It’s well known that shares of Research In Motion (RIMM) have been battered, down over 70% in 2011. This collapse in the stock has occurred despite profitability, 70 million users worldwide and no debt. Value investors tout the stock’s extremely low valuation of less than 4 times earnings, and management’s plan to upgrade the product offering with new phones running the company’s yet-to-be-released QNX operating system. I’ve read myriad reports as to whether RIMM is a value stock or a value trap, but for this article I’ll leave out the financial metrics and focus on the qualitative.
The real question is whether RIMM will pull off a turnaround and regain lost market share, or will it suffer the same fate as former handset giants like Palm, Nokia (NOK), Kyocera, Ericsson and Motorola (MMI)?
The answer lies in RIMM’s ability to adapt to the shift in power that has taken place in the handset marketplace. This nascent and exploding industry has experienced several paradigm shifts in its short history. The initial growth in cell phone rewarded those companies with the ability to design and produce smaller and cheaper phones. Features were limited and hardware was the differentiator. One megapixel on a cellphone camera? What could be next?
I even remember when the clamshell design was the pinnacle of cell phone cool. Saturday Night Live hilariously parodied the ever-shrinking flip phone in this clip (here).
Texting and messaging was a revolution in cell phone technology but still within the programming capability of the handset makers. This was the sweet spot for RIMM as its phones allowed consumers to untether yet stay connected to the network of friends and work, 24/7. The Crackberry era was flourishing.
However, it was only a glimpse of things to come as the software side of the industry took notice and began to rethink the cell phone as something more. Handsets were envisioned as computers you could carry in your pocket. Staying connected went beyond text and email. It meant web access and social networking apps. Hi-res screens became a must have item. The smart phone was born.
Enter Apple (AAPL) and Google (GOOG) which followed the blueprints of the PC war. Apple, of course, followed its integrated closed architecture strategy while Google followed the Microsoft (MSFT) model. Both understood the importance of creating a developer-friendly environment to allow third party applications.
RIMM was left at the gate as the mobile industry shifted from hardware to software. Blackberry’s core strength became a basic feature on all phones. Consumers are now looking for greater entertainment and productivity tools available on the iOS and Android platforms. Because they were prepared to fight the last war, RIMM was unable to create a competitive operating system for the current market. They simply lacked the programming horsepower of Apple or Google (not to mention Microsoft with their new mobile OS).
Fourth and long and time is running out. RIMM had no choice but to acquire QNX Software Systems and its eponymous operating system. QNX may help in the short term, but investors should be concerned about whether RIMM will be prepared to compete with Apple and Google beyond 2012. If the recent corporate history is an indicator, I fear RIMM will be unprepared again for the next paradigm shift, whatever that may be.
Disclosure: I am long AAPL, GOOG.
Additional disclosure: I am short RIMM.
