BETTING ON SECURITY
BlackBerry’s decision to ditch the hardware business for software looks like a wise move
Everyone saw it coming for a long time, but everyone was wondering when BlackBerry would stop making BlackBerrys.
BlackBerry Ltd. chief executive OTTAWA John Chen stops short of saying “I told you so” in the aftermath of Facebook Inc.’s privacy scandal over its data being harvested for use in the U.S. election, but just barely.
“I told my daughters all the time, ‘Don’t put all this stuff on your Facebook’,” he said. He complained so much about their picture-posting habit that they unfriended him.
“They say, What’s the harm? Well, when you turn on location there are certain elements of privacy you give up. Maybe it’s not a big deal, but it’s a certain amount of privacy,” Chen said in a wideranging interview in Ottawa.
Chen, 62, might sound like a typical paranoid dad worried his three millennial daughters’ vacation pictures could alert thieves to their empty homes. But he’s banking on his belief in the importance of privacy and security. After all, BlackBerry’s future depends on his ability to sell its products as the go-to digital security guard for everything from mobile phones to connected cars.
Many thought the Waterloo, Ont.-based company was a writeoff when Chen grabbed the wheel in November 2013, but he has salvaged its software business even as its hardware business crashed under competition from Apple Inc. and Samsung.
Despite the soft spot employees held for the iconic BlackBerry devices with their beloved keypads, Chen zeroed in on its software services, QNX division and thousands of patents as future growth drivers.
Four years into a job that was supposed to be temporary, Chen’s strategy is starting to gain traction. BlackBerry is a fraction of its former size, down to US$932 million in revenue and about 4,000 employees in fiscal 2018 from US$20 billion and 17,000 employees at its peak in 2011.
But BlackBerry ’s stock price has doubled since Chen took over. It has landed partnerships for QNX software with major carmakers such as Ford Motor Co. and Jaguar Land Rover Automotive PLC and suppliers like Denso Corp. and Delphi Technologies. On the software side, it has partnered with Microsoft Corp. and won clients such as the North Atlantic Treaty Organization (NATO) and U.S. Air Force.
Now, Chen needs to speed up revenue growth to prove he turned the right way when he ditched smartphones to sell software.
His big bet is on the ability to secure devices, whether it’s a mobile phone, surgical equipment or a self-driving car. He believes “securing endpoints” will enable BlackBerry to leapfrog ahead of its competitors in the Internet of Things age.
“I’ve been wrong, but this feels right,” Chen said.
If he is right, BlackBerry could be his second successful turnaround.
Chen’s first turnaround is what got him the job at BlackBerry in the first place. After management stints at Pyramid Technology Inc. and Siemens Nixdorf Informations system eA G, his first shot at being chief executive was at database maker Sybase in 1998.
Berkeley, Calif.-based Sybase was in rough shape back then. In a tale that will sound familiar to BlackBerry investors, Sybase’s stock and reputation had plummeted after a bad product update helped competitors get far ahead and stay there.
To fix the mess, Chen slashed payroll and costs, hired a new executive team and focused on niche markets such as mobility at a time when cellphones couldn’t even send email (BlackBerry would introduce that capability the following year).
People laughed at him, he told The New York Times in 2006, and called wireless a money-losing dream. But his rescue mission worked. He stayed at the helm until 2010 when German giant SAP SE acquired Sybase for US$5.8 billion, more than six times the value of the company when he took charge 12 years prior.
Chen seems to be applying similar tactics in writing BlackBerry’s redemption story. When it comes to bets on the future, he said he likes to “get to the puck before the puck gets there.”
It’s a charming if slightly clumsy Canadian metaphor for a businessman raised in Hong Kong and educated in the United States, where he saw his first hockey game while studying for his electrical engineering degree at Brown University. (He got his master’s degree in the same field at the California Institute of Technology.)
BlackBerry investors seem to like what they have seen recently from a series of stock price spikes over the past year. Some analysts predict a return to glory, albeit a muted one compared to the company’s former kingpin status.
Phil Hochmuth, director of enterprise mobility at International Data Corp. Ltd., said Chen, after a painful restructuring period, has focused on what BlackBerry does well, such as over-the-air software updates.
