It's Time for Research In Motion to Change Strategy

Includes: AAPL, BB, GOOG
by: Monty Spivak

Research In Motion (RIMM) shared results with its investors and the public, and its first quarter-end results were not exactly stellar. I will not bore you with all of the statistics that are available almost everywhere, but the drop in earnings demonstrates that the current strategy is not working effectively:

For the three months that ended May 28, RIM earned $695 million, or $1.33 per share. That's down from $769 million, or $1.38 per share, a year ago.

The full text of the Q1 Fiscal 2012 Results Announcement is on the RIM website.

The single largest problem for RIMM is that Apple (NASDAQ:AAPL) basically repeatedly introduced disruptive technologies in RIMM’s space. Apple invented “cool” products designed for a young, mobile customer. To quote ABC News/Money:

RIM started in and dominated the corporate smartphone market and has sought to expand its appeal to consumers, but has recently had trouble with consumers because the phones aren't perceived to be as sexy as Apple's or Google's (NASDAQ:GOOG).

With a history of brilliant design, innovation, visual and functional appeal, and a cult-like following, Apple is a tough competitor to face head-on. The “me too” mobile device players – including Samsung (OTC:SSNLF), Hewlett-Packard (NYSE:HPQ), and Google (GOOG) – are either technological followers (the former two), or in the case of Google’s Android, have a widely accepted mobile operating system, very-large existing brand and client-base of their own. In addition to sales volumes and financial results and share prices, there is an enormous body of anecdotal evidence to support Apple’s dominance; just check the website of any large mobile telephone service company. Typically, they have a separate tab for Apple (iPhone), and all other vendors occupy another tab on the website.

I am not proposing that RIMM does not have a great product line-up; rather, I am proposing that it is chasing the wrong customer. RIMM’s technological advantages include the best messenger service (BBM), (push) email service, and very-high security. In regions that have poor broadband services, the BlackBerry (with email) is the only viable option for mobile data services. On the use side, the BlackBerry’s QWERTY keyboard, large business and government installed base, and focus on business solutions, has been the winning game. Clearly, this audience has different requirements, characteristics, and demographics, than the Lady Gaga generation.

Should RIMM try to occupy the retail footprint that Apple dominates? The company would need to build huge volumes, innovate more quickly, create a more leading-edge image, and somehow get ahead of Apple. I am a believer in “slow and steady wins the race,” but not in the marketplace of instant gratification. If RIMM would proceed on this basis, it would probably end up with a marginalized offering; it will become Canada’s equivalent of HP-Palm. The market seems to have already priced-in this assumption, with RIMM trading at well-under $35.00, which is its 52-week low, and over 50% below the 52-week high.

My proposal is that RIMM refocus on its existing customer base, and occupy a defensible global niche. Business and government are less price and feature sensitive, provided that RIMM can meet functional and security requirements. As there is a greater need to type documents, a keyboard is a pragmatic interface. Moreover, many baby boomers prefer keys, and large fonts. With a requirement for immediate, secure communications in almost any area, the ability to watch a movie in real-time is likely not part of a government’s purchasing decision. The security of personal information, government/business plans, and military information, paramount, RIMM would be a better choice. Would you want your security trades and credit card payments made on a “reasonably secure” or a “very secure” platform? In other words, RIMM has certain competitive advantages. Unfortunately, it is not focussing its corporate direction on leveraging the differentiators.
In practical terms, here are a few next steps that RIMM should take:
  • Stop squandering Research and Development (R&D) money on non-core target markets. R&D should add differentiators and value to the core customers and target niche.
  • Build the next generation of BlackBerry and PlayBook to optimize their use of business applications. They should be the best devices to manipulate spreadsheets, make Powerpoint presentations, and collaborate on documents. Perhaps they could record and document meeting minutes, and transform napkin-like scribbles into Visio diagrams. Without these, the RIMM BlackBerry smartphone and PlayBook tablet are undifferentiated devices.
  • Build applications that require very secure, guaranteed-delivery environments. A calculator or game is a nice application, but making a trade is a critical application for a broker. Some of these applications are a necessity for certain jobs – RIMM could maintain exclusivity in the entire financial services and government markets.
  • Create connectivity to devices that nobody else could and would consider. There are many legacy mainframe, Tandem/Non-Stop, and AS400 servers in the business and government organizations. Are there modernization applications, which could provide real-time connectivity? This could make the BlackBerry a back-office connectivity monopoly.
  • After a defensible set of applications and features are in place, increase prices to make these essential functions more exclusive. Tag Heuer, Rolex, and other high-quality watches did not build their marquis brands by discounting their high-value products.
  • Do not slash the line-staff who are working on R&D, sales and product management – RIMM needs these rubber-meets-the-road contributors and innovators. Eliminate the top heavy, duplicate CEOs and triplicate COOs in the executive suite. RIMM needs a flatter, more nimble, and more proactive organization, and reducing the senior management would be an important first step. Decimating R&D, operations/support, and sales – the likely outcome based on the cost-cutting comment in the announcement – will only disenfranchise and demoralize the real contributors.
It is time for RIMM to shrink – not grow – its target market. Focus is required – narrow RIMM’s R&D activities to gain functionality that nobody else offers. Build a defensible niche around their competitive advantages. They should not exit from retail entirely, but position the offerings so that they are unique to their customers, while only certain retail market needs are met. For example, they can play movies and newscasts for the office workers during leisure hours, but the key business differentiators should make them the default mobile device. How many business people are prepared to carry both a business and personal mobile device?
There are risks with this strategy. Volumes will almost certainly decrease in the near term, or at least not grow as quickly. This is the nature of a strategy – one makes choices to achieve a certain outcome – and this is an alternative, which narrows the market that RIMM would seek to satisfy. It would be hard to more negatively impact the share price than continue on the current course. When benchmarked to its historic valuation, RIMM is about the same price as in August 2006, and at one-quarter of its 2008 high. Risking lower volumes in exchange for a better future looks pretty good when compared with the status quo.

Despite potentially lower volumes, unique business and government functionality could permit higher pricing. In fact, this strategy mirrors that of Apple. Over the past 20 years, Apple’s 5% of the Personal Computer (PC) market was mainly in the arts niche (photography, music, and related fields). This loyal following was the result of specialized capabilities that met the needs that the Wintel PCs could not. Eventually, Apple moved to the Intel chip-set, supported Microsoft (NASDAQ:MSFT) Office applications, and built the functionality demanded by mainstream PC users, however, they continue to meet core-client needs, and command a price premium in the PC market.

RIMM should learn from Apple’s success. It has the opportunity to refocus its strategy in order to attain a monopoly in a specific market. Warren Buffett would probably endorse RIMM building this economic moat (he defined this as a company that has competitive advantages in order to protect its long-term profit and market share). This would be far superior to the current strategy of working very hard to fall further behind Apple. If management does not alter its course, then RIMM may become marginalized. Before it is too late, RIMM should change its strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.