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Despite What May Appear to Be Strong Fundamentals RIMM Is In Trouble, Look Past the Present and Into the Future

Submitted by Reggie Middleton on 09/09/2010 14:24 -0400

Below is my last public installment on Research in Motion. I have
given away much information, data and analysis on this company which
many readers could have used to profit handsomely. I have done so
because I believe RIM’s foibles are obvious. It is the harder to gauge
nuances in this company’s valuation as it’s price plummets that requires
a much more advanced analysis – an analysis that I have made available
to my subscribers.
I will walk both subscribers and free readers through some of these
nuances, but first I want to communicate Research in Motion’s
predicament with an anecdotal, real life experience.

“G”, His Iphone 4 as a Fashion Statement, and the Lawyers Who Thought They Loved Their Blackberries!

I was having lunch at a friend’s house on Labor Day with a bunch of
the fellas, and the topic of smart phones came up. It was an interesting
discussion for that small group of five 40 something guys served as a
microcosm of how I see these mobile computing wars unfolding. Let me
explain how it began. The host, who I’ll call “G”, is a doctor with a
prolific practice in the heart of a big business hub. He drives a
Maserati Quattroporte, does significant charity work and has a very nice
brownstone in a very nice part of town (right about here).
He has also purchased every iPhone iteration within months after it has
been released despite using Windows for his medical practice. I tease
him about his new iPhone 4, saying it is more of a fashion statement,
not a workhorse. He used the iPhone to pump music through the bottom
floor of the house while we ate and chatted using a Bose music dock.

There were two lawyers present as well who had older model
Blackberry’s and another gentlemen (slightly older than us) with an HTC
Touch Pro 2 that didn’t know how to change the time from military
format. The conversation started when I asked G how satisfied he was
with his newest iPhone. He said he loved it. I then asked the lawyers
how they liked their Blackberries. They said they were satisfied with it
it, since it did everything that they needed and wanted from it, namely
phone calls, texting and emails. They emphatically stated that they
were not the game playing, video toy crowd and had no interest in
“i”Objects. When they asked if I still adored my HTC Evo, I said I
believe it is the best smart phone out, bar none – and I have tried most
of them. They all laughed and said I sound like a corporate rep, and
questioned whether I was getting an Android/HTC check in the mail
. Ha, hah, too funny. I then suggested that their satisfaction with
their Blackberries and iPhones may be based in the fact that they were
not aware of what other phones cum portable computers were capable of,
and explained the series that I was publishing on BoomBustBlog. They
laughed again, and asked for what amount were my Android checks for. I
then decided to relate a story of how I took my kids to a Cantonese
seafood restaurant and entertained the staff by speaking to them in both
Mandarin and Cantonese.

At this point, the laughter became borderline obnoxious, but the
premise of the joke was pretty funny so I laughed along. They jokingly
said, “So let me guess, you spoke into your phone and it spoke back
Taiwanese, allowing you to tell your sexy Chinese waitress how pretty
she was? Ha, ha, ha…” I replied, “How the hell did you know that?” as I pulled the Evo out and demonstrated “Talk to Me, Cloud Edition” which verbally and textually translates 38 languages (bi-directionally).
I demonstrated it in Italian, French, Spanish, Korean, Mainland and
Taiwanese Chinese. I then gave the phone a verbal command to text “G”
and send a message to his iPhone that warned him about the dangers of
teasing Reggie, the most awesome, the most knowledgable! Their
collective jaws literally dropped as it worked flawlessly, pulling up
the SMS app, populating it with G’s info and the body of the text
exactly as I spoke it in about 4 or 5 seconds. G attempted to the same
on the iPhone, but to no avail for a) its voice recognition was not as
accurate and b) it didn’t have the voice command apps – or at least they
didn’t work! G was flabbergasted (see this Google Voice Command demo, its quite slick).
As a matter of fact, a similar thing occurred during the lunch at the
Cantonese restaurant. A collective of iPhone4 owners ran up to me after
being informed by the manager of the man with the multilingual phone and
tried to locate the translation app for their phones. Of course, it
didn’t work because this app is only available for the Android system.

