Rim_Analysis

Strategy and Evolution at RIMM If Research in Motion founder Mike Lazaridis had a crystal ball in 1984, only then would he be able to predict the wild success that would have come from the humble founding of RIM. Mike Lazaridis was a recent dropout from the University of Waterloo when he decided to establish RIM. The company’s early projects were rooted in a variety of automated machinery contracts for the likes of G.M. of Canada during the mid to late eighties. These are the types of projects RIM would use as a springboard to gain additional technological competencies, from which they would parlay their success in the mobile devices arena. RIM found the product that would ultimately put it on its path to success in the late 80’s, subsequent to developing a project for the wireless company Rogers Cantel Wireless Company. The technology RIM was in charge of investigating the power of the newly found wireless technology being developed by Ericsson. This would prove the project that would afford them the early technology that would lead to the development of Blackberry technology. This proved to be one of the technological turning points for the company, for it was at this point that RIM would develop the interface technology that would lend itself to the functionality of the Blackberry email and cellular device. The key facet of their technology lie in the utilization of radio packets for the delivery of email messages, opposed to piggybacking on the existing cellular technology. The key to this technology’s success was that it afforded users an uninterrupted source of reception . When this feature was paired with a device that could carry its own address, the Blackberry was essentially born. The first Blackberry was introduced in 1999 as an option that would afford corporate and personal customers with the flexibility of accessing emails from virtually any location. For obvious reasons, the technology was an instant success. The email technology was revolutionary in that it did not require its users to utilize access commands in order to download emails to the device. Instead, it utilized a “push” technology that does not require the user to power down a device in order to receive emails. At this point in time, Blackberry’s most formidable competition came from the Palm device, which was similar in that it allowed users to remotely access email accounts from a handheld device. The main difference lie in the methods by which customers were able to access their email accounts. The Palm product required usage of an antennae device, while the Blackberry required both the user’s computer and Blackberry connections to be both powered. Also giving Blackberry an advantage in the market was the starting price point discrepancy for the two products. During 1999, a new Blackberry was available at a cost of $399, while comparable Palm devices were in the $599 range. Due to the similarity in productivity tools, this afforded Blackberry a significant value advantage . Considering the relative similarities in these mobile productivity devices, the main issue for most consumers in terms of product differentiation surrounded the enhancements that would properly integrate this technology with their personal and/or corporate emails, for this is what ultimately served as a point of attraction for these devices; the ability to work remotely and achieve significant productivity gains by eliminating the need to be tethered to a traditional workstation in order to remain productive at the workplace. With the advent of these devices, mobile employees were now free to perform a myriad of sales and service related functions outside the office, all the while having the capability to check and respond to important messages that would normally arise in their absence. Additionally, added features of the Blackberry, such as the calendar function, would also allow their users to determine their future appointment availability on the go, simply by verifying with their Blackberry. Thus far in the development of the personal handheld device, or the “smartphone”, as many have dubbed this convergence of technology, the Blackberry has been afforded an advantage over its competitors namely for two reasons. First off, its enhancement of the radio frequency technology that lent so much to the process in terms of network reliability and functionality did wonders for its establishment as a market leader in this push technology. Secondly, the afore-mentioned technological gains and system efficiencies realized by RIM allowed them to capitalize on the early adopters in this market, those corporations and individuals that realized the intrinsic value in the technology, as well as its potential impact on their professional and personal productivity. As a point of validation, Thompson, Strickland and Gamble point out that “RIM had more than 100,000 enterprise customers and an estimated 42 percent market share of converged devices, and significantly higher market share of data-only devices in North America.” Industry Environment The convergence of technology that has been engineered into these amazing devices has developed at an amazing clip. The smartphone has evolved from pagers and analog capable phones into devices that can handle tasks ranging from managing email accounts, to carrying on a three-way conference call for business purposes. The days when business was performed remotely with a cell phone and/or paging devices seem like they transpired eons ago; however, the rapid evolution of technology to which we are currently witnesses has really taken shape during the past ten years. The rapid evolution of technology has spawned a myriad of devices and operating platforms that are capable of executing the various functions typified by these amazing devices. With such intense competition for the Holy Grail of a superior operating system that will afford one manufacturer a monopoly in this segment, it creates constant engineering challenges for those companies that compete for market share in this arena. RIM, being one of the early pioneers of such technology, has largely been able to capitalize on their position as one of the early innovators of the technology from which the great majority of these devices have been spawned. However, this industry has spawned a myriad of competitors from whom