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2 October 2015

Microsoft and BlackBerry build the barricades around their enterprise turf

The consumer market for mobile devices and web services is in a hiatus period, squeezed by price wars and lack of differentiation, as the users wait for the next big thing, whatever that may be. That is intensifying the mobile companies’ interest in the enterprise space, where developments like unified IP communications, hybrid PC/tablet hardware, and enhanced security and manageability all give more room for providers to add value (and revenue).

This is Microsoft’s turf to defend, and for once it even has hardware in pole position, with the Surface Pro, which has been eagerly copied this year by Apple, with the iPad Pro, and by Google, first with the Chromebook Pixel and now with the Android Pixel C. These sturdy touchscreen tablets with keyboards are very similar (although Chromebooks have a different conceptual approach, supporting online rather than native usage). They represent a consensus among the mobile triumvirate around a certain form factor for business, after years of fragmentation and false starts (netbooks, smartbooks, convertibles and so on), and now they will seek to seize the lead in building services around that.

With new releases of Office 365 looming, Microsoft CEO Satya Nadella says: “The way people work has changed dramatically, and that’s why Microsoft is focused on reinventing productivity and business processes for the mobile-first, cloud-first world”. In particular, Office will be reworked as a series of interconnected modules rather than a family of largely standalone apps.

And while Surface Pro is doing well at protecting Microsoft’s traditional influence over business PC design – forcing Apple, unusually, to adapt to its rules – Nadella knows that the real power, and revenues, will come from extending cloud services like Office 365 to as many platforms as possible. That was clear when the mobile version of Office launched on Android and iOS before Windows Phone, and the same pattern continues – for instance, the new Delve app, which is designed to ease collaboration between tasks and users, is currently available only on the two non-Microsoft mobile OSs.
Delve, and other features emerging for mobile Office, are designed to achieve two key stated goals – to add intelligence to the software and to aid collaboration. Javier Soltero – who heads up Outlook having come to Microsoft when it acquired his start-up, Acompli – said in an interview with IDG that his main challenge is to improve the intelligence of Office and Outlook by bringing together the complex mesh of documents and relationships which is being built around the platform. Delve and Office Graph are central to that.

“I think for me the interesting part of Delve is not the app you see that shows you all the documents and so forth, it’s the Office Graph itself. Under the hood, what the graph is bringing up is relevant content of various types, that is a combination of documents, email messages, people, calendar events etc.” But he acknowledges that, on a small screen, it is hard to save users from having to skip between apps and screens. “That’s very difficult here, because you’re dealing with a very small screen,” he said. “But it’s perfectly doable.”

The other incumbent in mobile enterprise services is, of course, the beleaguered BlackBerry, which bolstered its platform last month with the acquisition of Good Technology. The firm’s latest move on the hardware front – since it stubbornly refuses to call it a day on devices – is to introduce an Android slider phone called Priv, later this year. As its name suggests, this is designed for business users whose primary concern is privacy and security, building on one of the remaining areas where BlackBerry has scarcely been challenged by Apple or Google.

Despite some high profile email security issues a few years ago, the level of trust in BlackBerry remains high. Some of the back end protection capabilities have been applied to multiple platforms as the firm, like Microsoft, has turned away from its own device OS and focused on broadening the reach of its cloud services. However, users still face the dilemma that, if they want all the security functionality of BlackBerry, they are stuck with its increasingly old-fashioned devices and its limited range of native apps.

Now they may have the best of both worlds, combining BlackBerry security with Android. Like Microsoft’s Nadella, BlackBerry CEO John Chen has refused to bow to pressure from some shareholders and partners to ditch smartphones altogether. Both companies are now mainly targeting enterprise users (though Microsoft is also, inexplicably, hanging on in the budget smartphone market).

They have established credentials with IT departments, and know that, even in the BYOD (bring your own device) world, trust and security carry an attractive price premium among business users.

Microsoft CMO Chris Capossela told analysts last week: “We’re going to build phones for businesses. We know business customers want a very, very secure phone that’s incredibly good at calendar management, at email, at productivity, and Skype for Business etc … We can build a much, much better solution and much better business than we have today.”

