Bloomberg News

BlackBerry Leads Connected Cars Google Covets: Corporate Canada

March 27, 2014

BlackBerry Chief Executive Officer John Chen

BlackBerry Chief Executive Officer John Chen said, “All of a sudden, with the industry’s move on connected cars and the ‘Internet of Things’ and machine-to-machine and Big Data, it seems to be all colliding and helping us in where we position ourselves. Now our job is to continue to lead in that space and also branch out to other verticals.” Photographer: Patrick T. Fallon/Bloomberg

BlackBerry Ltd.’s share of the global smartphone market has tumbled below 1 percent, crushed by Apple Inc. (AAPL:US) and Google Inc. (GOOG:US) The Canadian company says it’s determined to keep its lead in the race for the connected car.

BlackBerry’s QNX operating system, used to power its BlackBerry 10 phones, has become the technology of choice for mapping, communication and entertainment systems in cars from Ford Motor Co. to luxury German brands Porsche and BMW.

“QNX is one of the more, if not the most valuable, assets in the company right now,”said Mark Boyadjis, an analyst at IHS Automotive in Minnetonka, Minnesota.

The Waterloo, Ontario-based company is looking for a larger chunk of the connected-car market as sales of smartphones continue to slide. Revenue last quarter probably slumped 58 percent from a year earlier, according to analysts’ predictions. QNX, which accounts for an estimated 2 percent of BlackBerry’s sales, faces its own challenges: The connected-car market, predicted to reach $53 billion in 2018, is also coveted by Apple and Google.

BlackBerry Chief Executive Officer John Chen, who took over in November, signaled his intention to transform BlackBerry into a software company as much as a hardware company when he struck a December deal with Foxconn Technology Group. Outsourcing design, production and distribution to the Taiwanese electronics manufacturer will free up resources for software development.

Continue to Lead

“All of a sudden, with the industry’s move on connected cars and the ‘Internet of Things’ and machine-to-machine and Big Data, it seems to be all colliding and helping us in where we position ourselves,” Chen, 58, said in an telephone interview earlier this month. “Now our job is to continue to lead in that space and also branch out to other verticals.”

Shares of BlackBerry have climbed 23 percent this year as investors warmed to Chen’s vision of a company focused less on touchscreen phones for consumers and more on devices for businesspeople and government customers, as well as software. Still, the stock is down almost (BBRY:US) 95 percent from its 2008 peak and dropped 2.6 percent to $8.93 at 10:10 a.m. in New York.

Andy Perkins, an analyst at Societe Generale SA, downgraded the shares today to sell from hold following recent gains.

BlackBerry reports fiscal fourth-quarter earnings tomorrow before markets open in New York. Analysts predict (BBRY:US) a loss of 57 cents a share, excluding some items, on sales of $1.11 billion, the average of estimates compiled by Bloomberg. The company doesn’t break out revenue for the Ottawa-based QNX unit.

IHS’s Boyadjis estimates QNX will generate about $100 million in revenue this year, about 90 percent from the auto industry. Boyadjis assumed an average software license of about $3 per vehicle and QNX selling 20 million units.

Apple’s CarPlay

The market for technology that links cars and smartphones was worth $18 billion in 2012 and will jump more than threefold in 2018, according to GSMA, a global association of wireless carriers. The world’s biggest technology companies are turning their design efforts to connected cars as smartphone growth rates slow. Apple introduced the CarPlay platform this month at a car show in Geneva, where Fiat SpA’s Ferrari unit, Daimler AG’s Mercedes-Benz and Volvo Car Group showcased technology enabling hands-free use of an iPhone.

Inside the car, Apple and BlackBerry are collaborators rather than rivals. QNX software allows CarPlay to recreate the iPhone experience on the console’s screen, with icons familiar to iPhone users, including “Phone,” “Messages” and “Maps.”

Apple Partner

“I’ve never thought of us as a competitor,” Derek Kuhn, QNX’s vice president of sales and marketing, said in a phone interview. “We have been working with Apple for many years.”

Tara Hendela, a spokeswoman for Cupertino, California-based Apple, declined to comment.

The iPhone, introduced in 2007, was the first threat to BlackBerry. Then came devices running on Google’s free Android operating system, which now dominate the global smartphone market. Google is trying to replicate its phone success with cars. On Jan. 6, the Mountain View, California-based company announced the creation of the Open Automotive Alliance with Audi AG (NSU), General Motors Co., Honda Motor Co. and Hyundai Motor Co.

Mary Chan, president of GM’s Connected Consumer unit, said in a statement that day that the carmaker saw “huge opportunities” for Android to pair with its OnStar car communications and tracking system. OnStar, however, relies on QNX for alerts in emergencies and for hands-free operations.

Collaborator, Competitor

“It’s a classic Silicon Valley situation -- one day you’re a collaborator, another day you’re a competitor,” said Boyadjis, the IHS analyst.

Google poses a bigger threat to QNX, according to Boyadjis, as more carmakers adopt the Android operating system. Kia Soul and the Mercedes SLS AMG are among the first vehicles that now run Android, he said.

Kuhn said Google and QNX have been collaborating for many years -- including on the integration of Google Earth into Audi cars -- and remain partners. Christopher Katsaros, a spokesman for Google, declined to comment on its relationship with QNX.

Chen, who honed his turnaround skills reorganizing Sybase Inc. into a competitive maker of enterprise software, is looking beyond cars to anywhere technology is needed to enable machines and computers to talk to each other.

Machine-to-Machine

“Whether it’s housing, hospitality, construction, retail, it’s all going to come to the same stage where cloud-based, all-things-connected is going to be a big application movement,” Chen said. “ With QNX and other technology we have -- back-end servers and security -- it’s going to be a good play for us on machine-to-machine.”

Like Microsoft Corp., QNX got it start on a college campus. A year or so after BlackBerry inventor Mike Lazaridis enrolled at the University of Waterloo in 1979, two fellow students, Dan Dodge and Gordon Bell, developed the first version of QNX in the southern Ontario town. They relocated to the Ottawa area, Canada’s emerging tech hub at the time, and released the first commercial version of QNX in 1982.

One of QNX’s biggest-selling points is that it’s a microkernel-based operating system -- meaning it has multiple layers or servers that keep operating even if one is shut off or freezes. Stability is indispensable in environments where a server crash could be fatal, and QNX won contracts with the U.S. Army’s unmanned Crusher tank and nuclear power plants operated by Atomic Energy of Canada Ltd.

QNX Acquisition

In April 2010, BlackBerry, known then as Research In Motion Ltd. (BBRY:US), or RIM, bought QNX for $200 million from Harman International Industries Ltd. Bloomberg News reported in August that RIM was using QNX as the operating system for its first tablet computer to challenge Apple’s iPad -- and then for future phones.

QNX continues to make inroads with automakers. Ford Motor Co. last month dropped Microsoft’s software for QNX in its Sync car system, according to two people familiar with the shift. Ford would be an addition to a client roster that includes Chrysler Group LLC, Hyundai Motor Co. and Jaguar Land Rover Automotive Plc, as well as most luxury German automakers.

“QNX is the standard right now,” said Matthew Stover, an analyst at Guggenheim Partners in Boston. “It’s proven and people know what it is.”

A key to maintaining the lead is QNX’s track record in running safety systems, crucial in situations where a software freeze could mean a car accident.

“That advantage will help carry them as they fight the titans Google and Apple in the future,” said Boyadjis, the IHS analyst.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Jacqueline Thorpe, Cecile Daurat


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