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Research In Motion's (RIMM) stock price has taken another turn for the worse over the last few weeks – although this time, arguably due to weakness in the tech sector and general pessimism towards RIM. The most revealing news to come out during this period has been the press releases of a number of marketing research companies detailing their estimates for Q3 smart phone market share.

The most alarming numbers were provided by Canalys. By their estimates, RIM’s share of U.S. smart phone sales has declined to an astonishing 9% (from 24% one year earlier) – a worrisome result for any RIM investor to say the least. Keep in mind, however, the distinction between sales market share and subscriber market share. Sales share takes a short-term view while subscriber share takes a long-term view. So while RIM represents only 9% of smart phones sold in Q3, RIM still represents 19% of all subscribers in the U.S. (as reported by comScore). Sales share and subscriber share must ultimately converge, but the current deviation can be interpreted in two ways. Either we have a permanent reduction in sales and subscriber share will be dragged down over time; or, we have a temporary lull in sales as subscribers hold out for BBX (BlackBerry’s next-generation operating system), and sales will rebound accordingly when that time comes.

In any case, I have updated my U.S. forecast with the latest estimates.

10-year U.S. Forecast
(Click to enlarge)

In summary:

  • Subscriber projections unchanged.
  • Revision of 2012 sales figures:
  • Faster smart phone sales ramp-up – 95% penetration by 2016.

The net effect is a less aggressive sales projection for RIM, but the takeaway remains the same: The smart phone “pie” is growing very quickly and RIM only needs a small slice.

Note: This article is a continuation of an earlier discussion on RIM. Refer to my previous article, entitled “RIM: What’s in a $30 Price Target?,” for additional background information.

The Story in Canada

How is RIM faring on its home turf? The answer is: much better than in the U.S., but maybe not for long. Although a drop-off in market share is noticeable, it is lesser in magnitude and lagged relatively to the U.S. trend.

As a Canadian myself, I can qualify some of what the data is saying from the perspective of a Torontonian. My observation is that loyalty among existing BlackBerry users has been maintained for a prolonged period of time, but confidence in RIM is now noticeably beginning to wane. For the greater part of this year, amidst a tumbling BlackBerry stock price and a bombardment of negative press on RIM, I continued to hear people openly profess their love for their BlackBerry. From my colleagues at work to my cousins in high school, the message was the same: All their friends were on BBM (BlackBerry Messenger), and they simply didn’t need the extra bells and whistles offered by their flashy touch-screen counterparts.

This seemed to be the case up until BlackBerry’s latest setback – the service outage felt around the world. I’m certain the inconvenience was minor for most, but the disruption to RIM’s prized infrastructure was a wake-up call for many and the end-of-the-line for some. What sticks in my mind, however, is not the incident but the lackluster response. The apology did little to instill confidence in its subscribers. All I got were some free apps that served less to appease me than to grimly remind me of the lack of quality apps available in RIM’s repertoire.

So what’s next? All is not lost yet, but RIM needs to act quickly and decisively. The state of the Canadian telecom marketplace has most users locked into 3-year contracts, so many still sport a BlackBerry, but the stickiness is disappearing. Also keeping RIM afloat in Canada are the enterprise users. IT professionals still favour BES (BlackBerry Enterprise Server), and not much is expected to change in the near term.

But enough of what I think; I’ll let the numbers speak for themselves.

Canada (in millions)

Feb-09

Feb-10

Feb-11

Feb-12

Source

Population

33.7

34.0

34.3

34.7

United Nations

Mobile phone penetration

65.6%

70.0%

75.2%

80.0%

Calculated

Mobile phone subscribers

22.1

23.8

25.8

27.8

CRTC

smart phone penetration

21.3%

21.8%

32.8%

40.0%

Nielsen; comScore

smart phone subscribers

4.7

5.2

8.5

11.1

IDC

BlackBerry market share

45.0%*

42.0%*

42.0%

35.0%*

comScore; Ipsos

BlackBerry subscribers

2.1

2.2

3.6

3.9

Calculated

Average lifespan of mobile phone

2.2

3.0

2.1

2.0

Calculated

Mobile phones sold

9.9

7.9

12.3

13.9

Calculated

smart phone penetration

32.5%*

42.0%

55.0%*

60.0%

IDC

smart phones sold

3.2

3.3

6.8

8.3

Calculated

BlackBerry market share

64.9%

62.0%

55.0%*

35.0%

IDC

BlackBerrys sold

2.1*

2.1*

3.7*

2.9

RIM Annual Reports

New subscribers per unit sold

0.03

0.37

0.11

Calculated

* Estimated based on imperfect or partial data

The key points in my opinion are:

