Jim Balsillie, the founder and chief of Research in Motion (RIMM), is like the old maid in a pantomime. Poor Jim can’t see that the danger is behind him. His answers to analysts’ questions on the last conference call were a bit like eavesdropping on someone’s private psychodrama. The answers were tortured, obscure and only loosely connected to reality.
The ‘dramatic arc’ that RIM is following is now clear for all to see. It goes like this: in 2008, RIM achieved an average selling price of around $400; by the middle of last year, this had fallen to $356; and by the last quarter of 2009, it had fallen again to $311. Next stop will be closer to $305. Yet, as Best Buy (NYSE:BBY) has just confirmed, the fourth quarter of last year was an exceptionally strong one for smart phones, Apple’s (NASDAQ:AAPL) average selling price rose above $600. If you are a seller of smart phones, life has never been better.
So why did ASPs drop for RIM? Probably because RIM is following the same path beaten by Nokia (NYSE:NOK) at the beginning of the last decade. Average selling prices will continue dropping because RIM’s product is becoming passé, just as Nokia’s did. The next step will be that RIM’s market share in the U.S. will drop as Apple picks up Verizon (NYSE:VZ) and Google’s (NASDAQ:GOOG) Android operating system gains momentum. As they say in the pantomime, it’s curtains.
Google’s Android is really aimed more at the Blackberry than the iPhone. The Android is a device that offers businesses the secure email that the Blackberry offered them. Secure email has, so far, been the Achilles' heel for iPhone, which is a product that is largely focused at consumers. A recently published survey by Crowd Science, a U.S.-based market researcher, found that 40% of Blackberry users would make the iPhone their next smart phone. However, coming up quickly on the inside, Google’s Android operating system appealed to a third of Blackberry users.
Another recent survey – this time from ChangeWave – specifically looked at U.S. corporate IT budgets. A total of 1,702 respondents involved in IT spending replied: Importantly, the Apple iPhone saw a five percentage point rise in market share, while Google’s Android device saw a four percentage point rise. The Android is at an earlier stage of development, so as hardware vendors and Google continue to enhance the design it will become more competitive. In particular, there are more than 20 companies supporting the Android, so we can expect prices to fall rapidly, which will bring further pressure on RIM. There will come a day when even Apple has to drop prices.
Smart phone Ecosystem
Smart phones are computers first and phones second, which means that applications and content are more important than the quality of voice calls. This is where RIM comes unstuck. There are now seven smart phone operating systems out there: iPhone, Symbian, RIM, Google, Windows (NASDAQ:MSFT), Palm (PALM) and Meego (Nokia and Intel (NASDAQ:INTC)).
This presents a headache for the hordes of developers who are, in reality, the people who decide which smartphones become successful. The typical applications developer has limited resources, so he has to make a carefully considered decision over which operating system to commit resources. The phone that gets the developer’s attention becomes the phone that has most to offer subscribers. The result is a virtuous circle in which the phone with the most applications attracts the most subscribers, which, in turn, attracts more developers who create more applications.
The release of Apple’s iPad will make this even more apparent. At present there are 75m users of the iTouch and iPhone. Within a year, another 6m or so iPads will be sold. These three devices all share the same operating system, which in turn is supported by Apple’s wildly successful Apps Store. From the point of view of developers, Apple offers you a great environment to write for a tremendous storefront from which to sell your software and a large and fast growing user base.
Like Nokia before, RIM has been slow to recognise that the market has changed. The Blackberry’s operating system is old, the web browser primitive and the device itself is still largely keyboard based. Meanwhile, the market – and even Nokia – has moved to touch sensitive screens. Eventually, RIM will launch a proper touch sensitive Blackberry and will improve its operating system, but by the time it does the market will have moved on. RIM is in catch up mode. It is not a leader.
What Blackberry does have going for it is market share. It has about 20% of the global smart phone market compared to Nokia’s 39% and Apple’s 20%. Mobile operators like the Blackberry device because it uses less bandwidth than either the iPhone or Android and, as we have seen, corporations like the email function. Kids also like the Blackberry messaging function and, for the time being at least, the device is popular in emerging markets.
RIM is not yet in a dire state. However, from the point of view of investors, the stock will continue to underperform – despite the low rating compared to Apple – until there is confidence that the average selling price has stabilized. That is unlikely to happen anytime soon, because it looks ominously as though RIM’s market share in the U.S. is poised to implode. More disappointing conference calls will leave investors with a real feeling of Balsillie ache.
Disclosure: I do not own shares in RIMM or AAPL