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BlackBerry could see software-only future if new Android can’t keep up

CEO John Chen says there is another potential outcome: DTEK shows there is a market for a secured version of Android.


Is BlackBerry Ltd. really prepared to stop making BlackBerrys?

That's the biggest question as the company prepares to unveil its latest quarterly earnings on Wednesday. It's yet another moment of truth for the former giant from Waterloo, Ont., and comes just three years after the company renamed itself after its signature device. The reason the issue is top of mind? Chief executive officer John Chen put it there.

"If by September, I couldn't find a way to get [profitability in handsets], then I need to seriously consider being a software company only," he told CNBC in April. But then the company launched a new handset in August, the DTEK50, which is a rebranded Alcatel Idol 4 with BlackBerry's more-secure version of the Android mobile operating system. In recent weeks, there have been reports that suggest the company has another, slightly pricier, new Android phone in the pipeline, to be called the DTEK60. And Mr. Chen also told reporters in April, "I truly believe we're very close to break-even or profitability."

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Why then, with all this contradictory evidence, are analysts setting the stage for a post-hardware BlackBerry. Stephen Li at Raymond James wrote a note last week that "scrubbed" hardware revenue from the company. In that software-only model, Mr. Li wrote: "We like what we see: 80-per-cent recurring revenues, 15-per-cent organic growth and 25-per-cent, 30-per-cent EBITDA margin a couple years out.

"Worst case, DTEK flops and BBRY becomes software-only. Another possible outcome, in our view, is that DTEK shows there is a market for a secured version of Android. Now, think of the potential of licensing a "secured version" to Android manufacturers and have their device enterprise ready."

Indeed, there is reason to believe Mr. Chen's September deadline on hardware profitability isn't exactly set in stone.

In 2014, he announced that he was going to double the company's annual software revenue from $250-million (U.S.) to $500-million. In subsequent quarters when pressed on the progress of the target, he tended to express frustration at ever having spoken the number aloud. Ultimately, the company included both one-off software licensing revenue and the so-called "inorganic" growth numbers from its acquisition of Good Technology to meet the goal, but Mr. Chen declared victory all the same. "There were a number of doubters when we first set this goal," he said back in April. Mr. Chen is three years into a turnaround that he said on Monday was only two-thirds complete and the wags at Seeking Alpha have apparently taken to calling him John "Next Quarter" Chen because he does tend to ask for more time to hit markers that he himself sets.

"This whole expectation setting things, and the shareholder communication, it's tricky. Really tricky," says Jim Fisher, professor emeritus and former vice-dean of the Rotman School of Management at the University of Toronto. "One of the problems is it's asymmetrical: If he sets some milestone and if he falls a penny short, or six units short, he just gets stomped on. If he meets or exceeds it by some amount, it's kind of ignored. And if he way overshoots it, people say 'oh he was just setting us up.'"

Mr. Fisher, who recently published The Thoughtful Leader – A Model of Integrated Leadership, says public company CEOs who have been around as long as Mr. Chen are well aware of this asymmetry of announcements and expectations.

Mr. Chen's habit of suggesting "I shouldn't tell you this," or "I'm going to get in trouble for saying this" is all part of the crafty strategic communications game.

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