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Reggie Middleton

Reggie Middleton

Posted: August 20, 2010 01:56 PM

A couple of weeks ago, I penned the piece “After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play“. As explained in that article, many are prematurely discounting the success of Microsoft in the mobile space. It wasn’t the wise thing to do in the browser space, the gaming console space, or the enterprise server space (all of which took time to gain inertia and momentum), and I don’t feel it is wise to do in the mobile space either – despite the temptation to do so born from the apparent mismanagement of the mobile OS platform. More importantly, it brings up the topic of stickiness and permanency in the enterprise space and (in my oh so humble opinion), the only thing that is keeping Research in Motion from sheer and utter collapse.

In the aforementioned blog post, I made it clear that MSFT is uniquely positioned to assail RIM in its bread and butter Exchange functionality stronghold, being that MSFT is the creator of Exchange. It was just a matter of time before MSFT had to make this move, and facing the demise of its mobile platform, now is the time to make it. Of course, there are some stalwart Blackberry users and RIMM investors who feel the threat to RIM is over blown. If you peruse the comment section of Seeking Alpha, you can see where I syndicated the aforementioned article and it received 88 emotionally charged, passionate and downright vociferous comments from retail investors defending their favorite handset, company or investment. The amount of emotion vs empirical analysis is a red flag, in and of itself. One point brought up by the many commenters was that RIM is about to introduce new tech, which I was not very excited about. Days later, they released it, and I responded with RIM Smart Phone Market Share, RIP? It appears as if I was correct in my assumption that RIM was going to miss the mark with their new hardware/software refresh. They are playing catch up, and have not even caught up yet – as Apple becomes as popular as ever (even encroaching upon the long sacred enterprise) in the smart phone space and Android grows like a mutant weed, literally disrupting the entire industry. Below, you can find excerpts of our most recent forensic analysis and valuation of Research in Motion. Enjoy and prolific investing!

So, where did RIM go wrong?

Note: Charts below created with data sourced from Nielsen, Gartner, Canalys.

Technology firms usually operate under a rapidly changing environment, and the price for falling behind the curve is nothing less than failure. Research in Motion (RIM) sowed the early seeds of the smart phone industry and altogether altered the industry dynamics through its killer email applications. That was in early 2000. Come 2010 and the dynamics of the industry have again been altered. Sadly for RIM’s shareholders, RIM’s management has failed to materially take part in this paradigm shift.

As the focus shifts to graphically rich, cloud based, touch-centric mobile computing as part of a holistic ecosystem and away from traditional thin client/fat server based applications, Android, Apple (and potentially Microsoft) are set to benefit the most due to a richer browsing experience, broader app/cloud availability and deeper ecosystems. RIM, despite what can be expressed as a “Johnny come lately approach” is still seen as struck with an email focus, and is failing to (re)gain traction in the retail space, which has the reflexive effect of affecting its popularity in the enterprise space. This is (ironically) the exact inverse of how RIM pierced the consumer market in the first place, for its popularity in the enterprise allowed it to move into the consumer space due to product familiarity found in mobile professionals who adopted the work device for personal use. Brand recognition did the rest.

Fast forward to today, and underpowered handsets, trailing functionality, and a (comparative) lack of innovation in the OS design are causing consumer defections in droves!!!

Each quarter of this year has seen Blackberry loyalty go from bad to worse…

As Android appears from practically nowhere as a major player on the scene and Apple continues its march to damn near cult status, Blackberry users are defecting en masse, with a contingent held captive by enterprise server lock-in!

From literally nowhere, RIM ascended to become the second largest smartphone vendor and it has the potential to fall just as fast – if not faster. Even now, with a significant waning in Blackberry handset popularity, enterprises users are left with no option but to buy RIM devices to avail their enterprise server and security services. Thus, migration from the RIM platform in the enterprise will often occur in very large chunks of several thousand users at a time in lieu of a slow bleeding of individual, piecemeal defections as the grip of the enterprise server is weakened.

So, what's next?

