With the number of opinions being expressed on major companies like Research in Motion (RIMM 68.48 ↓7.42%) and Apple (AAPL 235.97 ↑0.41%), it can get awfully overwhelming to try and understand from a high level what the situation is. This has especially been the case with RIM in the last few days when they released so called “mixed results” – which basically means that they disappointed the street, but not really.
It’s fairly easy to identify the things people agree on – RIM has a solid balance sheet, no debt, $2.9 billion in cash, strong growth in revenues (up 18% yoy, though still not enough for Wall Street), shrinking gross margins (now at 45.7%) and reductions in average selling prices (currently $311/unit). A brief look at any analyst report will give you that information. However, there is less certainty on other more contentious issues – as I see it, there are two big issues in the balance, and the one that comes to dominate in the next few years will determine where RIM goes from here.
Issue (Negative): Competitive pressure in retail consumer space
80% of RIM’s revenues still come from new device shipments, meaning that it still very dependent on new sales growth, as opposed to revenues from post-sale services, which make up only 16% of revenues. It’s this sales growth that many analysts feel will be compromised by the additional competitive pressures that BlackBerrys are facing in the retail marketplace from Apple’s iPhones and other Samsung (005930 857000 ↑1.42%) and Motorola (MOT 7.06 ↑0.57%) smartphones that operate on Google (GOOG 568.8 ↑0.30%)’s Android platform. RIM’s competitors are deemed to be better at providing a better user experience as the focus shifts away from smartphones providing just email access (where BlackBerry dominates) to a more complete experience including applications, browsing and connectivity (where BlackBerry loses out). As an analyst from Sandford Bernstein put it – RIM can expect “margin pressure as BlackBerry gets more and more into a mass-market role with vanishing product differentiation and eroding brand premium.”
So in the mass-market RIM’s products are expected to lose market share to its new rivals especially as the focus of the user experience shifts.
Issue (Positive): The enterprise market and love from carriers
It is well-established that RIM is a market leader in the enterprise space thanks to its superior security capabilities that are necessary in an environment which is less cost sensitive but also more functionally demanding. The enterprise market loves the BlackBerry for its superior email handling capabilities which are more important to that space than other “toppings” like applications and browsing. While the security features of other smartphones are likely improving, the BlackBerry still holds its own there. Its leadership in the enterprise space is the trump card that RIM holds and is using to enter new emerging markets. RIM is currently dependent on the North American market but the real growth lies elsewhere as smartphone penetration levels start to taper off in North America. With ongoing expansion efforts in China and Indonesia, you could start to see new engines of growth for RIM and this might have been reflected in the company’s higher than expected guidance for subsequent quarters.
Another area that is frequently overlooked is the relationship that RIM has with its carriers. RIM provides a lot more value to carriers than just being a handset provider. This point was well made in a feature in the Canadian Business magazine. RIM actually operates data-processing centres which look at all the information sent via BlackBerrys, in the process removing potential threats and providing a level of security that is hard to match. At the same time, the system also helps carriers manage its traffic and uses compression technologies which allow more information to be carried over the same network from the carrier – the importance of this value-add cannot be underestimated when usage is becoming increasingly data intensive and clogging most networks. One more plus point that ties carriers to RIM is the carrier’s need to differentiate its product offerings from other competitors. It’s hard for them to do that with the Apple’s iPhone which is the same across all providers since there is only one model. But with the BlackBerry, RIM actually provides each carrier with something unique through its different models and hence caters to their needs. With the carriers doing a lot of the marketing for the handsets, this relationship counts for a lot.
Watching how the cookie crumbles
Ultimately, RIM’s prospects depend on which of these issues end up being more important down the road. The big question is whether RIM’s dominance in the enterprise market, combined with its strong carrier relationships and emerging market growth is enough to outweigh or offset the market share it might lose in the North American retail space to competitive pressures from other smartphone providers.
Disclosure: Author holds a long position in RIMM