  • BlackBerry market share held strong coming into 2011 at a time when corresponding U.S. market share was falling sharply. Canadian market share was 42% in February 2011 while U.S. market share had fallen to 27% (from 42% one year earlier).
  • There is evidence that RIM is losing ground to Apple (NASDAQ:AAPL) and Google’s (NASDAQ:GOOG) Android partners, but RIM still leads the market in terms of subscribers. BlackBerry subscriber market share was 42% in February, 38% in August (as reported by Ipsos), and headed towards 35% by my forecasts. Meanwhile, the trend for iPhone and Android is upwards.
  • The average lifespan of a mobile phone in Canada is between 2 and 3 years. This is longer than in most developed markets and reflects the lengthy post-paid contracts that subscribers are locked into. This suggests that changing smart phone preferences are slow to translate into actual market share impact.
  • The Canadian smart phone market is quite small relative to the overall market. It makes up 2% of all smart phone subscribers, 2% of all smart phone sales, 6% of all BlackBerry subscribers, and 7% of all BlackBerry sales. This means that success in Canada has a limited effect on RIM’s bottom line.

Here’s my 10-year forecast of the Canadian marketplace. My key assumptions include:

  • 95% smart phone sales penetration by 2016.
  • 95% smart phone subscriber penetration by 2021.
  • BlackBerry’s long-term market share will be 20%.

10-year Canada Forecast
(Click to enlarge)

Also noteworthy is the amount of attention RIM was able to gain with its decision to slash prices on PlayBook tablets in Canada for the holiday season (from $500 to $200 CAD). A money-losing scheme in and of itself, but filled with upside potential. First, there’s the rare positive media attention. I’ve also witnessed consumers more interested in the PlayBook than ever before; inventories at major retailers are short-lived. Furthermore, if this results in a sizeable number of PlayBook owners, positive network effects are stimulated – where more users attract more developers who build apps that attract yet more users. And since RIM’s upcoming BlackBerry touts a common platform with the PlayBook, any traction gained in the tablet space increases the probability of success for the next-generation BlackBerry.

RIM in the U.K.

Apparently, the British love their BlackBerrys. The trend in the U.K. has run counter to what we’ve been seeing in North America. BlackBerry sales exceed iPhone sales, and even more surprisingly RIM’s market share is holding steady while Apple’s share is on the decline. From what I’ve been reading, Androids and iPhone are a hit with new users, but BlackBerry is the number one choice for feature phone switchers. So while the success of Android is eroding iPhone sales, the BlackBerry has been left relatively unscathed. Earlier this year, RIM celebrated its strength in the EMEA (Europe, Middle-East, and Asia) and announced that BlackBerry was the number one U.K. smart phone vendor – an impressive but somewhat misleading statement as the entirety of the Android universe (consisting of multiple vendors) still vastly outpaces BlackBerry in terms of size and growth.

U.K. (in millions)

Feb-09

Feb-10

Feb-11

Feb-12

Source

Population

61.7

62.0

62.4

62.8

United Nations

Mobile phone penetration

124.3%

129.5%

130.0%

130.5%

Calculated

Mobile phone subscribers

76.7

80.3

81.1

82.0

Ofcom

smart phone penetration

14.0%*

22.9%

40.8%

47.0%*

comScore; Kantar WorldPanel

smart phone subscribers

10.8

18.4

33.1

38.5

Calculated

BlackBerry market share

15.0%*

18.7%

18.0%*

17.0%

comScore

BlackBerry subscribers

1.6

3.4

6.0

6.5

Calculated

Average lifespan of mobile phone

1.3

1.3

1.3

1.5

Calculated

Mobile phones sold

57.8

63.6

60.5

54.6

Calculated

smart phone penetration

16.0%*

28.0%*

48.0%*

70.0%*

Ofcom; Kantar WorldPanel

smart phones sold

9.2

17.8

29.0

38.2

Calculated

BlackBerry market share

18.0%*

20.0%*

20.0%*

22.0%*

Kantar WorldPanel

BlackBerrys sold

1.7*

3.6*

5.8*

8.4

RIM Annual Reports

New subscribers per unit sold

0.51

0.43

0.07

Calculated

* Estimated based on imperfect or partial data

Here’s what I see from the numbers:

