In a recent article, I talked about a rare 1-2 punch that Research In Motion (RIMM) issued its investors last week. The company did the unthinkable. First, it delivered a jab to the head of investors with an earnings miss and then sent a “gut wrenching” blow by issuing a warning. Does that spell a knockout might be on the way? It just might be in the cards.
Should Investors Throw in the Towel?
That’s the question we should be asking and hopefully this article serves to help formulate an answer. But I will have to admit that it is one that I find very hard to answer at this moment. It is really challenging to make an investment decision, when it appears that management doesn’t appear to know what it is up against. The other challenge as an investor is trying to find a “silver lining” in the company’s direction. With no clear route toward sustainability, I would have to say that the company is an ideal short play at the moment, and if not, at best it should be handled with surgical gloves.
The Tale of the Tape
For the quarter ending in May, RIM said it now expects per-share earnings of $1.30 to $1.37, down from the $1.47 to $1.55 projected last month. RIM also said it expects shipments of BlackBerry phones for the quarter to be at the lower end of the range of 13.5 million to 14.5 million it forecast in March. The company said the lower shipments and a shift to lower-priced models will result in revenue slightly below the $5.2 billion to $5.6 billion forecast in late March.
My sense is that complacency crept into the company at the most inopportune time. RIM has had a nice franchise in the business market selling very secure highly mobile devices. The BlackBerry was a “game-changer.” Do you remember the Palm Pilot and the market’s first introduction to stylus-supported Smartphone’s? Were the phones really and truly “smart” back then? It was comical! Then arrived Research In Motion with its flagship BlackBerry mobile device; a truly revolutionary product that was embraced not only by every executive and but also executive wannabes. That’s right, the product designed for the corporate enterprise environment eventually made its way on to the hips of 12th-graders. It became an icon of status that even made its way on to several rap songs. It was truly remarkable. Now RIM has approached “MySpace” status; remember them?
I think it is more than fair to say that RIM has been caught resting on its laurels and it's cost them big time. It is making strides in areas of the consumer business, but is not fairing very well. It seems it has recently acknowledged that it’s time to enter the next phase of its model. But the question is: How much time does the company have left? The writing on the wall says that it is on the verge of being erased by the dominance of Apple (NASDAQ:AAPL). Nobody, so far has proven to be worthy of entering Apple’s space without getting a merciless beating. Does RIM have enough left in the tank to withstand the onslaught of Apple’s pounding or will we soon discover that it was simply playing “rope-a-dope,” a fighting strategy made famous by Muhammad Ali. For RIM’s sake, and for that of its investors, let’s hope that’s the case since Apple has had a history of forcing the competition to throw in the towel and leave the market entirely.
There are several major differentiators between Apple and RIM and for that matter, the rest of the mobile devices market. I would point to some of the things that Apple has strategically taken advantage of, others can as well; albeit, probably not to the same degree. These include having increased capacity of screens, more robust batteries with longer lives, low power and more efficient processing etc. For the most part, every brand and competitor has access to those things and I believe that the overseas ODMs are very anxious to make these devices for any company that wishes to brand them.
The things that Apple has that others don't have are the ecosystem; particularly the developer network, those that make the accessories, and well, not to overlook the groups of people who support Apple. Then there is the most important factor of all, the customers and the buzz that surrounds every Apple product. Another advantage is that Apple has this thing called the unified stack, which is that it owns everything from top to bottom in its computing paradigm. So it doesn't need to rely on other partners. It can make a very slick and extremely unified platform.
Contrasting the Competition
Where Apple sees the benefits of platform unification, others such as Google’s (NASDAQ:GOOG) Android, have more of a fragmented platform. Of course they are doing pretty well, but how long will that platform design withstand the need for more stability and scalability in the OS? Don’t get me wrong, I would much rather be Android than RIM at the moment, but when compared with the unified IOS of Apple, there are some major differences; particularly in the area of hardware configurations. From a customer’s perspective that is something that might be overlooked, but from the standpoint of development, it raises questions. Developers tend to follow the platform that supports the largest population or “seats.” In Apple’s IOS, developers only need to create the app once and it becomes supported across all of Apple’s platforms.
In Google’s Android platform, developers would have to first select the platform, then they will need to decide on the hardware vendor and finally, they would have to also create ports for the hardware. For developers, that’s a significant amount of work and “red tape” to bring an app to market. And I suspect at some point it will catch up to Android and we might then see a diminishing volume of supported apps, so this is an area where developers may see Apple as “ripe for the picking” while the others will likely be left in the basket.
So, clearly in the apps space and hardware space there is a virtuous cycle where Apple has locked up the market pretty tightly. So it’s hard for the others to get in; RIM in particular. Apple likes to win its customers one at a time. It does not worry about the enterprise nor does it try to please the IT department. Its M.O. is to please the individual and not the enterprise. This is where RIM has failed and has over-extended itself. Its PlayBook tablet was suppose to change that perception and excite consumers, but based on the less than glowing sales, it’s likely too late.
As I’ve said previously, there is obvious cause for concern if you are a RIM shareholder. The signs have been on the wall since late 2007 when the original Iphone entered the market. Now that market share is being lost at a rapid pace, we wonder what management will do to mitigate the inevitable “throwing of the towel.” While I would not advocate throwing in the towel just yet, I can clearly see the white fabric in management’s hand, where this was once an unthinkable option. As an investor, you need to ask, will RIM make it to the next round? Or do you hope that it will be saved by the bell? Whichever option you chose, one thing is certain. The clock is ticking.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.