Everyone in the investment community is focusing their eyes on Research in Motion's (RIMM) upcoming BlackBerry 10 operating system. Yes, yes, we've all heard a billion times how fantastic the operating system is. We can't discount the fact that RIMM still has a strong 79 million subscribers using its devices.
Many analysts were scared out of their minds when last quarter RIMM announced that the subscriber fee structure will change with the forthcoming BB10. There were many analysts who claimed that RIMM will not be able to sustain profitability if it doesn't have this source of income. In many respects, this argument is profoundly true. For the last year, if RIMM's service revenue didn't exist, we honestly might not be able to see the upcoming BB10 OS. Nonetheless, the company found a way by navigating the ship around tight corners with disciplined financial management and relatively good execution. The company's cash position grew last quarter by $600 million, while also maintaining a healthy operating cash flow through the deduction of accounts receivables and inventory. While this method of generating positive cash flow will be limited going into the future, the company does still have quite a bit of accounts receivable and inventory left.
Now here's the point I want to bring to your attention: Mobile payment will be one of the keys for RIMM.
Why would I say that? For starters, because of the recent announcement that Visa has approved RIMM's encrypted mobile payment system. Forrester research has forecast that mobile payments will balloon to $90 billion by 2017. That's a substantial amount!
To clarify things, RIMM's encrypted system is the back-end solution for carriers to process the transactions. For example, if someone decides to pay with their phone, RIMM's solution ensures that all data passed from the carrier to the financial institution is completely encrypted. RIMM has been known for its outstanding security, so this is one of its key competitive advantages that it can continuously focus on. To add onto that, John Paczkowski of AllThingsD.com, who's been a long time skeptic of RIMM, is feeling optimistic about the recent Visa approval.
Mobile payments will be the future in 5-10 years. As more and more consumers use smartphones, the ability to pay with your phone would be both convenient and simple. No more cash, no more hassle - a simple swipe will do the trick. One of the concerns for the shift into mobile is the security issue surrounding NFC. There are hackers out there that have the ability to use NFC to steal all your personal information. That's where RIMM will step in. Renowned for its security, it can provide a platform for the carriers to ensure that all of the users' personal information will be safe and sound.
Another reason why payments will soon go to mobile is due to the growing trend of using debit and credit cards. The average number of credit cards held by a household is 3.5. The U.S. alone has nearly 609.8 million credit cards. That's an astonishing amount. To back this data up further, look at the recent earnings from MasterCard (MA) and Visa (V). Their dominance is stupendous, and it will only continue going into the future.
If we take a look at the recent trend started by Starbucks (SBUX), its mobile app has the ability to pay for transactions. Starbucks reported that after nine weeks, more than 3 million transactions were conducted via the mobile app. Now by enabling the ability to pay via mobile, it makes up 1 in 4 transactions. (You can read more about this here.)
Now, if the trend continues, I can say with a high degree of confidence that mobile payment will make up a majority of the way we pay for things. And that's not taking into account the possibility of having your phone being able to open your locks, start up your car, voice control the settings in your house, and much more. All these things are what we do in our everyday lives - imagine the type of security these activities need.
The other reason why I'm stating that BB10 wouldn't be the future for RIMM is the fact that the smartphone landscape is way too crowded. There are many people who think Google's (GOOG) Android and Apple's (AAPL) iOS will dominate the smartphone landscape going into the future, and then you have hardcore Nokia (NOK) fans. But I can tell you now, that from a competitive business point of view, the lucrative profits generated from this industry will attract way too many competitors for two dominant OS providers to remain on top forever.
Samsung (SSNLF.PK) recently announced that it will enter into the OS landscape themselves by introducing Tizen. Then we have ourselves another player who wants to introduce a new OS called Ubuntu, made by Canonical.
Now you might wonder, with the app ecosystem being a barrier-to-entry, how could these new operating systems prevail? The answer to this is HTML 5. With HTML 5, app developers are able to build a unified application and make it accessible via a browser. Once the user accesses it, they can simply pin that page onto their screen, which is essentially an app. This technology will make the app world relatively obsolete, because from a developer point of view, being able to build an application on one platform but make it accessible to all operating systems is a very attractive deal.
If Tizen and Ubuntu hit the market, that would make a total of 5 operating systems on the market. That wouldn't be considered a duopoly anymore - it would be considered a monopolistic competition. In this economic scenario, companies will be able to differentiate themselves through their product offerings, but the competitive advantage won't be sustainable due to other competitors copying those offerings. In the end, under this scenario, none of the firms would be able to earn any long-term economic profits due to the heavy competition.
To be clear, I can't see the future, nor can I predict it accurately, but from a pure business perspective, it makes perfect sense for RIMM to introduce an OS to remain competitive, but slowly fade out of the business. As I described earlier, there will be more than 2 operating systems that will be viable going into the future, and I would not be surprised if the smartphone landscape becomes similar to that of the automobile industry.
For RIMM to really make a turnaround, the key won't be in BB10, but in an industry that requires its security features. I predict that RIMM will find a way to secure the payment systems for all the carriers around the world. If it can do this, it would be able to carve out a blue ocean for itself, rather than staying in the bloody red seas of the smartphone war.
Disclosure: I am long RIMM.