BlackBerry Ltd. Will Try and Fail Again With Hardware

BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) needs to focus on software and security.

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My very first smartphone, the Curve 8300, came from BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY). I used to type like crazy on that phone.

After a while, though, I switched over to an Android phone, and then, after being quite resistant to it, I finally got an iPhone. Ever since the Curve, I have never even considered buying a BlackBerry phone. And the numbers show that most people share that sentiment.

The reality is, BlackBerry’s hardware division won’t be able to release a hardware product that will turn the company around. Even its just-launched DTEK50 isn’t going to do much for the company. While it’s true that it’s only going to cost US$299, the low-cost smartphone business is really competitive. And while it does have an HD screen and two cameras on it, its battery life is weak and the processing power people expect in smartphones is just not there.

Unfortunately, BlackBerry has lost the hardware war. But that doesn’t mean BlackBerry is a failure. There is something that could make BlackBerry even greater, but to achieve that it needs to accept that it has to get out of hardware and focus entirely on software.

Here are a few ways that it can succeed.

1. Patent and software licenses

BlackBerry has invested billions in its research and development over the years. And with that sort of investment, it has built up a huge arsenal of patents that is has used on its own phones. When it finally stops with its hardware business, it’ll have the opportunity to start licensing those patents to other businesses.

One analyst has estimated that patent royalties could earn upwards of US$400 million per year. The best part? BlackBerry doesn’t need to create a phone to earn that; it just needs to cash cheques.

Licensing software can be a great deal. BlackBerry just has to let other companies make the phones, and BlackBerry can provide the operating system or secure software. BlackBerry is known for security. It should stick to that.

2. Recurring revenue

While its software business is still ramping up, BlackBerry is still able to generate a significant amount of recurring revenue. It’s a business model I’m quite bullish on.

Its software and services business has had a 76% increase in revenue to US$130 million year over year. Even better, 70% of that revenue is recurring. That means it can count on $91 million in revenue. Predictability is key. For context, by the end of the last quarter BlackBerry had 3,600 enterprise software clients. That will continue to go up as BlackBerry focuses more on software.

3. Cybersecurity

BlackBerry is all about being secure. And with hacking becoming increasingly likely for large financial and healthcare institutions, companies like BlackBerry are primed to help. The global cost of cybercrime in 2015 was approximately US$400 billion. That’s going to go up.

To gain access to the space, BlackBerry acquired Encription Ltd., a U.K.-based cybersecurity consultancy. This is a great pass-through business in which the company can recommend its enterprise software to its consulting clients. For the record, cybersecurity businesses should be worth about $23 billion by the end of the decade.

Hardware doesn’t work for BlackBerry anymore. The DTEK50 is a nice attempt, but it’s time to be realistic. BlackBerry needs to focus on software and security and leave hardware to the other players.

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 Jacob Donnelly has no position in any stocks mentioned.

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