We had a quick demo of 4G speeds (more jaw dropping), then I
explained that I use the phone for work often, updating rather complex
spreadsheets and word docs (such as these forensic reports as they come
from my analysts). The lawyers retorted that they don’t use spreadsheets
much. I replied, “But you are always writing briefs”. The big screen of
the Evo combined with “Documents To Go for Android”
(which does not mangle even Office 2010 files) makes this type of touch
up and email work quite feasible. After demonstrating how easily and
quickly I can modify complex word files (I used the forensic analysis of
RIMM as test case), all of those laughing boys were inquiring how much,
where, and how long it would take to get an Evo. All of course, except
G!

The moral of this story is multifold.

First, even those who are still loyal to Blackberry products are
probably so due to the lack of knowledge regarding the capabilities of
the new crop of Android and Apple products.
Second, despite viral marketing and popularly held in the media
beliefs, the high end Android products can do A LOT more than the iPhone
4 at this juncture. This is actually a good thing for Apple fans, for
you can bet the last of your left ass cheek hairs that Steve Jobs will
throw everything, including the kitchen sink, into making the iPhone 5
the most competitive device Apple is capable of. He has to, because it
will take more than marketing to overcome Androids rapid technology
iterations and improvements.
Third, the iPhone vs Android decision is still largely a matter of
taste and preference (despite technical advantages going to Android,
IMO). The comparisons to the Blackberry are not. The Blackberry is
largely an inferior device, even for those who desire a physical
keyboard (which are available on high end Android phones, ex. the Samsung Epic 4G or the Motorola Droid 2). Even the latest iteration fails to keep pace to that released 3 months ago from Apple and Android (see As I Have Anticipated, There is Absolutely No Fire in the Torch, Except for the One That’s Frying RIMM’s Share Price)
and it is already being discounted 50% to the consumer merely weeks
after launch while the Evos, Droid Xs and iPhones can’t remain stocked
at full price!

This appears to be the writing on the wall for Blackberry in the
consumer space. Luckily for Research in Motion, its bread and butter is
in the enterprise space – or is it so lucky? A cursory – or even a deep
dive scan shows that Blackberry is also losing its foothold in the
enterprise space, and is doing so at an incredibly rapid pace. Faster
than I, and most likely they, could have ever imagined. Okay, I take
that back. I could have imagined it and I actually stated such in the File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional, 45 pgs. (those who wish to subscribe for access to the analysis, reports and models illustrated in this article should click here). Subscribers to this document (you can purchase a day pass
to access this document if you do not want to subscribe monthly or
annually) should reference pages 18 and 19, as illustrated below.

So, you see we have been very much aware of the pressures that RIM is
facing in its core market, a market that will probably preclude RIM
from participating in the lion’s share of new smart phone adoption and
will eventually close in on the company unless they can pull a seriously
sized rabbit out of their ass in the very near term. Let’s see if a
quick Google/Bing search shows that we had a point…

Apple’s iOS and Google’s Android Creating a Game Changing Shift in the Enterprise

www.securityweek.com Aug
5, 2010 – When it comes to mobile platform of choice, Research in
Motion’s BlackBerry has been a favorite with mobile enterprise users
until recently. But ever since users released the full enterprise
capabilities offered by the Apple and Google platforms, experts are
starting to observe a shift in the trend that does not favor RIM. The
survey conducted by Trust Digital reckons that sometime next year,
around one-third of IT executives will be seen managing mobile
platforms other than RIM’s BlackBerry.

This portends 1/3 of the future revenues that would have went to RIM
is now going to its two largest competitors. This doesn’t even factor in
the damage that Windows Phone 7 may do.

iPhone and Android Both See “Meteoric” Enterprise Growth …

In December of 2009 mobile device management vendor Good Technology
began supporting iPhones and Android devices. Since then the companies
says 1,500 enterprises have deployed iPhones and Android devices using
Good for Enterprise, around 43% of Good’s overall deployments. Good has
described the monthly growth of both platforms as “meteoric.” For
instance, the iPhone 4 was the fourth most popular phone among Good
users by the end of June – and it didn’t even come out until June 24. By
the end of July it was Good’s most popular device.

