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BlackBerry Ltd.: Will 2016 Be the Year it Finally Gives Up on Smartphones?

It’s been a mixed year for BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY).

The company has had moderate success releasing some new smartphone models. The Passport is a nice phone, and the recently released Priv runs on an Android platform, the world’s most popular mobile operating system. A big beef from BlackBerry users has been the lack of apps available for their devices, and this is simply because developers have no interest in making apps for an operating system with such a small market share. The Priv solves this problem.

Still, the company is still a long way from being anything more than a bit player in the massive global smartphone market. During the company’s most recent quarter, it recorded revenue from approximately 800,000 devices. This should get a nice spike during the Christmas quarter, but it still means an improvement is needed to achieve CEO John Chen’s goal of selling five million phones per year.

According to Chen, BlackBerry will likely leave the handset business for good if it can’t hit that moderate goal. Projections are that nearly 1.5 billion smartphones will be sold worldwide in 2016. BlackBerry would capture just 0.33% of the market if it were to hit its five million goal. That pales in comparison to the big players in the sector. Heck, Microsoft is a distant third in the smartphone market, yet it still has 2.6% of the market, a full eight times higher than BlackBerry’s share.

Needless to say, BlackBerry has a long climb back to respectability, never mind getting back to a dominant position. Can it get back to having even a small slice of the smartphone market, improving on its tiny share?

An action plan

BlackBerry has two niches. One is its operating system and the other is its physical keyboards; BlackBerry is the only handset maker who takes the physical keyboard seriously.

I believe the BlackBerry operating system itself is practically worthless. It suffers from the app issue I mentioned earlier, and it doesn’t hold much of an advantage over Android or iOS for the average user. The end experience for users is good for each of those systems. There’s nothing truly extraordinary about BlackBerry’s OS.

The physical keyboard niche is much more interesting. If BlackBerry wanted to get serious about producing Android phones with physical keyboards, I think there’s a market for them. There’s a certain segment of the population that loves a physical keyboard. It’s not a big market, but it also has zero competition.

BlackBerry is telling investors the Priv is selling out of stores, which is making bulls excited. Bears are quick to point out the company also said other models sold out, but still didn’t report great overall sales. It’s still possible that the Priv is a moderate success, which is all the company really needs to show investors that it can compete in the crowded Android market.

Don’t bet on phones saving BlackBerry

BlackBerry may have a strong enough 2016 to be able to save its smartphone division. Or it might finally signal the death of that part of the business. It’s tough to predict without seeing Priv sales data.

What I can predict with more confidence is the growth in software. BlackBerry’s future is in software, particularly the Internet of Things. There’s potential for its software to go into dozens of smart items. It already has captured a large part of the auto market; it makes the software that runs in-dash entertainment systems.

During its most recent quarter, the company reported software sales that were up 19% compared with the same period last year. And that was before it spent more than US$500 million on two acquisitions to bolster its software division.

During the latest quarter, gross margins for the whole company were 37.8%. Gross margins for software are approximately 80%. With software sales expected to surpass US$500 million in 2016 and those kinds of margins, it’s obvious where BlackBerry’s future lies.

BlackBerry will still likely try to sell phones in 2016. It might go well and it might not. Either way, investors shouldn’t think handsets are the key to BlackBerry’s future. Software is the key, and not the kind that runs smartphones either.

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Fool contributor Nelson Smith owns shares of BlackBerry.

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