The Motley Fool

BlackBerry Ltd. Has 3 Options for its Hardware Division

It’s no secret that BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) is shifting its focus from handsets to software.

But in the most recent quarter revenue from hardware was still twice as high as revenue from software and technology licensing. So, the legacy business still deserves plenty of attention, even though it is shrinking rapidly.

This leads to a very obvious question: what should BlackBerry do with its hardware division? Everyone has their own opinion, but there really is no obvious answer. We take a look at three options below.

1. Try to reverse the slide

Without a doubt, this is the most challenging option. BlackBerry shipped only 1.3 million handsets in the most recent quarter, a decline of 50% year over year. Reversing this slide would mean going head to head with the likes of Apple and Google, two formidable opponents to say the least. BlackBerry would need to step up its game, which likely means spending more money on things like R&D and marketing.

That being the case, this option is also the most rewarding should it pay off. Not only would revenue improve in the hardware division, but margins would, too. A positive outcome would also help the BlackBerry brand, which would give a big boost to the software division.

Yet this is probably the least desirable strategy from a shareholder’s point of view. The odds of success are simply too remote.

2. Shut it down

There is a growing chorus that BlackBerry should simply throw in the towel with its handset business and just focus on software.

There are some things to like about this strategy. It would transform BlackBerry from a struggling hardware provider into a fast-growing software company. It would allow BlackBerry to focus on what it does best. Profitability would likely improve dramatically.

But there remain some major obstacles. First of all, many of BlackBerry’s most important customers—especially governments—still count on the company’s handsets. If BlackBerry were to stop making phones, the company would be doing a major disservice to its most important clients. Secondly, phone-making is part of BlackBerry’s DNA, and eliminating this division could cause irreparable damage to the company’s culture. And finally, such a move would cement BlackBerry’s failure in this business, thus damaging the brand further.

3. Scale it down

At this point, BlackBerry’s best course of action may be some sort of in-between option.

For instance, it could continue making handsets, but not target them at the consumer market. Or perhaps it could target the consumer market with an Android-powered phone only. Maybe it could shift its consumer focus entirely towards emerging markets.

If BlackBerry can find the right balance, this is undoubtedly the best option. But it will be tricky. Designing phones is an expensive process, and if BlackBerry is only targeting a small market, then making profits will be very challenging. And if consumers aren’t using BlackBerry phones anymore, how appealing will these phones be to large enterprises?

At this point, BlackBerry has no miracle option. Thus, if you’re a shareholder and are expecting quick results (or a visible future), you should sell your stock now.

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

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