According Dimitri Volkmann, Good’s VP
of Product Management, the company isn’t seeing many companies
dropping support for BlackBerrys or Windows Mobile phones, but it is
seeing a lot more companies supporting multiple devices. Nearly 1/5 of
its enterprise customers are now supporting at least three platforms.

…As we’ve mentioned before, Intel (a Good customer) now supports more user owned devices (mostly iPhones) than company owned BlackBerrys.

Intel is both a belweather and leader in the tech industry. Where
Intel goes, many more are sure to follow! This means very bad things for
RIM.

Good provided us a top ten list of devices activated with Good Enterprise in July:

1. Apple iPhone 4 [iOS4]
2. Apple iPhone 3GS [iOS3/4]
]3. Apple iPhone 3G [OS3]
4. Motorola Droid [Android]
5. Apple iPad [iOS3]
6. Motorola Droid X [Android 2.1/2]
7. HTC Droid Incredible [Android 2.1/2]
8. HTC Evo 4G [Android 2.1/2]
9. HTC Cedar [Windows Mobile 6.1/5]
10. Samsung I637 [Windows Mobile 6.1/5]

iPhones and Androids pouring into the enterprise — now what …

Infoworld – Aug 5, 2010 It’s no surprise
that a new generation of smartphones is headed for business. What is
surprising is how fast those devices are appearing on IT’s plate — and how more and more of those smartphones are not BlackBerrys.

…Those are the major findings of a survey
of 150 Fortune 500 CTOs, CIOs, and CSOs commissioned by Trust Digital,
shortly before the mobile management vendor was acquired by McAfee in
June. Unlike many surveys that ask decision-makers what they might do in
the future, this one asked the IT executives what they already have
planned for the next 6 to 12 months, says David Goldschlag, vice
president of mobile technology for McAfee.

iPhones and Androids join BlackBerrys in business. The BlackBerry, of course, has long held the dominant share of business-oriented smartphones. But the runaway success of the iPhone and Android platforms is changing that far faster than one might have expected. According to the survey, one-third of the IT execs will be managing mobile platforms other than the BlackBerry by sometime next year.
Many businesses, says Goldschlag, are already moving to the iPhone and
are planning to add Android support. There is less support for Windows Phone 7, Hewlett-Packard’s WebOS, and Nokia’s Symbian, he said, although the survey did not actually quantify the exact share of each platform.

… There are a number of reasons for the
shift: Users would like to stop carrying two cell phones — one for
personal use and another for business, particularly email — and
employers figure that if an employee owns a smartphone, he or she
already has a data plan and the company won’t have to pay for it.
Perhaps most significant, employees are telling their mangers that the
applications they need aren’t available on the BlackBerry and they will
be more productive using an alternative device. In fact, according to
another survey by online measurement company Crowd Science, nearly 40
percent of BlackBerry users prefer Apple’s iPhone as their next smartphone purchase, while a third of them would switch to the Android operating system.

Our own proprietary research has shown similar findings. Reference the informative article, “Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion”:

Each quarter of this year has seen Blackberry loyalty go from bad to worse…

As Android appears from practically
nowhere as a major player on the scene and Apple continues its march to
damn near cult status, Blackberry users are defecting en masse, with a
contingent held captive by enterprise server lock-in!

The aforementioned server lock-in is not as locked-in as many would
be led to believe. Below is a listing of the enterprise offerings from
Zenprise for the Android platform. Android (and Apple iOS4 products as
well) are actually competitive enough to challenge RIM on its home turf,
and this is a very big problem for RIM for they have effectively lost
the consumer race and the enterprise is their last bastion.