  • Mobile phone penetration is exceptionally high. Currently, penetration is around 130%, which can be roughly interpreted as every third person owning two mobile phones. In effect, the size of the addressable market is larger than what the U.K.’s population might otherwise imply.
  • BlackBerry’s market share in the U.K. has a slight upward trend. RIM’s share of smart phone sales has improved from 20% in FY 2011 to 22.5% (as reported by Kantar WorldPanel) over the last quarter. This is in stark contrast to BlackBerry’s rapidly declining position in North America.

Below is my 10-year forecast of the U.K. marketplace. My key assumptions include:

  • 95% smart phone sales penetration by 2015.
  • 95% smart phone subscriber penetration by 2020.
  • BlackBerry’s long-term market share will be 15%.

10-year U.K. Forecast
(Click to enlarge)

RIM elsewhere and the emerging market opportunity

BlackBerry is the number one smart phone brand in a number of countries – among them are the Netherlands, South Africa, the U.A.E., Saudi Arabia, and the Philippines. A recent article in the Wall Street Journal provides a glimpse into RIM’s emerging market success. In just 2 years, Indonesia has seen RIM’s market share rise from 9% to 47% with over 5 million subscribers today. BlackBerrys are priced at $200 (compared to $500 USD for iPhones) in Jakarta and networks provide access for as little as 25 cents a day. Although less-expensive alternatives are available, none compare to the BlackBerry’s ease of use and reliability. Furthermore, the BlackBerry’s native data-efficiency drives the affordable fixed-rate plans which are as much of an attraction as the BlackBerrys themselves.

It is also important to note that in many emerging markets, computers are unaffordable and the BlackBerry represents the first time an individual can readily access the internet. This rings especially true in West Africa, where access to BBM can be more consistent than even electricity. The unprecedented access to information and instant messaging has elevated the BlackBerry to a symbol of status in countries such as Ghana and Nigeria.

On the other hand, a couple of drawbacks come with RIM’s emerging market focus. Behind spectacular subscriber gains, RIM is in effect expanding on a lower-margin business, which drags down overall profit growth. Secondly, early success in developing markets is difficult to sustain. Income levels will eventually rise and the influx of competition is inevitable.

Apple is no slouch either. They’re pursuing an emerging market strategy of their own and have gained traction in more developed areas such as Brazil, Mexico, Russia, and China. The iPhone’s popularity in China is particularly worrisome to RIM given the size of the population and thus importance in the long run (where access to China Mobile yields 600 million potential subscribers and access to China Unicom yields another 200 million). Despite Apple’s decision not to discount the iPhone, they’ve been able to attract 9% of the population, catering to the ultra-rich in a nation with tremendous disparity between rich and poor. Meanwhile, RIM still struggles to stir up long-term interest, ironically criticized for their high price point. The large number of BlackBerry clones and counterfeits on the market has also dampened demand.

In India, home to 600 million mobile subscribers, the story is different yet again. RIM’s market share is 15% compared to Apple’s weak 2.6% showing. The reversal in fortunes is best explained by the state of network infrastructure in India. Almost a generation behind, India’s 2G and preliminary 3G networks are more conducive to BlackBerry devices. Even so, BlackBerry is a distant third from market leaders Nokia and Samsung, predominantly featuring the Symbian platform, and combining for a market share of 61%. (Similarly, in China, market leaders Nokia and Samsung account for 46% of the smart phone market.)