“Everyone saw it coming for a long time, but everyone was wondering when BlackBerry would stop making BlackBerrys,” he said. “Overall, he’s done pretty well in doing the hard part.”
But software is a completely different market than hardware, Hochmuth said, pointing out that BlackBerry’s challenge now is in competing against the likes of IBM and VMware Inc., which have huge portfolios of software to bundle, cross-sell or give away.
Investors also expect BlackBerry will go on a spending spree given that it is now armed with a stack of cash thanks in part to a $1-billion award from Qualcomm Inc. after an arbitrator decided it overpaid for that company’s chips. It also sued Facebook Inc. for allegedly using proprietary messaging technology that started with BBM (BlackBerry Messenger). Chen hopes to settle.
But Chen expects the road to get rockier now that BlackBerry is generating cash, growing its software business and winning customers. After all, it’s not hard to convince people to try a new direction when they know the status quo isn’t working, he said. “Now, it’s different. Now we have something to protect.”
How much risk to take on to chase that better future or exactly what that future looks like then become the primary questions.
Given the similarities between Chen’s tenure at Sybase and BlackBerry thus far — including the departure of most key executives, resulting in a leadership team entirely based in California and Texas — analysts have wondered whether Chen is priming it for a takeover.
He insists that’s not the case, though he said if someone wants to “handsomely reward” his shareholders, “I have to at least consider it.”
Chen originally signed on as executive chairman and interim CEO, with plans to set the direction and help with strategy, not actually run the day-to-day operations.
Now that “interim” has clearly been crossed off his title, Chen, who jokes he’s “being shanghaied into this job,” keeps a primary residence in California where his wife lives, although he said he has a place in Waterloo now, too.
He remains a private man, known to be more compelling in small groups or discussions than in front of large audiences.
“Fortunately and unfortunately, I became the face of the company,” he said.
Initially, though, Chen was anxious about the big decisions, most notably the one to abandon BlackBerry’s roots as a smartphone maker. The math showed him BlackBerry couldn’t afford to continue the way it had since it was no longer a market leader, but it was emotional for employees and investors alike to shift from the device that put Waterloo on the map. Chen had to go with his gut.
“After the initial first year, I was never doubtful that this company would survive,” he said.
These days, his role involves travelling around the world to convince powerful customers they need BlackBerry’s software to protect their business, be they governments or corporations. A lot of them still think BlackBerry is a cellphone provider, Chen said, so he wants to get the comeback story out.
But a sales job isn’t what brings him to Ottawa in mid-March. He’s there to convince the federal government to set national standards for automated vehicles, one of BlackBerry’s major business categories in its post-smartphone phase. His visit comes a few days after a self-driving vehicle owned by Uber Technologies Inc. killed a pedestrian in Arizona.
The “unfortunate tragedy” reveals two things, he said: one, the industry needs to step up when it comes to predictability and safety overrides to avoid test runs turning into mere marketing ploys; and two, Ottawa needs to set regulations as soon as possible.
“It’s like drunk driving,” Chen said, pointing to the government’s limit on blood alcohol content. “The government needs to take a strong role in defining what is the minimum level of security that an autonomous platform needs to demonstrate before it’s even allowed to be put on the road.”
Private parties should participate in writing the rules, he said, but he’s calling for a minimum national standard to apply to every manufacturer and component provider.
That’s where QNX comes in. QNX only makes up a fifth of BlackBerry’s business — its enterprise software services pull in more than 40 per cent of overall revenue — but the division is expected to grow after design wins that should, if the puck goes where Chen anticipates, generate revenue as cars become more automated over the next five years. He doesn’t want delays in regulations to slow the industry down.
“It’s not if I get (revenue); it’s when I get it,” he said.
Meanwhile, the recent Uber and Facebook incidents, along with the U.S. government heightened focus on cybersecurity, have thrust safety and security into the spotlight. For Chen, that’s free marketing.
“It’s kind of like when there’s a drought everyone wants water. I provide water,” he said. “The more it is debated, the more awareness it brings, the better off for BlackBerry.”