The Motley Fool

Why BlackBerry Ltd. Needs to Stop Selling Phones

I may be a little biased as a BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) shareholder, but I think the new Passport and Classic phones are top notch. Anyone who does a lot of texting or emailing can attest to how nice the physical keyboard is, and security is always a top BlackBerry feature. My inherent cheapness won’t let me replace a perfectly functional iPhone, however, so it looks like my desire to upgrade might have to wait a little while.

But after reading a recent report from Veritas Investment Research, perhaps I shouldn’t be waiting very long to buy the newest BlackBerry device, since they might not be around for much longer. The report makes a pretty compelling case that BlackBerry shouldn’t even be in the handset business in the first place.

The skinny

You know how in the movies the good guy and the bad guy end up at a standoff because they’re both pointing a gun at each other? The smartphone industry is kind of like that.

The reason is because of patents. Between the big players in the industry, hundreds of thousands of patents are owned, covering everything from the latest tech marvels to pretty basic stuff.

Essentially, it works like this. Each company will routinely steal features from their competitors in the hope of getting around the patent. Even if the idea is blatantly stolen, they know that competitors are stealing just as much stuff from them. So, while lawsuits do happen, there really aren’t a lot of them.

But what would happen if one of the major patent holders got out of the smartphone space completely?

From a patent perspective, the answer is pretty simple. That would leave the company free to sue whoever was using its technology without fear of reprisal. The leaders don’t do this because it’s far more profitable for them to make phones.

But for BlackBerry, the economics are completely different. In fact, according to Veritas, it’s not outside the realm of possibilities for BlackBerry to bring in $400 million per year just from monetizing its patent portfolio. That’s a far cry from the $100 million in gross profit the hardware division brought in the company’s fiscal 2015. Just about all of that $400 million would be pure profit.

The alternative

What happens if BlackBerry keeps the handset business?

I’m not sure the company can ever get back to the position where it can make as much selling phones as it could not selling them. Remember, BlackBerry has slipped to a worldwide market share of less than 1%. There’s always the possibility it pulls itself up from this, but it seems pretty likely that the company’s future in smartphones is only that of a small-time bit player.

Getting out of phones would give BlackBerry more freedom to focus on the stuff it’s actually getting right. The company has already signed agreements with several of its competitors to help them out on security, an area where BlackBerry is clearly miles ahead of its peers.

There’s also the possibility to enter into some sort of licensing agreement, letting a competitor manufacture, market, and sell BlackBerry phones in exchange for a licensing fee. This would keep BlackBerry phones on the market, while giving the company the flexibility to aggressively monetize patents. Plus, it could likely cut costs further with such a move, making investors happy.

It’s obvious that software is the company’s future. Over the last year the company had just $287 million in cost of sales for $1.87 billion in software and services revenue. That compares with more than $1.3 billion in costs on just $1.4 billion in handset revenue. It’s obvious which division is the most profitable.

If BlackBerry continues to make handsets, it runs the risk of making the same mistake it made in 2013. Previous management overcommitted on the then-latest smartphone design, leading to an inventory write-down of nearly $2 billion. By focusing on software, it can easily scale up that business, and use some of its US$2.9 billion in cash to acquire competitors in that space.

The future is bright for BlackBerry. It just shouldn’t involve making phones.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Nelson Smith owns shares of BlackBerry.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.