In the grand scheme of things, the real winner is the Android platform. Since 2009, Android has been rapidly swapping places with Symbian. Almost all the major smart phone vendors – including the likes of Sony, Motorola, Samsung, and LG – have withdrawn prior membership in the Symbian Foundation in favour of becoming partners in Google’s Open Handset Alliance (OHA). The resulting market trend has been a decline in Symbian market share from 47% to 17% accompanied by a rise in Android market share from 4% to 52%. Even in China, where Symbian is still prevalent in the form of Nokia handsets, the momentum shift towards Android is evident. A handful of home-grown Android variants – such as Xiaomi and Dianxin – are coming to fruition and geared to undercut foreign players with prices between $200 and $300 (USD). Furthermore, experts predict the wide-spread presence of a low-cost segment in the near future made possible by the Android platform – we’re talking about $150 (USD) and below.

Now here’s the kicker: Despite Android’s dominance over Symbian, Symbian still commands the second largest share of today’s world-wide smart phone market. Imagine how small the global footprints of RIM, Apple, and Microsoft must be.

Before jumping into the numbers, let me first describe how I arrived at them. Unlike the data I have gathered for RIM’s primary geographies, the data below is not based on any market reports. Instead, these numbers represent the remaining balance once the corresponding U.S., Canada, and U.K. figures have been subtracted from the “World” values.

Other (in millions)

Feb-09

Feb-10

Feb-11

Feb-12

Source

Population

6413

6490

6562

6636

Calculated (Balance)

Mobile phone penetration

56.8%

65.7%

74.2%

80.0%

Calculated

Mobile phone subscribers

3643

4262

4872

5308

Calculated (Balance)

smart phone penetration

4.2%

4.7%

6.5%

10.0%

Calculated

smart phone subscribers

154

201

315

531

Calculated (Balance)

BlackBerry market share

6.3%

6.0%

8.0%

9.6%

Calculated

BlackBerry subscribers

9.7

12.0

25.1

51.0

Calculated (Balance)

Average lifespan of mobile phone

4.1

4.9

4.5

4.0

Calculated

Mobile phones sold

899

866

1090

1332

Calculated (Balance)

smart phone penetration

9.7%

12.2%

17.8%

24.9%

Calculated

smart phones sold

88

106

194

331

Calculated (Balance)

BlackBerry market share

6.7%

9.4%

11.4%

9.7%

Calculated

BlackBerrys sold

5.9*

9.9*

22.2*

32.1

RIM Annual Reports

New subscribers per unit sold

0.23

0.59

0.81

Calculated

* Estimated based on imperfect or partial data

Here are some takeaways:

  • The sheer size of the opportunity outside of RIM’s primary geographies is astounding. Over 92% of the world’s mobile phone subscribers live outside of the U.S., U.K., and Canada. Of those 92%, fewer than 7% are smart phone subscribers. And of the 7%, only 8% are BlackBerry subscribers. In that respect, “other” markets alone present plenty of fuel for RIM’s growth.
  • Despite RIM’s dominance in a number of countries, overall market share in “other” markets remains below 10%. Cleary, RIM is not the only player profiting from rapid growth outside traditional North American and Western-European markets; nor is RIM the chief beneficiary. However, the variety of markets available means that the BlackBerry need not compete head-on with its key competitors in its perhaps temporarily weakened state.
  • RIM’s efficiency in gaining new subscribers is superior in its “other” markets. In FY 2011, 6 net new subscribers were gained for every 10 BlackBerrys sold. FY 2012 will likely see the same or better as a large percentage of these customers are new smart phone users. The opposite is happening in all of RIM’s primary markets, where this metric is worsening significantly.

My 10-year forecast for “other” markets is as follows. My key assumptions include:

  • 50% smart phone sales penetration by 2017; 70% by 2021.
  • Nearly 50% smart phone subscriber penetration by 2021.
  • BlackBerry’s long-term market share will be 12%.

10-year Other Forecast
(Click to enlarge)

In recent news, Chinese telecom giant, Huawei, threatens RIM’s command in Africa. It has firmly established itself in Kenya with the introduction of a $100 Android smart phone, carving out 50% of the smart phone market in just over a year. Now, Huawei has its sights set on South Africa, and will challenge RIM’s 60% market share in the coming year. It is uncertain how well the revered BlackBerry brand will hold in Africa, but some reversal to RIM’s explosive African growth is expected.