Android Enterprise Device Management Features at a Glance

Android Lifecycle	Details
Activation Management	User provisioned for mobile access on Exchange
Policy Management	Apply available Android 2.2 ActiveSync policies Remotely update Android ActiveSync configurations
Service Management	Monitor the real-time health and access of every Android smartphone Group VIP end users for increased service-level tracking Perform advanced diagnostics tests
Security Management	Monitor and track all Android smartphones for compliance violations Setup security policies for device password requirements, failed password device wipe, and lock screen timer. Identify non-compliant Android smartphones and suspend ActiveSync access for the account. Access security and compliance reports Wipe lost or stolen Android smartphones
Decommission and Recovery Management	Identify dormant or rarely used Android Smartphones Identify and deactivate carrier data and voice plans for unused devices

The Error That Many Who Are Bullish on RIM Are Making

Many believe that RIM will benefit immensely from the general
expansion of the smartphone market, which itself is growing like a weed.
The error in logic is that although RIM’s boat will be lifted by the
rising tide, Android and Apple are punching holes in said boat and that
boat is now leaking market share, and leaking it quickly. I have
explored the market share metrics in the following articles:

In order to enable subscribers to get to the root of the issue of
market share growth, I have congealed information on both device
shipments by operating system (subscribers, see File Icon Mobile Operating System Market Share Model) and handset manufacturer (see Smartphone Market Model – Blog Download Version). These models were used to produce the following graphs…

The Bull Argument: Even if RIM loses share, smart phone penetration is set to increase by leaps and bounds

Although there is a considerable merit in the argument that the pie
is expected to double over the next three years (344m smartphone
shipments in 2012e from 175m in 2009), it matters not if a player loses a
disproportionate of share in said pie. It is important to understand
the delta of market share gains and losses vis-à-vis increase in
penetration to blindly rely on this argument.

To drill down into this topic, we have bifurcated each of the smart phone player’s growth into following factors

Growth due to overall mobile handset market
Growth due to smart phone penetration
Growth due to vendors increase (decrease) in smart phone market share

This exercise was carried out in explicit detail in the subscriber reports ( File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional and RIMM Forensic Analysis and Valuation – Retail),
and shows on a granular basis how much RIM stands to gain or lose per
unit of smart phone market growth and penetration. (Subscribers, please
refer to appendix section at the end of your reports for metrics on
other players)

“As demonstrated earlier, RIM shipments have lagged overall market since Q1-09. Further,
bifurcating RIM’s shipment growths into above three factors reveal
that nearly their entire growth in shipments could be attributable to
growth in market and not organic growth perpetuated by RIM market
capture. During Q2-10, RIM recorded 6% q/q growth in shipments of which
6% was attributable to growth in handset markets, 2% due to increase
in smart phone penetration and a negative 2% due to decline in RIM’s
market share. The story is similar in three of the proceeding five
quarters.“

The dynamics between revenue growth, market share growth, target
sub-market penetration, margins and unit shipments in an environment as
dynamic and volatile as one such as this undergoing a paradigm shift,
leaves static valuation models near useless and unrealistic. As such, we
have created a multi-variate sensitivity and scenario analysis with a
variety of market occurrences exemplified. This is available as a
dynamic Excel model so Professional and Institutional subscribers can
layer any combination of market factors and assumptions to come up with
their own custom valuation using our internal analytics. It is
available here: RIMM Multivariate Valuation Model.

In the aforementioned model, subscribers can find the following
trends and data that support the anecdotal finding above – Research in
Motion is not participating fully in the smartphone boom. As a matter of
fact, as the boom intensifies, RIM’s participation is actually waning…

No matter which way you look at RIM’s revenue drivers, they are being
driven down by the competition. As RIM’s price pops up with an
irrational market that celebrated better than expected (yet still
horrendous) unemployment numbers that were contrived by a federal government that had to estimate the figures for 7 states because they did not report due to the Labor Day Holiday weekend, those who had the chance to play with and tweak the RIMM Multivariate Valuation Model. with the data from the File Icon Smartphone Market and Mobile Operating System Market Share Models may look to act accordingly. I urge subscribers to review the forensic analysis again in light of any new developments.

