Should BlackBerry Ltd. Continue to Make Devices?

BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) has failed to garner a significant number of sales for its Android-powered Priv handset. Does this spell the end of the hardware division?

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BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) is in the midst of a massive transformation. The once iconic handset manufacturer has released a number of new devices over the past few years, and each release has been met with disappointing sales.

Company CEO John Chen stated some time ago that if the hardware division could not meet certain levels–initially five million devices a year, and more recently this figure has dropped to three million devices a year at a price of $300–then the hardware division would be shut down. Doing so would effectively make the company a software- and services-only company.

Is new hardware is still coming?

The company’s latest device, the Android-powered Priv, was released last fall to generally positive reviews, with hardware that was, for the most part, current in terms of specifications. Only the Priv’s front-facing camera, an unimpressive and dated two megapixel camera, was below par on the device.

The Priv was priced at a flagship premium and, as a result, sold far less than what the company had hoped for–only a few hundred thousand have been sold. For the fiscal year that ended on February 29, BlackBerry realized revenue on 3.2 million handsets, a massive drop over the seven million devices from the previous year.

Earlier this month, BlackBerry came to the realization that the Priv’s price was the reason for the underwhelming sales. The company announced plans to release two more Android-powered phones this year that will be targeted to the mid-tier user. Chen revealed that one of those devices would be a full-touchscreen device and the other a physical-keyboard device.

Why release more devices?

Industry pundits view these two devices as the company’s last true attempt at saving the hardware division. As impressive as the Priv was, it was priced far too high to appeal to the company’s core audience–enterprise. The company believes that a device priced along the $400 range will appeal to enterprise customers who typically buy devices in bulk.

While this strategy may work, the company and the hardware division have to be careful not to swing the pendulum too far in the other direction. A mid-tier specification-wise handset can be sold for $400 and appeal to organizations, but the lower price implies older components, which could defer others from paying for “last year’s tech.”

When looking at the entire hardware industry, BlackBerry simply isn’t the player it once was when competing in price, features, and even demand from consumers.

The company can’t compete with others on hardware or on distribution channels. Even the Priv, which was, by the company’s own admission, a flagship device, was priced higher than many competitors’ flagship models. And despite being touted as a premium device, the Priv had some older tech components and lacked many newer features that others have been adding.

The one area where BlackBerry has excelled with the Priv has been the software. The company managed to replicate many of the features from its own BlackBerry 10 operating system into Android and continues to work on porting applications over and increasing functionality.

In my opinion, the software side is where real growth and opportunity lies for the company. Messaging security and calendaring functions in particular are BlackBerry’s strengths and, ironically, Android’s weakest areas. The Priv already comes with enhanced security and customized messaging and calendar applications. All that needs to happen is for those applications to be released (and monetized) to other devices, but that may mean the hardware division needs to fold first.

At the moment, BlackBerry remains a company that is in the midst of a turnaround. Chen has improved the fortunes of the company immensely in the past few years, but it remains, in my opinion, an extremely risky investment that could go in either direction.

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 Demetris Afxentiou has no position in any stocks mentioned.

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