Just How Far Can QNX Take BlackBerry Ltd.?

The QNX operating system has been a rare success for BlackBerry Ltd. (TSX:BB)(Nasdaq:BBRY). But competitors are closing in quickly.

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Not long after taking over as CEO of BlackBerry Ltd. (TSX:BB)(Nasdaq:BBRY), John Chen referred to QNX as “probably one of the crown jewels” of the company. But what exactly is QNX, and what does it mean to BlackBerry? Below we take a look.

A big opportunity in cars alone

Back in 2010, BlackBerry bought QNX from Harman International Industries Inc. for roughly US$200 million. Since then, QNX has turned out to be one of BlackBerry’s rare successes.

QNX is an operating system that has come to dominate the market for in-car infotainment systems. One estimate put QNX’s market share at 53%, nearly double that of its nearest competitor, Microsoft Corporation. QNX also seems to have the best technology in the space.

This is extremely promising because the connected-car market has been taking off and should continue to grow very quickly. One estimate says that there will be 400 million connected cars by 2020, up from 82 million in 2014. If BlackBerry can maintain its lead throughout, then that would be a big win for shareholders.

Some major hurdles

That said, there are a couple of big obstacles for BlackBerry to overcome. First of all, the company isn’t really making much money off of QNX. This number isn’t disclosed in financial statements, but according to Bloomberg estimates, QNX accounts for just 2% of BlackBerry’s total revenues. Other estimates peg QNX’s licensing revenue at just $3 per car.

And it may be difficult to bump this revenue number up. Competitors are closing in and are threatening to commoditize this market. Google Inc. is probably the biggest threat. This is partly because the company has very deep pockets and is not accustomed to losing in any market.

But more importantly, Google doesn’t need to make money from selling Android systems to car makers. Instead, the company is happy enough to spread the use of its search engine and apps. This is not unlike its strategy for the Android operating system in mobile phones and tablets.

There are other options available at a low cost. For instance, Tesla Motors Inc. uses Linux, an open-source software, for its “Control Panel Operating System.” It’s no wonder BlackBerry can’t charge very much for QNX.

QNX must do more than play defence

If QNX just sits back and tries to defend its market share, then BlackBerry’s shareholders will surely be disappointed. Fortunately, BlackBerry is doing much more than that with QNX.

Remember, it’s not just cars that are being connected to the internet. All sorts of products are being connected to the Internet, and this is collectively referred to as the Internet of Things (IoT). If QNX is able to penetrate the broader IoT market, then the opportunity is far greater than the automotive industry: one estimate says that the number of networked devices will rise from 5 billion in 2015 to 25 billion by 2020.

What that means for BlackBerry’s bottom line is anyone’s guess. But the company is aggressively going after the IoT market with QNX. If these efforts are successful, then BlackBerry’s shares could finally take off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. David Gardner owns shares of Google (A shares), Google (C shares), and Tesla Motors. Tom Gardner owns shares of Google (A shares), Google (C shares), and Tesla Motors. The Motley Fool owns shares of Google (A shares), Google (C shares), Microsoft, and Tesla Motors.

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