BlackBerry bets on Android's apps to buoy new Priv

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BlackBerry Ltd. is betting its handset business on the smartphone world's bestselling operating system for one simple reason: apps.

Following the release of earnings that missed expectations, chief executive John Chen admitted on Friday that an Android phone with access to the more than one million apps in the Google Play Store has been in the works for a year – and it's going to be called the Priv (which rhymes with "give") because of BlackBerry's legacy of "privacy," Mr. Chen said. Formerly code-named the Venice, it's a slider phone with a curved screen that will be selling for a premium price.

But it won't be as secure as a BB10 handset, a fact Mr. Chen confirmed on Friday, saying further security improvements to the Priv would come in the new year. For a company that has prided itself on bulletproof security since its inception, the move could be a letdown for some, considering Mr. Chen's pledge that the company would not make an Android device unless it could "secure" the platform.

The announcement also marks a further commitment to the handset business, an area analysts and Mr. Chen himself have questioned whether the company should pull out of altogether.

To break even in BlackBerry's handset business, which in the second quarter shipped only 800,000 units, Mr. Chen said he would have to sell five million phones in fiscal year 2016. Give or take a couple hundred thousand units, that means he's making a bullish bet the Priv will sell more than one million units in the next two quarters.

"The device business, I would say, is not dead yet but in bad shape. Eight hundred thousand units is really nothing," said John Butler, senior handsets analyst at Bloomberg Intelligence.

Set for release later in the fall, BlackBerry's Priv will enter a competitive market for high-end smartphones already saturated with new offerings from Apple Inc., whose iPhone 6s went on sale Sept. 19, and Samsung, whose Galaxy S6 hit shelves earlier this year. Meanwhile, cheaper phones, such as those made by China's ZTE and Huawei, are gaining ground.

While refusing to reveal any details on specs, price or carrier partners until October at the earliest, Mr. Chen confirmed the Priv won't be swimming with those fish.

"I won't go to the very low-end consumer, because I can't compete with Huawei and LG" on price, he said during a roundtable with reporters on Friday.

Mr. Chen's first attempt to fix the app deficit in the company's phones came in 2014 when the large, square-shaped Passport shipped loaded with Amazon's app store (and its 250,000 apps). He confirmed on Friday that strategy relied on the online retailer achieving success with its own Fire Phone.

"I was dying for Amazon, for it to be successful with their phone," the CEO said Friday. "I figured that if they get good traction the apps will come." Instead, sales of the Fire Phone flopped, prompting the online retailer to discontinue the device, and BlackBerry's plan B was Android, where developers offer well over a million applications.

"I'm going to eliminate the apps as an excuse not to buy our phone," Mr. Chen said.

As for why he's ready to reveal the existence of the phone now, he says the decision came to him Thursday night.

"The reason why I jumped the gun today is because it's leaking everywhere," an exasperated Mr. Chen told analysts on an early morning conference call. Given the company had to face the markets with weak earnings, and the dozens of news reports and channel partners posting videos of the device, there was no option to try keeping it secret.

BlackBerry reported $51-million (U.S.) of net income for the three months ended Aug. 29, an improvement on the net loss of $207-million a year ago, and positive free cash flow of $100-million.

But the Waterloo, Ont.-based company fell short of adjusted expectations with a loss of $66-million or 13 cents per share – deeper than the 9 cents per share analysts had expected. Revenue dropped 46 per cent to $490-million, well below analyst estimates of $611-million. Shares fell 7.7 per cent on the news. BMO Nesbitt Burns analyst Tim Long lowered his price target on the stock to $7 from $9.

Some analysts have questioned whether the flip to Android means that BB10, the platform BlackBerry launched in 2013 to run on all of its new handsets, is dead. Mr. Chen refuted that notion, however, saying there are too many high-profile government and corporate clients on BB10 to contemplate that immediately.

Mr. Chen was clear the amount of hardening that BlackBerry does, from chipsets to the Linux kernel and on down, requires a lot of help from Google – which they are getting – to make an Android phone as secure as a BB10. That said, the Priv will have security features no BlackBerry or Android has had before.

"We will have technology that will help the individual know if they have been snooped, attacked, compromised," said Mr. Chen, adding on screen notifications will "measure your vulnerability … and individuals will be able to tell if anything is happening to them."

He also admitted there was still a great amount of debate within BlackBerry about going Android.

"When this first leaked I thought the Crackberry people was going to send an assassin to kill me," he quipped. "One thing is good for our people: We have some really committed diehards. I respect that there's a lot of heritage here, a lot of pride. If the math doesn't add up, the math doesn't add up. We could keep the pride and die hungry or we can eat well and not so proud, maybe. So I chose to eat well. It's good for the company to continue to have a shot at building handsets."

Mr. Chen is now pegging the fruits of his turnaround plan to show up largely in the fourth quarter of 2016. Both the software and services revenue, which was up on the year and on the quarter, are growing and should help the company hit $500-million in software revenue by the end of 2016, he said.

Helping that along will be new business from Good Technology and AtHoc, purchased recently for approximately $675-million, revenue from which should flow in at the end of the year.

"We believe management will come within reach of the $500-million target for software revenue for [fiscal 2016], but only with a lot of help from M&A," analyst Mr. Long wrote in a note Friday.

The most revealing exchange on the software strategy came toward the end of the morning's analyst call when Mr. Chen was asked why Enterprise Mobility Management (EMM) space is not growing faster. In the second quarter Mr. Chen said a lot of software growth came from BlackBerry's EMM platform BES 12, but it hasn't been lighting the world on fire. Mr. Chen's argument is that analysts are counting the wrong numbers.

"The number of licences combined in all the [EMM] players are about 10 per cent of the mobile devices out there, there are 90 per cent open space [the potential customer base], and everybody thinks about it that way," he said. "I think about it differently; I think about endpoints … this is why we are spending so much money on IOT."

Most of the estimates for IOT (the Internet of Things) put the "endpoints" of smart devices in the tens of billions. Mr. Chen says that it's possible some of the competitors in EMM might some day give the platform away for free, which would undermine BES (BlackBerry Enterprise Server). That's why his buying spree has been focused on those applications such as WatchDox, AtHoc, Movirtu and Secusmart.

"We believe the customers will pay very little for the base platform, but they will pay a lot for the applications that run on the platform. I don't know whether that makes sense to you, [but] it is our plan. Just based on the EMM strategy it may be okay for a little while, but it's not going to be a long-term thing."

That's BlackBerry's future, and Mr. Chen also teased "some very exciting products we're developing in house" that address IOT.