RIM must constantly defend themselves in the battle for integrated cellular technology. Currently, there are several companies in the mix for market share in this segment, which has substantial long-term growth prospects. To validate this, approximately 118 million smart phones shipped during 2007, according to Thompson, Strickland and Gamble. Many analysts are estimating that demand for these devices is estimated to increase to approximately 1 billion phones by the year 2012. If the analyst’s estimates are correct, this would represent a global uptick in demand of roughly eight-hundred percent. These estimates, whether or not they may be on the aggressive side, serve as substantiation to the great potential that exists in this segment of the cell phone industry. This effervescent competition has already challenged the R&D capabilities of RIM with respect to the development of new phones and features that must be constantly improved in order to further separate the Blackberry as a superior productivity tool. The following is a list of current competitors who represent a potential threat to RIM’s market share, as well as where they currently stand from a global market share perspective. As one can clearly interpret from the chart , RIM has been able to sustain as well as improve upon its position as a global force in the smartphone market. The two most substantial threats to the continued growth of Blackberry, as evidenced by the compiled data, are the Apple iPhone and phones stemming from the Symbian operating platform (jointly owned by Samsung, Ericsson, Nokia, Panasonic & Siemens AG) partnership. Apple’s iPhone doubled its worldwide sales, while Blackberry nevertheless enjoyed a healthy unit gain over 2008. This data, when compared to the overall cell phone numbers reported through the 1st quarter, 2009, reveal some interesting trends with respect to shifts in cell phone market segmentation. The obvious trend is toward increased consumption of smartphone devices, while the traditional cell phone market has experienced slight declines. At 269.1 million units through Q109, traditional cell phones have experienced a decrease of nearly 9% on a global basis. However, this is not an overall indicator of market demands, for smartphone sales for this period were on the rise by approximately 13.7% . In spite of the numbers that will substantiate growing and intense competition in this market, RIM has been able to introduce new products with increased functionality, as well as improve upon their global position in the smartphone market. It can further be construed that our previous citations with respect to their domestic positions have solidified RIM as one of the leading innovators and offerings in this growing market segment. Vertical Integration and M&A Enhancements RIM has proven to be a very aggressive organization from the standpoint that it will execute the necessary acquisitions that present opportunities to further augment and enhance the operating system of Blackberry, its flagship smartphone and one of the most widely recognized telephony devices on the market. One of its most recent and strategic acquisitions was that of Canadian developer Torch Mobile. Torch had been a developer of the Iris web browser, and one of its more notable clients was Microsoft Windows. However, as an inevitable stipulation of this deal, Torch will cease further developments of the Iris system for Microsoft, focusing solely on the WebKit browser for RIM and its Blackberry product . This is certainly a brilliant move by RIM as it looks to shore up one of the only points of criticism of its Blackberry devices; the web browser is average and cumbersome to navigate. As a current Blackberry user, I can agree with some of the criticism, especially those critiques surrounding the lackluster processing speeds. This is a move that may well position RIM to gain ground on the more robust browser applications of some its main competitors (Apple’s iPhone). More importantly, this move demonstrates that RIM’s senior management is in tune with what competitive flaws are glaring in its product line, as well as what organizational moves can be executed to improve upon them. Given the recent developments in the area of smartphone capabilities, especially as they relate to browser capabilities, this acquisition seems to serve as one of the more substantive strategic moves RIM could have executed. While the price of the acquisition remains undisclosed, RIM was able to forego some of the associated expenses with growing this platform in an organic manner. Due to the significant employee, systems and research costs that would have accompanied such R&D endeavors, this may prove to be a calculated move from a timing standpoint. After all, the acquisition occurred in the third quarter 2009, a year in which Blackberry sales had yet again increased on the global market. What this may afford RIM is an opportunity to quickly integrate some of the Iris features within its platform, all the while losing little momentum in the quest for smartphone dominance. Another area in which RIM has afforded itself a competitive advantage unique to the industry relates to its vertical integration. When we discuss vertical integration as it relates to RIM, they are somewhat of a unique study. Many of the technologies from which they reap benefits today are the evolutionary product of several industry alliances that date back to the late 80’s, as previously touched upon in this analysis. Their perfection of what is largely proprietary push technology has been developed and honed over a twenty-year period. This has afforded them a technological advantage on the backward integration side of their business, for the overwhelming majority of this technology was, and continues to be, developed by RIM engineers. The acquisition of Torch and the Iris web browser, while not originally their conception, should afford further backward integration on the technology side when paired with their expertise in the push technology. As far as forward integration is concerned, RIMM is in line with the majority of other cell phone manufacturers, in that contractual and product offerings by a network provider are almost essential to one’s success. RIMM has one of the dominant domestic partners in Verizon wireless, which explains their overwhelming