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BlackBerry: A Cautionary Tale for Microsoft and Google

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Bad hardware can kill even a well-respected software product.

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Software gets no respect. It's the Rodney Dangerfield of the tech industry – always the underdog, and yet somehow, always around.

Microsoft (NASDAQ:MSFT) has monopolized the PC industry for decades. Google's (NASDAQ:GOOG) control of Web search is uncontested. Adobe (NASDAQ:ADBE) and Symantec (NASDAQ:SYMC) may as well be unmovable objects, and despite the perennial threat from cloud competitors, SAP (NYSE:SAP) and Oracle (NYSE:ORCL) are as profitable and healthy as ever. Not exactly a tough audience.

The hardware industry hasn't been nearly as kind to HP (NYSE:HPQ) and Dell (NASDAQ:DELL). Chinese competitors have grabbed market share from HP, while Baidu (NASDAQ:BIDU) has failed to dent Google. Dell and Microsoft were both challenged by a change in consumer trends, but Microsoft has remained afloat while Dell hasn't. Hardware isn't easy, and IBM (NYSE:IBM) only survived the last 102 years by walking fast and carrying a packed suitcase; the 2005 sale of its personal computer business to Lenovo (OTCMKTS:LNVGY) was just the latest in a long history of well-timed exits.

Despite this, software firms are competing for the chance to sell a physical product – and in many cases they're jeopardizing their software business in order to do it. Google bought Motorola in 2012, sowing discord with Samsung (OTCMKTS:SSNLF) and threatening Android's neutrality. Microsoft debuted the Surface tablets last year, and more recently purchased Nokia's (NYSE:NOK) handset business; HP now considers Microsoft a competitor. Amazon (NASDAQ:AMZN) sells its own tablets, which routinely get top billing on the Amazon website. Oracle bought its way into servers, and promises clients "integrated solutions." Indeed, integration is a word that pops up frequently these days, as everyone looks to Apple (NASDAQ:AAPL) and tries to copy its approach.

BlackBerry (NASDAQ:BBRY) offers us a more cautionary tale. Like Apple, it ran an integrated business long before the model became popular, selling both mobile devices and the software and services that ran on them. Obviously, the outcome was quite different; BlackBerry is now shopping for a buyer, while Apple sits on a $480 billion valuation.

Good software can't save bad hardware. Bad hardware, on the other hand, can kill even a well-respected software product. Last week, BlackBerry opened its instant messaging service to iOS and Android, and the app quickly rocketed to 10 million downloads. Not bad. And three years ago, this move might have established BBM (Backberry Messenger) as a top mobile messaging application. Now it faces an uphill climb against well-established competitors, a falling subscriber count, and a deteriorating brand.

That's a shame, because both BBM and BlackBerry's Enterprise Server are valuable products, offering security to a business world that desperately needs it. Data has become a make-or-break asset for corporations, and the loss or theft of that data is getting both easier and more damaging. Bring-your-own-device has populated offices with personal smartphones and tablets, opening the door to potential security breaches. BlackBerry could have positioned itself as a solution to these problems, if it hadn't tied everything to a sinking hardware line. Instead, it's looking like BBM and BES might go down with the ship.

Meanwhile, Google has failed to turn around Motorola. Oracle has struggled since acquiring Sun Microsystems' server business, and Microsoft was forced to write off $900 million on the Surface RT last quarter. For years, Microsoft didn't release Office for iOS and Android, preferring to drive consumers toward mobile Windows products; but the only obvious result was more business for alternatives like Google Docs.

There's a danger that, in trying to copy Apple's model, these companies are merely repeating BlackBerry's mistake – eroding their core business in an attempt at hardware glory. Certainly, it's hard to argue that integration necessarily results in better products, when Samsung holds the top spot in the smartphone market and four of the top five tablet vendors are OEMs (original equipment manufacturers).

At its peak, BlackBerry's hardware revenues were five times what it earned on software and services. Last quarter, that ratio inverted as software and services grabbed 50% of revenue. Too late, the handset maker has discovered which side of its business is the more valuable. As it looks for alternatives to a $4.7 billion offer from Fairfax Financial Holdings (OTCMKTS:FRFHF) – almost $4 billion under book value – BlackBerry will have a hard time convincing anyone to bid on what has essentially become a software firm in a world where software gets no respect.

See also:

Tech News: Steve Wozniak Doesn't Want New iPad Air and Amazon Delays Its Set-Top Box
No positions in stocks mentioned.
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