RIM – The Challenge of Entering New Markets

I sent out a mail last week with a link to a Business Insider article on the future of Research In Motion (RIM), BlackBerry’s parent company. The position taken by Ironfire Capital was that RIM would not exist as an independent company by the end of 2013. This is one of many negative positions taken on the previous smart phone market leader. They are being compared to IBM in the late 80’s and more recently Sun and Palm. The former overcome their strategic difficulties through senior leadership changes and strategy pivots while the latter two attempted to stay the course ultimately being consumed by larger players (Oracle and HP). The accompanying question I asked was – How do companies with large customer bases (RIM has 50million users), proven management teams and competencies (consumer research, new product development, partner management, logistics, marketing, channel management………) get themselves into compromised strategic positions? While RIM is far from being in the gutter (more below) their market cap has declined from $83billion three years ago to $14billion today and their US sales have declined for 5 consecutive quarters. The answers are difficult to unravel and beyond the scope of a blog post. A key contributor to their current strategic profile seems to stem from a decision taken to enter the growing consumer smart phone market.

Herewith background and summary thoughts on RIM’s decision.

RIM effectively enabled the 24hour worker through the provision of a pager on steroids with a phone attached. Through its ubiquitous messaging and e-mailing ability RIM dominated the corporate market by enabling significant employee communication and productivity gains. BlackBerry was and in some markets remains near addiction. In 2006 it decided to enter the emerging consumer smart phone market with the launch of the BlackBerry Pearl, preceding Apple’s 2007 iconic iPhone launch. In 2008 RIM released the Storm it’s so called iPhone killer exclusively supported by Verizon in the US. While the product did not live up to expectations (no Wi –Fi, sudden freezes, abrupt reboots, unresponsive controls), experienced high customer returns resulting in below expectation revenues, by the end of 2009 90% of all smart phones sold through Verizon were BlackBerry’s. By the end of 2010 the number had dropped to less than 20%. The competitive smart phone space proliferated with Google’s Android, Palm’s webOS, and Microsoft’s Windows Phone’s gaining increasing traction sparking an innovation race in both software and hardware. RIM’s response was to procure in April 2010 a next-generation operating system ONX and commence development on a new set of “super phones” paired with more sophisticated hardware platforms. They also launched the ONX based Playbook (also without Wi-Fi) primarily into an increasingly populated tablet market, with limited success. In May 2011 RIM lost its US market smart phone leader status (27%) to Android that now holds 34.7% of the 72mill unit market. While the company remains very profitable projecting 2012 EPS of between $5 – $6 it however trades at a lowly PE in the 5’s. RIM has been squarely downgraded from a growth to a value stock.

Below are a few points for discussion:

  1. Did RIM fully appreciate the business model and competency differences when deciding to enter the consumer market?
  • RIM had built a strong understanding of corporate needs reflected in functionality that focused on security, compression, keyboard and battery life backed by well run managed services. The assumption seemed to be that these functional prerequisites would translate into differentiators in a consumer centric decision making and usage environments.
  • Building and managing strong corporate sales forces that sell to telecommunications carriers and IT departments is a far cry from retail based consumer selling. The subtlety of employers allowing employees to procure and use their own smart devices at work is significant at a sales level. The buying criteria and influencer impact become much harder to understand and control.
  • Consumer branding and marketing require different capability sets to that of the corporate space. Non functional benefits play out in ways that corporate marketing teams have not had to deal with. Brand coolness, peer pressure/association and other emotive criteria need carefully crafted communications.
  •  Apple has leveraged strong incumbent competencies around design, interface, user experience, consumer marketing, retail channel management across the iPhone and iPad. These are competencies that have been enhanced rather than built from scratch.
  1. Different markets have their own pivots around which they scale. Competitors that understand how to configure and deploy products and services around these pivots are difficult to compete against. The key to consumer smart phone growth is the ecosystem it is tethered to. The ability to develop interesting applications and tie them to rich cloud based products and services are key. Did RIM fully appreciate the scalability of the iPhone platform and its ability to create interesting ecosystem effects? RIM viewed the iPhone as an attempt by Apple to put a computer into a phone and dismissed it as never being able to work. RIM’s dominant logic was that a messaging intensive (we provision the best communication devices and supporting services in the world) rather than an application centric world will continue to dominate and underpin the smart phone market growth.
  2. High growth and competitive markets require existing key competencies and enabling technologies to be scaled quickly, rather than being built or transformed during the heat of battle. Was RIM too slow in recognising and acting on their technology constraints and the ability to deliver high quality mobility experiences? RIM only acquired the QNX OS in April 2010 and plan to release their new platform phones in 2012. Time is often a competitive variable in hot consumer markets. All interim releases phones (3 new phones released this week with another 4 to come), are “old” technology. Probably more risky is the attempt to transition technology platforms. Not many technology companies get this right.
  3. Igniting the partner developed application market had to be key to any consumer based go – to market strategy. Having quality apps that utilise the full phone functionality significantly enhances the devices usefulness and customer experience. This requires very specific community building competencies – Identifying application categories, developers, building and marketing incentives, creating easy to use store fronts …The application developer community do not perceive the BlackBerry as developer friendly which is best demonstrated by the fact that there are approximately 425000 apps on the App Store vs approx. 20000 in Blackberry’s App World.

As stated, the company continues to produce profits, has a very strong (cash and no debt) and clean balance sheet with its year over year international revenues rising 67% in the most recent quarter. The market may well be overreacting. I believe a lot rests on the quality of the QNX phones, their ability to manage the potential brand damage, garner more third party application development support and to continue to maintain their leadership footing in the corporate space. Managing multiple independent devices across the corporate infrastructure is a challenge and hopefully for RIM one with a meaty profit pool.