Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Greetings from Kansas City, where we are abuzz with football hopes after last Monday night’s Chiefs opening win. I was reminded that the meteorological summer had not ended on Monday, when the “cash acquisition” theme was capped off with the $460 million cash acquisition of Cavalier Telelphone by Paetec. That was a very nice punctuation to what had already been a very active summer of mergers and acquisitions. Paetec has been successful at integrating previous acquisitions, and will definitely be able to take advantage of the fiber resources of Cavalier. And another great headline for M/C Ventures, Cavalier’s primary shareholder.
To carry through the themes from last week’s Reality Check column, this week also witnessed the resignation of LG Electronics Co. Ltd.’s CEO Nam Young. LG, like Nokia Corp., has struggled to find its footing in the smart phone world. The feature phone market is rapidly changing and being No. 3 ain’t what it used to be. Best wishes to the new CEO, Koo Bon-joon.
In a media world determined to pick winners and losers, Research In Motion Ltd. is a favorite target. The Canadian-based smart phone producer and services provider announced earnings on Thursday, in which revenues grew 9% on a quarterly basis and 31% on an annual basis. Gross margins were a respectable 44.5%. They grew their base of BlackBerry users by 4.5 million, ending at 50 million users. Service revenues are now 17% of the company’s total quarterly revenue stream and are running at a $2.9 billion annualized rate. They are diversifying globally, with 45% of their subscriber base outside of North America. To satisfy nervous shareholders, they bought back shares at a rapid clip, but still have $2 billion in cash on hand and no debt.
Even with the strong report, many are questioning whether RIM can survive by lumping the company in the same category as Nokia, LG, and Sony-Ericsson. If you look at a stock table comparing Nokia and RIM, it’s hard to get excited about either of them (RIM is down 42% vs. last year, and Nokia is down 36%). But RIM and Nokia are fundamentally different companies with different survival strategies.
The BlackBerry is synonymous with consistency and reliability. It’s a fixture at most businesses, and, at least for now, occupies the position of affordability – the Chevrolet of smart phones. Few complain about the battery life on their BlackBerry. And in e-mail – the original paid app – they are the worldwide standard.
So why the dismal outlook and negative sentiment? Three reasons:
1. RIM has not achieved a foothold beyond e-mail. Their applications store has just over 10,000 applications, but 4,100 are wallpaper/themes (24%) or reference/eBooks (17%). Compare that to Apple Inc.’s iTunes store at 43,000 books alone. This column has criticized the lack of a serious business applications leader – RIM, it’s yours for the taking, but Apple is catching up – fast.
2. RIM is not known for bandwidth. We are in the infancy of 4G phones, while RIM touts upgrades of their two most popular phones, the Curve and Pearl, to 3G. They have more experience in global applications management (bandwidth, load balancing, redundancy, etc.) than any of their peers. While they have the pieces in place to forge a 4G product line, do they have the strategy? Could BlackBerry overtake iPhone4 and HTC Corp. as a leader in high-end devices? It’s not an impossibility – a business grade video product would be ideal.
3. RIM needs business buddies. Over the past three years, RIM has scaled. Three years ago when Apple was introducing the first generation iPhone, RIM was shipping 3 million devices in the fiscal second quarter on a total base of 10.5 million users. Since the iPhone launch, RIM shipments have grown four-fold and the base has grown nearly five-fold. But they got that base on the back of (non-North America) consumer growth. Consumer distribution has become harder, however, with everyone else jumping on Google Inc.’s Android bus. As we pointed out in the “Android Nation” Reality Check column, RIM has no flagship carrier, and Android has become the flagship for Verizon Wireless, Sprint Nextel Corp., and T-Mobile USA Inc. RIM needs business partners – Cisco Systems Inc., IBM Corp., and an even stronger relationship with Microsoft Corp. would be a good starting point. On distribution, they could be the thread that knits cable business product lines together. Or they could enable challengers to the larger players, combining applications and bandwidth to create a secure, consistent solution for business that is carrier independent (imagine RIM as the machine-to-machine enabler for a host of business applications – not out of the realm of possibility).
On the conference call, the first question during the Q&A session was “Can/how will you remain competitive?” Here’s how RIM’s co-CEO answered the question (full Seeking Alpha transcript can be found here):
“Sure. I mean, there’s such an interesting dynamic going on in the market because first of all, I mean, I think when you talk about sort of platform and design and future aspects, and I think you’re going to be pleasantly surprised at Dev Con in a week Monday, so I can’t really give you too much here but I think you’re going to be really interested there. So I think the more aspects design philosophy are going to come out there.
And I think in terms of what BlackBerry does, it still has a tremendous number of attributes that really serve the market in the way that we align it for the service and for the carrier and for the segment that’s supposed to address, and I think it’s dangerous to frame all this in a high end arms race and I think you’re going to see our capacity to go beyond what could have been expected by anyone and yet, still address the issues of cost effectiveness, security, efficiency, and desired form factors, so our specialty has been in resolving a paradox and if you don’t resolve that, if you don’t innovate to resolve that paradox, robbing Peter to pay Paul isn’t really a solution because you’re just shifting strategies and so the feature phone is upgrading to a Smartphone.
You know I think our guidance just shows what’s happening and if you saw the road map and you saw the engagement strategies you would see that we’re being very prudent in our approaches but this is really a promising space.
And we can address lots of segments and we can still respect carrier alignment and efficiency and different price points, but I think you’re going to see the ability to I don’t know how to say it better than – other than resolve the paradox because if you make these things so high end that they’re not addressable to the market or they are so consumptive of the networks they can’t scale, that’s not what we originally design
ed our business for and what we’ve done is innovate
to really avail the capability but still not sell out our lineage and that’s the paradox that we’re resolving. So, but be careful that just because you don’t jump to Peter and abandon Paul, to sort of carry on with that sort of approach, that we don’t have an answer, but you know we’re trying to innovate forward our business, not be strategically erratic.
So the core BlackBerry aspects are well defended and while it looked after and protected but it’s in a space where people have mushrooming expectations of what these things can do, and that’s the essence of the paradox and all I can say is it won’t take long before you see how we’ve done that and I think Torch and BlackBerry 6 is really an excellent step forward and that’s why you’ve seen – you know the promo campaigns are just starting but that’s why you’ve seen the jump in guidance and subs in fact.
So, you know, I hope I answered your question. It’s a bit of a, it’s hard for me to answer too directly without sort of violating confidential road map stuff.”
While it looks like we have the seeds of a strategy from this answer, it’s not hard to see why many analysts are sanguine on the company.
Bottom line: Google and Apple have moved beyond the carriers, drawing a line for control, but still demonstrating cooperation. RIM, in order to survive, needs to grasp this change and understand that carrier penetration does not equate to success in the smart phone market. They need to use their base as an asset and grow beyond e-mail. They cannot do this alone – they need partners.
Next week, we start to look at Q3 headlines. There are many to choose from. Thanks for your continued interest in this column – if you have ideas to make it better (topics, etc.) I am all ears. We are heads down rolling out Mobile Symmetry and very excited by its prospects.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your commentsatjim@mobilesymmetry.com.