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

Previous Research in Motion commentary

Subscription content (click here to subscribe):

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Thu, 09/09/2010 - 22:53 | 573346 TraderTimm

I've always thought that the main limitation of portable electronics is the battery technology inside of them. When you get down to it, you have a screen that gobbles up power, CPUs that are limited either by optimizing techniques and draw, and finally - the lionshare of power used to just transmit a signal via cell or plain old wireless.

The ubiquitous communication revolution won't truly happen until the whole power-tether can be severed for longer periods. Once it ramps up, hell, you can stuff anything you want into a phone-sized device as long as you can handle the heat issues.

I'm just a dreamer, I guess. Carbon nanotube tech seems to be offering a large leap in the right direction, though.

Thu, 09/09/2010 - 22:49 | 573342 zyby

Can't wait for HP to buy RIMM. They are both so clueless.

Thu, 09/09/2010 - 22:41 | 573331 ft65

FFS people and their f***ing phones.

All phone devices will eventually converge into a single dockable PC like device. All (pocket sized) phones have two limitations - a decent size screen and easy input (keyboard / mouse). They are all fads and are all in a transitionary phase. They will all converge to do exactly the same thing. It will then be down to price / branding.

God I hate people and their f***ing sad obsession with f***ing sad phones.

Thu, 09/09/2010 - 22:24 | 573313 onlooker

I also do not like complex stuff. BUT, the spoken language translation seems great for the boss without a second language skill. It might also be fun when dealing with those who speak another language, with their own people, during the conversation. I suspect my $200 piggy bank may not be enough but I will buy one when they get cheap----- sooner than you think.

Thu, 09/09/2010 - 21:04 | 573228 halvord

Don't worry about an MS phone. They have proven incapable of doing anything but Office and Windows, and the reason is that the Office and Windows divisions are allowed to throttle every new initiative in the cradle. Until this corporate policy is corrected, they're a two-trick pony.

As to Apple v.s. Google, this will always be a culture split. Google is a features company, the more features the better, no matter how clumsily they fit together. Apple is a lifestyle company like Gucci, Martha Stewart and Oprah: it relies an Alpha Designer who knows better than you do what you want, and has the power to scream "NOT GOOD ENOUGH" for months until he gets what he wants.

And, yes, I'm a late adopter and am being dragged into the smart-phone-zone for work. If the iPhone had a keyboard I would demand it.

Thu, 09/09/2010 - 20:24 | 573179 taraxias

Sounds like we should be shorting Nokia

Thu, 09/09/2010 - 20:49 | 573211 CPL

Kidding me, they out sell every phone on the list 10 to 1.

Thu, 09/09/2010 - 19:33 | 573119 Careless Whisper

absolutley correct. i would back up the truck to short RIMM except i'm afraid there's some corporate asshole out there that will attempt a takeover just when i short it.

http://www.youtube.com/watch?v=FL7yD-0pqZg

Thu, 09/09/2010 - 22:40 | 573333 Artful Dodger

When you short, aren't you actually accelerating the truck forward with the back full of shares and the gate open, really really fast? I think so.

I don't have an analogy for how the fuck the shares got in the truck in the first place, though.

(Good article BTW)

Thu, 09/09/2010 - 18:38 | 573020 Charlie Brown

Not to threadjack here at the start of the comments, but I really HATE phones with sixteen-zillion features. I would pay extra for a phone that did nothing but make & receive calls.

I think lots of people feel the way I do about hand-held devices -- I prefer to use a calculator that is simple in the extreme (even though I've got a drawer here full of very sophisticated calculators, the one I use most-often everyday is an old, yellowed, dog-eared, beat-up piece of garbage from 1978 that wouldn't fetch 50 cents at a garage sale, yet I love the old thing). Same with remote controls: I took the massively complex remote control that was in the box when I bought my video equipment and put it aside immediately; I actually went out and bought a simpler piece.

Any phone that comes with a 300 page instruction book is simply not for me.

I'll pay extra, for SIMPLE.