Meanwhile, BlackBerry is promising an Android handset with a ‘circle of trust’ – meaning the source of the hardware and software components, and the people who assembled the product, can be verified. Priv will support end-to-end FIPS 140-2, a comprehensive security standard written by the US National Institute of Standards. While Android and iOS are FIPS 140-2 certified at kernel level and in their encryption algorithms, BlackBerry aims to go further and promise this support from end to end in messaging.

It is not clear how far BlackBerry will adapt Android to incorporate its security features. It could, for instance, deliver its branded capabilities along with full implementation of Android SE-Linux features and add its own business-oriented user interface to differentiate the devices further from the Android mainstream.

The company insisted that it “remains committed to the BlackBerry 10 operating system, which enables industry leading security and productivity benefits”, though as some of those benefits are ported to Android, there will be diminishing return on the expense of maintaining the homegrown OS. Version 10.3.3, which also promises to focus on security and privacy improvements, is due in March but there will be no new BB10 device this year, and Chen, on the firm’s Q2 earnings call, would not actually rule out merging or replacing BB10 with Android.

Like Microsoft, BlackBerry is likely to remain a niche supplier of handsets, but both have the potential to command high margins with specialized products that support an optimized experience of their key services – whether Office productivity or high security. BlackBerry still has a long way to go with its painful turnaround, however. Last week it reported a bigger fiscal second quarter loss than analysts had expected and saw its smartphone shipments fall to their lowest level since 2007, at about 800,000.

Device revenue fell by 52% to $201m but software revenue grew 19% to $74m, endorsing Chen’s strategy of refocusing on software (but raising further question marks over whether it is really worth staying in hardware). However, hardware still accounts for 41% of revenue, with 43% coming from service access fees and 15% from software and services. That balance suggests that Chen may, indeed, need to keep hold of the traditional device-based business for a while, until software growth turns into acceptable revenue levels.

Overall revenue fell by 47% to $490m, a blow to Chen, who said in March that revenue would never fall below $500m during his turnaround process. Nevertheless, he said he was “confident in our strategy and continued progress” and pointed out that BlackBerry’s fiscal Q216 was its fourth consecutive period of double-digit year-on-year growth in software licensing revenue and sixth consecutive quarter of positive free cashflow.

For the quarter to August 29, net profit was $51m, reversing a year-ago loss of $207m. On a non-GAAP basis it saw a loss of $66m, when excluding the impact of various financial transactions and charges. BlackBerry said it made 2,400 enterprise customer wins during the quarter, with about 60% of those licences being cross-platform.

Looking forward, Chen said he “anticipates modest sequential growth in total revenue” for the remaining quarters in fiscal 2016 and that BlackBerry was still on track to achieve $500m in software and services sales by year end.

The big question is whether Microsoft and BlackBerry can continue to trade on their past enterprise glories to keep hold of this lucrative space – in mobile services if not their own operating systems and devices. They will be under severe pressure from the big two, which are starting to form the ecosystems and enterprise alliances that were once the preserve of the Windows giant.

Google is pushing its own enterprise credentials, with the Pixel C and also its Android for Work platform, announced a year ago. This has now been deployed, on a live or test basis, by 10,000 companies, said CEO Sundar Pichai at the Nexus launch, with World Bank and the US Army being flagship customers. The offering, which includes centralized device and apps management and enhanced security, is designed to improve Android’s fortunes in large enterprises, where it has lagged behind Apple in stealing BlackBerry’s lunch.

Apple, too, is redoubling its enterprise efforts. CEO Tim Cook told the recent BoxWorks conference that enterprise sales were worth $25bn in revenue to Apple in the 12 months from June 2014, without counting BYOD devices that consumers purchased themselves. Key to expanding that business are Apple’s strategic partnerships with IBM and Cisco. “I think if you’re a CIO or you’re in a company, you want to do business with someone who’s part of an ecosystem, not someone who’s in an island somewhere,” Cook said. “Island days are gone.”