Since taking over as CEO of BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY), John Chen has overseen a big refocusing effort at the company, one that shifts the focus from hardware to software.

But that doesn’t mean BlackBerry is giving up on handsets just yet. While the company’s market share is less than 1%, it has introduced three new devices—the Leap, Passport and Classic—since September, and more are on the way. Mr. Chen has also sounded very confident, saying recently that he expects the handset business to be profitable once again.

So, that brings up some very important questions. Why are handsets so important to BlackBerry? Will Mr. Chen’s prediction come true? And what does this mean for the company? Below we take a look.

The handset business today

It’s no secret just how far BlackBerry’s handset business has fallen. Back in 2008, it was the runaway leader, but today it accounts for just 0.4% of the market. In the most recent fiscal year, handset volume decreased by nearly 50%, and revenue from hardware declined by more than 60%. Further declines are expected.

Fortunately for shareholders, there have been some major costs taken out of the hardware business. Most notably, manufacturing has been outsourced to Taiwanese giant Foxconn, which relieves BlackBerry of any inventory risk. So, there will be no more billion dollar inventory write-downs, no matter how poorly the company’s devices sell.

Why are handsets still important?

Many investors still wonder why BlackBerry makes handsets at all. When asked about this, Mr. Chen used one of BlackBerry’s biggest clients as an example:

“If you look at the U.S. Army, they’re still rolling out all BlackBerry. If I tell them there are no more phones, I lose that account. The question is, how do you make phones profitable at the volume those people represent?”

In other words, hardware can be thought of as the gateway for software. So, if no one buys a BlackBerry phone, then the company’s software business will suffer too.

What does the future hold?

BlackBerry makes very little money from its hardware business, and in order for Mr. Chen to turn this around, the division will have to start growing again.

This is a very tough goal. Clearly BlackBerry’s brand is still damaged, despite Mr. Chen’s best efforts, and that’s hurting smartphone sales. And when smartphone sales decline, that’s bad for the brand, creating a vicious cycle that’s almost impossible to break.

Mr. Chen’s goal for the hardware division seems a long way off. And if sales are really disappointing in the interim, then BlackBerry will likely face increasing pressure to sell itself. So, the company’s hardware division may never stop shrinking.

In any case, one thing is clear: Mr. Chen is fighting an uphill battle. What else is new?

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Fool contributor Benjamin Sinclair has no position in any stocks mentioned.