After more than eight years of unassailable dominance in the enterprise market, fissures in the enterprise façade are forming due to the external and internal pressures emanating from Apple and Android. The consumerization of IT and development of secure messaging services by Android and iOS, the launch of Microsoft’s Windows Phone 7 (the proprietor of the enterprise messaging de facto standard) and corporate IT’s willingness to offer additional platforms on a “bring your own phone” basis could spell the end of enterprise dominance and consumer reach for RIM – which is basically the entire business of this company with relatively undiversified revenues. Although it’s too early to categorize RIM as the next Palm, one thing is certain – RIM is definitely not sitting in a sweet spot and it would not be a stretch to say that the writing is on the wall. With that being said, RIM would be a strong strategic acquisition candidate for a larger company looking to staunch the growth of Android and Apple in the burgeoning competition that is the mobile handset enterprise space, namely Nokia Corp.

Besides encroaching share in the device markets, RIM is also facing margin pressure as the average revenue per unit declines resulting from the smartphone market commoditizing and BlackBerry’s brand premium erosion. With Android increasing its clout in the OS market at an incredible and unprecedented pace, handset players who produce their own competing OS through R&D such as RIM, Nokia and AAPL have the most to lose.

The Android’s popularity is pushing those that have prudently implemented the OS to new highs, even as Blackberry retention and satisfaction rates reach new lows…

Even (or more aptly put, particularly) Apple’s iPhone, which many could conceptualize as the antithesis of the Blackberry concept, is literally absorbing user from the RIM’s platform.

The Bull Argument: Even if RIM loses share, smart phone penetration is set to increase by leaps and bounds

Although there is a considerable merit in the argument that the pie is expected to double over the next three years (344m smartphone shipments in 2012e from 175m in 2009), it matters not if a player loses a disproportionate of share in said pie. It is important to understand the delta of market share gains and losses vis-à-vis increase in penetration to blindly rely on this argument.

To drill down into this topic, we have bifurcated each of the smart phone player’s growth into following factors

  • Growth due to overall mobile handset market
  • Growth due to smart phone penetration
  • Growth due to vendors increase (decrease) in smart phone market share

This exercise was carried out in explicit detail in the subscriber report, and shows on a granular basis how much RIM stands to gain or lose per unit of smart phone market growth and penetration. (Subscribers, please refer to appendix section at the end of your reports for metrics on other players)

“As demonstrated earlier, RIM shipments have lagged overall market since Q1-09. Further, bifurcating RIM’s shipment growths into above three factors reveal that nearly their entire growth in shipments could be attributable to growth in market and not organic growth perpetuated by RIM market capture. During Q2-10, RIM recorded 6% q/q growth in shipments of which 6% was attributable to growth in handset markets, 2% due to increase in smart phone penetration and a negative 2% due to decline in RIM’s market share. The story is similar in three of the proceeding five quarters.

The dynamics between revenue growth, market share growth, target sub-market penetration, margins and unit shipments in an environment as dynamic and volatile as one such as this undergoing a paradigm shift, leaves static valuation models near useless and unrealistic. As such, we have created a multi-variate sensitivity and scenario analysis with a variety of market occurrences exemplified. We will soon be releasing a dynamic Excel model so Professional and Institutional subscribers can layer any combination of market factors and assumptions to come up with their own custom valuation using our internal analytics.

The full Research in Motion Forensic Valuation reports are available to subscribers below (click here to subscribe or upgrade your subscription):

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
  5. This article should drive the point home: An iPhone 4 Recall Will Hurt Apple More By Opening Additional Opportunity for Android Devices Than Increased Expenses
  6. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  7. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  8. RIM Smart Phone Market Share, RIP?
  9. Android is gaining preference as the long-term choice of application developers
  10. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  11. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  12. Apple on the Margin
  13. RIM Smart Phone Market Share, RIP?
  14. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  15. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  16. There Goes Those Fancy eBook Aspirations from Apple, Barnes and Noble, and Amazon: 100,000’s of FREE eBooks from the Public Library
  17. How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
  18. Empirical Evidence of Android Eating Apple, Literally!
  19. More of the Android Onslaught: Increasing Handset Revenues and Growth
 

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