BlackBerry doubling down on future of connected cars with $40-million from Ottawa

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Ten years ago, BlackBerry Ltd. co-founder Mike Lazaridis e-mailed fellow co-CEO Jim Balsillie to say, “I have seen the future.” He was talking about an Ottawa software company called QNX Software Systems, and he thought that buying the firm the following year would vault his company back into the lead of the smartphone race.

Mr. Lazaridis was right that QNX was the future, but for reasons he couldn’t have imagined. With the recent sprouting of the autonomous vehicle market, QNX – a provider of software tools used in 120 million vehicles – has positioned BlackBerry to become something it hasn’t been for years: a growing company.

On Friday, BlackBerry said it was doubling down on the future of connected cars, announcing plans to spend $310.5-million – including $40-million from the federal government – to expand its QNX platform by developing new automated control systems, improved in-vehicle communications, and invest in vehicle safety and security by expanding its advanced driver-assistance system. The move will add 800 permanent jobs over the next decade.

After years of declining revenues owing to its vaporizing smartphone business, BlackBerry is now at a pivotal moment. The company generated no revenues from smartphone sales in the third quarter ended Nov. 30 and fees from older devices, which once amounted to hundreds of millions of dollars per quarter, accounted for just 4 per cent of its US$226-million total revenues. That means the smartphone business is no longer a drag on sales.

Meanwhile, its BlackBerry Technology Solutions (BTS) division, anchored by QNX, posted US$53-million in revenues – or 23 per cent of the total – up 23 per cent year-over-year. It’s the third largest division at BlackBerry, but the larger enterprise software and services unit is in decline, while its “licensing, intellectual property and other” division posts unpredictable results that are dependent on deals struck with third parties to pay for its IP.

QNX, meanwhile, will continue to post 25 per cent year-over-year growth and “it is entirely probable” overall annual revenue growth could eventually reach 20 per cent on the continued strength of QNX’s business, BlackBerry CEO John Chen said in an interview.

QNX started out in the early 1980s building a program that served as the base for powerful systems including nuclear power plants, credit card authorizations and air traffic control. Stereo maker Harman International Industries bought control in 2004, and under its ownership QNX became a leading supplier of digital entertainment system software for high-end cars.

After buying QNX, Mr. Lazaridis asked the team to rebuild the BlackBerry operating system for its smartphones and short-lived PlayBook tablet. Then, with BlackBerry device sales in free fall, “the world changed” in 2014 as the race to build autonomous cars kicked off, said John Wall, BlackBerry senior vice-president and BTS co-head.

As the automobile’s future becomes increasingly determined by software innovations inside the vehicle, QNX is well positioned as an established and certified supplier of “highly stable and secure” software for auto makers, Macquarie Research analyst Gus Papageorgiou said. Further innovations will see the number of electronic control units in vehicles decrease, taking complexity, weight and cost out of car software operating systems and leaving “a small handful of high-performance computing platforms” supplying in-car platforms. “I think QNX will be the Microsoft Office of the new world,” he said. “It has a chance of being the core operating system of the connected car.”

That could translate into improved results for BlackBerry. As it has expanded its offerings for in-vehicle software systems, QNX’s potential market has expanded by five to 10 times, Mr. Wall said. The company now generates between $3 and $5 in revenue for each of the 30 million vehicles shipping this year that feature its software. Mr. Papageorgiou estimated that could rise to $20 as BlackBerry’s expands its offerings to include such advanced driver assistance features as blind-spot detection, with further increases as it expands its market penetration.