast. Sarah Tew/CNET

BlackBerry is not going down without a fight.

There's no question that the smartphone maker is in trouble. The company has been losing customers and money for some time now. And this third fiscal quarter was no different than previous quarters in that regard. In fact, the losses were a bit steeper than Wall Street had expected.

The company is still bleeding customers, especially in the high-end device market. In total, sales of its BlackBerry smartphones were off about 50 percent in the quarter. And with about 75 percent of those sales for lower-end BlackBerry 7 units, it doesn't look good for the company's higher-end business that's using the newly launched BlackBerry 10 software.

But John Chen, the company's newly appointed CEO, says he has a plan. And during the conference call Friday to discuss the latest earnings, he laid out what that plan entails, which largely consists of focusing on areas of the business where BlackBerry has always been strong, such as enterprise security and messaging, while minimizing risk and exposure to parts of the business that have performed poorly, such as smartphones.

"It's important to understand that BlackBerry has an enormous amount of assets," he said. "We have committed devoted people who want to do the right thing for the company and customers. The market has spoken, and we have have listened."

The strategy

In the short term, Chen, who has only been on the job 45 days, said he is trying to stabilize the company's losses and preserve its cash to focus on parts of the business it can grow in the future. He said he has broken the company down into four major areas.

  • Devices
  • Enterprise software
  • BlackBerry Messenger
  • QNX and machine-to-machine

On the device front, a big component of the company's new strategy is a partnership announced today with device manufacturer Foxconn, which will help design and manage all new BlackBerry devices going forward. BlackBerry will continue to design the software, which will be based on BlackBerry 10, while Foxconn will design the hardware.

Chen said these new devices will primarily be sold in developing countries, a market where BlackBerry continues to thrive. But it's also a market with thin profit margins, requiring very efficient management of inventory and supplies.

"We now have someone with a world-class supply chain that can manage the costs and design of our products," he said. "That removes our exposure to inventory."

The first product the two companies will build together is expected to hit the market in March or April, he said. And it is being designed for Indonesia, with other products for other developing markets to follow. Chen admitted that the company's device strategy is simply to keep its head above water, and he didn't rule out the possibility of eventually abandoning devices altogether.

"I will be happy to break even on a low-margin device business," he said. "That will help monetize our software services and allow us to provide an end-to-end solution. The jury is still out on this. I have been working the past 45 days with Foxconn on this deal to make sure we don't lose money from the device business."

He added, "This is an ongoing conversation. I don't have any preconceived ideas that this has to be done one way or another."

For now, BlackBerry will not be building high-end smartphones for the North American consumer smartphone market. Instead, Chen said that the company will focus device development in this market on enterprise customers.

Focusing on strengths

This leads to the next big product focus for BlackBerry: enterprise. Chen, who has helped turn around several companies, said he is most comfortable in the enterprise setting already. And lucky for him, business customers are where BlackBerry has always found its strength. The new strategy will put a greater emphasis on building up the company's end-to-end security and productivity software tools for businesses.

"We have great technology in this area," he said. "But putting the packaging around it to go to market is our weakness. And I will work on that. I see an opportunity to offer more secure layering of technology and better integration of services, such as BBM."

One of the biggest problems that BlackBerry faces today is the fact that many of its largest enterprise customers are already starting to abandon the company and its BlackBerry Enterprise Servers. Chen said he realizes the challenge the company faces in retaining these customers and admitted that it won't be able to save every account. In order to focus, he said he is building a sales force that will target "regulated verticals." These are likely to include government agencies, banks, health care, and other industries where regulation and security auditing are necessary.

BlackBerry interim CEO John Chen
BlackBerry interim CEO John Chen. Bloomberg video/Screenshot by CNET

"We are the only company with an end-to-end security, handset, messaging, and machine-to-machine business," he said.

Chen said the company will integrate its productivity and messaging tools into its secure infrastructure in a way that its competitors will not be able to do. But competition has been increasing in this arena. And Chen admitted the company may not be able to fend off its attackers.

"It's not a slam dunk," he said. "But it's worth a fight."

On the bright side, BlackBerry's recent earnings indicate that at least some of its customers are willing to take a gamble on the new BlackBerry Enterprise Service 10 technology. The company said that it has increased the number of trials and installations of BES10 to 30,000 organizations.

"That is a significant number, although BlackBerry is not realizing any revenues from this yet as many are free trials," said research analyst Jack Gold. "Nevertheless, the fact so many organizations are at least willing to try BES10 indicates that BlackBerry has a good possibility of converting many of them to paying customers."

Chen also noted the company's strength in messaging with its BlackBerry Messaging platform, which is now available on some Google Android and Apple iOS devices. Chen said that 60 percent of the service's active users are using it daily, which is a big deal considering some other apps, like Instagram, have about 50 percent of their user base using the app every day, he said.

He added that many BBM users are also using the app longer, about 90 minutes per day. But he said the challenge is finding a way to monetize this activity. He said that he looks at this division within BlackBerry as a startup, and he plans on investing and building out this part of the business. He said he expects to see revenue in messaging to really kick in around fiscal year 2016.

Leveraging QNX

The final segment of the business he discussed is the QNX software business, which Chen called the crowned jewel of BlackBerry. This software is already being used for machine-to-machine communication by more than 40 partners in the automotive industry. And Chen said he plans to expand this business into other verticals beyond cars.

"Anyone following this industry knows that the Internet-of-all-things and mobile is the next frontier," he said. "The good news is we are already in that space."

The problem again is making money from this. To date, QNX represents only a fraction of revenue for BlackBerry. And analysts don't see this contributing much to the company's bottom line until much later. Still, it is an opportunity for BlackBerry's future.

Chen said he is focused on these and other opportunities to grow the business. He said the company plans to expand its software reach to devices beyond BlackBerry. While he wouldn't offer specifics, he said he was already cooking up partnership opportunities with Google Android and Apple iOS to get the BlackBerry software on those platforms. But he said these deals will take time. And he expects to know more in a couple of quarters.

For now, Chen said the company is ready to move forward. He has done some significant house-cleaning in the executive suite, and he feels the company is able to move more nimbly as it takes on its new strategy. And with the latest infusion of cash, he believes the company has a much longer runway to work on its turnaround. He also said that a lot of talented people have already contacted him to work at BlackBerry.

"A lot of people find us intriguing right now," he laughed. "I've done a number of these before. This one is a great challenge. But it will do well."

He added, "We're no longer worrying whether we will be around. Now, we're ready to fight back."