Blackberry's Secret Weapon

| About: BlackBerry Ltd. (BB)
This article is now exclusive for PRO subscribers.

Imagine this: thousands of customers are lining up in Indonesia for the release of your newest product. The number one rated brand in South Africa is yours. A Nigerian TV show named itself after your brand. This would be the pinnacle of success for many brands. Yet, Research in Motion (RIMM), whose Blackberry brand has achieved all of these successes, has seen their business in the U.S. and Europe collapse. Its past quarterly news with the layoff of 5,000 people is just one more sign of how bad things are for RIM.

But, while RIM struggles in the U.S. and Europe, they have a secret weapon in the developing world that could jump-start massive growth.

The question is, will RIM be able to capitalize on this in time to keep them alive?

RIM's Secret Weapon

What people do not realize, is how powerful RIM's Blackberry Internet Service and BBM are in developing countries. It is so powerful that Blackberrys in places like South Africa and Indonesia still crush sales of Apple (NASDAQ:AAPL) iPhones and Samsung (OTC:SSNLF) smartphones.

RIM's former co-CEOs did something so insightful that it is keeping RIM alive today - they formed special relationships with telecoms. Unlike other smartphones that operate data just on the carrier's network, Blackberry Internet Service uses RIM's own servers. While this can be problematic such as when they had their outage last year, it also means that RIM gets a cut every month of the carrier data plans sold to customers. For example, if you pay AT&T (NYSE:T) $10 for a data plan (I wish!), RIM may take $4 for their BIS service. This creates a massive recurring revenue stream even after they sold the customer a Blackberry.

More importantly, this makes text messaging and data affordable in the developing world. While falling, the cost of text messages and data in many developing countries in Latin America, Africa and Southeast Asia still makes smartphones very expensive to own. In contrast, Blackberry Internet Service is incredibly cheap.

With BIS, Blackberry customers pay a relatively affordable monthly fee, and in return get unlimited Internet access, email and BBM. In South Africa, for example, each text can cost a user $0.20 but BIS costs about $8 a month. On BBM, a user can send an unlimited number of messages for no extra cost. So, for 40 text messages, a Blackberry user can send 10,000 messages if she wanted.

The Network Effect

The key to making all this work is that BBM only works with other Blackberrys. This creates a massive networking effect among friend groups in developing countries. Friends can be left out if they do not have a Blackberry. BBM has become the way to communicate as calling and texting are so expensive. Friends that do not have Blackberry, have a harder time staying in contact. Even while relatively affluent students in India buy Androids and iPhones, they still have a Blackberry to keep in touch with most of their friends.

At under $230 in many countries, RIM has made their Blackberry 8520 one of the most affordable smartphones on the market. This network effect combined with affordability keeps RIM alive and Blackberrys flying off the shelves.

The Fundamental Difference

RIM's position as the leader in the developing world, however, is coming under threat. Consumers are starting to notice the smartphones popular in the U.S. New companies are manufacturing affordable smartphones in developing countries like MicroMax and Maxx in India, MobiCell and Dream Mobile in Africa, and Blu in Latin America. Other data messaging applications providing an alternative to BBM, like WhatsApp, have gained major traction in many developing countries. Lastly, data costs are starting to come down to affordable levels. These factors are threatening RIM and will soon force RIM to find a way to maintain its edge.

The difference between RIM's challenges in the U.S. and Europe compared to emerging markets is that RIM is trailing badly to strong competitors in the U.S. and Europe, while it is the market leader in the developing world and primarily competes with Nokia (NYSE:NOK), who is also struggling. This is a fundamental difference in the challenges RIM faces. If RIM wants to take over as market leader in the U.S., it must fight a costly and improbable fight, taking on Apple, Google (NASDAQ:GOOG), Samsung, and LG. In the developing world, it needs to find a way to keep its lead.

RIM's Magical Software

In the past few months, I've heard of rumors about RIM considering breaking itself into two companies - a hardware company and a software company. This idea has more credibility than one might first consider. Its strength in the markets it dominates is in its messaging and data services, not in its hardware. If RIM licensed or otherwise found a way to monetize its software to other companies, it might be able to become extremely profitable and could come to dominate messaging all around the world.

But RIM must be careful and not jump into this too quickly as much of its success and profitability is in its hardware and software combination. However, if they were to find a way to make the software profitable on its own, then this break up appears very promising.

Changing the Leadership's and Investor's Perspective

As we have seen recently with their massive layoffs, RIM has to make drastic changes and perhaps accept the fact that they are now a smaller company. The management team and investors need to change how they think about the company.

RIM is already so far behind Android and Apple in the developed world that their uphill battle to come back in the U.S. seems extremely unlikely. In contrast, in the developing world, RIM still has the competitive advantage. Yet, managers and investors still put the primary emphasis on RIM's business in the U.S. It seems to me, a better option would be for RIM to double down and focus on the massive growth in the developing world, discount RIM's U.S. business, and treat any sales in the U.S as a nice bonus.

The challenge - and opportunity - that investors should be focusing on is whether RIM can somehow find a way to keep and grow its customers in developing countries.

Disclosure: I am long T. Author founded and runs Dream Mobile, a competitor to RIM.