Tying it all together

Aggregating all earlier forecasts by geography, I can summarize my overall forecast as having these properties:

  • 80% of the world will own mobile phones by 2012; 90% by 2021.
  • A quarter of all mobile phones will be smart phones by 2015; half by 2022.
  • Half of all global mobile sales will be smart phones by 2016; three-quarters by 2022.
  • 12.2% of all smart phones owned and sold will be BlackBerrys in the long run.

10-year World Forecast
(Click to enlarge)

Two remarkable results follow from the above:

  • RIM will have 417 million subscribers in 2021. (Six-fold growth in 10 years.)
  • RIM will sell 219 million BlackBerrys in 2021. (Four-fold growth in 10 years.)

How sensible is this? Take a look at the chart below. If we truly grasp the rate at which the smart phone market is growing, then my forecasts for RIM should be no surprise.

Global Smartphone Sales by Platform
(Click to enlarge)

I encourage you to focus on the number of BlackBerry units sold (the orange line), and the total size of the market (the sum of all lines). These totals are straight from my forecast and substantiated by all earlier analysis. Competitor unit sales are also provided, but I wouldn’t dwell on them as they are merely quick and dirty estimates.

I will continue this discussion in a following article, where I will relate the overall subscriber and sales forecasts to RIM’s financials. From there, I will discuss trends in average selling prices, geographic shifts in revenue, and develop a revenue forecast. Finally, I will look at a DCF calculation and explore the resulting valuations that can be arrived at.

Disclosures regarding the data

  • February 2009 to 2011 are based on historical figures, while February 2012 is forward-looking – based on management’s guidance and my own expectations for 2012 Q3 and Q4.
  • Annual increments ending in February are used for alignment with RIM’s fiscal year. As a side-effect of this convention, I am forced to time-shift figures for which only year-end data is available. In general, I will use, without interpolation, 2008-year-end-figures for February 2009, 2009-year-end for February 2010, and 2010-year-end for February 2011.
  • Population estimates are based on the 2010 Revision of the World Population Prospects published by the United Nations. I used their medium fertility estimates and linearly interpolated between their five-year projection intervals.
  • The BlackBerrys sold figure for geographically segmented data is roughly approximated. It is assumed that RIM’s overall revenue breakdown by geography can be used to approximate the share of units sold per geography. This is obviously an imperfect assumption due to varying average selling prices around the world, but the simplicity in logic is what I’m aiming for.
  • My subscriber totals intentionally do no match those estimated by comScore. Since comScore surveys only the portion of the population age 13 and over, their absolute figures cannot be used directly. Instead, I have used comScore’s percentage figures and assumed they hold true across the entire population.
  • My revised U.S. 2012 sales figures imply a reduction in the size of the overall mobile market. Either overall sales have slowed, or there is a fundamental disagreement between measurement methodologies used by SNL Kagan, Nielsen, and Canalys – where SNL Kagan’s estimates formed the basis for my 2009 to 2011 mobile sales figures.
  • My sales totals intentionally do no match those estimated by Ofcom. Since Ofcom’s data only represents sales through consumer channels, their absolute figures cannot be used directly. Instead, I have used Ofcom’s percentage figures and assumed that they are also representative of enterprise channels.
  • The World forecast is calculated as follows. 2009 to 2011 figures are based on historical market research reports and RIM financials. 2012 figures are influenced by current market research reports, RIM’s quarterly reports and management guidance. 2013 and beyond are calculated by summing across my earlier forecasts for each individual geography.
  • Sources for numbers used in the section entitled “RIM elsewhere and the emerging market opportunity” are as follows. Indonesian figures from Wall Street Journal article entitled “BlackBerry Finds Fertile Ground in Asia”. Chinese figures from Wall Street Journal article entitled “Apple Eyes Bigger Slice of Chinese Market”. Indian figures from Bloomberg article entitled “Apple Cedes Surging India smart phone Market to Nokia (NYSE:NOK)-RIM”. Android figures from various Gartner reports.
Source: The Other Half Of The Research In Motion Story: Canada, U.K. And Emerging Markets