domestic acceptance. The majority of cell phone manufacturers, in order to access the mainstream marketing critical for a phone’s success, are teamed up with a major carrier, affording them access to the large marketing budgets typical in pushing new product. This is an area where RIMM has another advantage over rivals like Microsoft. While Microsoft fees are typically an $8-$15 licensing fee for the Windows Mobile System, Blackberry compensation includes not only the cost of the device itself, but also a service fee that affords them with another robust revenue stream. It is estimated that a combination of such fees will allow RIM to realize 2010 revenues in excess of $14B, Microsoft will be lucky to reach $400MM from its Windows Mobile licensing fees. This is significant because of other net margin duds on the books of Microsoft. With Xbox and Zune barely contributing any net margin to the company, Microsoft can ill-afford to offer another margin thief for the sake of competition . International Strategic Expansion While Blackberry holds a significant advantage in the domestic smartphone market, there is undoubtedly room for improvement abroad. This is not to say that sales of RIM’s popular device have lagged internationally, it’s just that room for improvement exists with respect to the international markets and the potential for increased market share. The Blackberry suite of products currently accounts for approximately 42.6% of the domestic market share . Top Smartphone Platforms 3 Months Ending Dec. 2009 vs. 3 Months Ending Sep. 2009 Total U.S. Age 13+ Source: comScore MobiLens Share (%) of Smartphone Devices Sep-09 Dec-09 Point Change Total Smartphone Subscribers 100.0% 100.0% N/A RIM 42.6% 41.6% -1.0 Apple 24.1% 25.3% 1.2 Microsoft 19.0% 18.0% -1.0 Palm 8.3% 6.1% -2.2 Google 2.5% 5.2% 2.7 However, as previously illustrated on page six, the global market for RIM paints a slightly less dominant position. The global growth pressures on RIM are exacerbated by the presence and momentum of their two most formidable international threats, Apple and the Symbian operating system. The maker of Blackberry products, by virtue of its new Bold 9000 product, has essentially made the commitment to expand upon the breadth and quality of applications available on its phone. The robust user inputs is one reason why iPhone has been able to draw buyers in droves to their product; this has certainly not gone unnoticed by RIM, and as a result they have responded with phones offering graphical user interfaces that are more easily navigated than prior models. With the global cell phone market shifting more toward smartphones, which afford the user more productivity and one of the most attractive features, the ability to access emails. What will likely occur in the forthcoming battle amongst the major smartphone manufacturers are intense competition and the surfacing of price wars. Neil Mawston, director of industry analytic firm Strategic Analytics, had this to say about future events, “The smartphone market will become ultra-competitive in 2010. The smartphone wars will be good news for consumers, but the fierce competition will inevitably place downward pressure on vendors’ margins and pricing.” As further validation to RIM’s success, Mr. Mawston points out that 34.5 million Blackberrys shipped during 2009, which surprisingly eclipsed Apple’s iPhone by nearly 10 million units. This uptick in global growth is an indicator that domestic (Canada & US) and worldwide units are trending positively. For the year 2010, Blackberry is cognizant of the fact that additional and strengthened carrier relationships will afford them even greater growth on a global basis. After all, it is the carriers that perform the lion’s share of marketing product to customers. Additionally, advanced technological offerings, paired with attractively priced contracts, will further assist carriers and manufacturers in garnering clientele. Considering the fact that global carriers featuring the Blackberry line of products expanded by nearly 100 in 2009, this should be a realistic goal, especially considering the introduction of phones such as the Bold, Storm and Curve 8900. The 2009 RIM annual report confirms the importance of expansion via a robust network of retailers and cell phone carriers. Future Initiatives At first glance, it appeared as if the 2009 revenues of RIM were eaten away by horrible product margins, an occurrence one typically blames on the competitive effects on pricing. However, a further dig of the data on the RIM 2009 annual report attributes the decreased margins to the significant development costs associated with their new smartphone offerings, as well as unusual circumstances in the global foreign exchange markets, a circumstance that obviously carried a negative impact for the firm. The convergence of these internal developments and external partnerships are likely to have a positive effect on the future business development prospects and financial results of RIM. This can be extrapolated because the majority of R&D expenses necessary to develop their fantastic and broad product line have already been recognized and should have a nominal impact on net revenues going forward. Considering the fact that most of these products were developed in the 2nd half of 2009, their consumption has yet to realize its full potential, an event that could likely unfold in 2010. As these new and innovative products are introduced by the recently on boarded and prospective distribution partners, they could have a profound impact on the future prospects of RIM from a global market share and gross revenue perspective. In terms of future changes that lie ahead for RIM and other manufacturers, one previously mentioned market condition that will almost certainly occur is the downward pressure competition will place on product pricing. Considering the afore-mentioned absorption of R&D costs for the new Blackberry suite, this may come at an optimum time, if such a thing exists. The company has virtually no debt and can afford to absorb price discounts in order to further circulate the products it’s recently developed. It is my belief that a strong corporate platform reputation, excellent product selection and a strong carrier/retailer network will afford Blackberry further success in the Smartphone arena.