Is RIM Getting Torch'd?

RIM's stock price took a bit of a dive the past several days, although as you can see in the chart that it isn't, yet, a broken stock. As with any high profile technology stock there are always people willing to trot out problem after problem, most of which are just so much noise, though occasionally the problem proves significant. The most recent issues include: RIM's hold on the enterprise market and the latest foray into the consumer market with Torch, both with respect to competition from iPhone and Android (both of which are taking market share); whether Torch is a failure or if it's too soon to say; and, the caving in on government access to their enterprise customer email.

It does have to be said that BlackBerry is still growing its customer base, it's just that their market share versus other smart phones is declining. That is, they're winning a small share of a larger market. This is being taken as a sign by some that there is future trouble ahead. In the horse race mentality that prevails there can be only one winner, and if that winner isn't going to be RIM then you must sell your shares right now. In reality there can be more than one winner so this style of analysis is too simplistic. BlackBerry doesn't even have to have the panache of Apple's iPhone; Android, for example, has overtaken iPhone in the US and a lot of Android phone owners don't even know or care that their phones are Android based. Dull but competent can do very well.

Although it is impossible to know why RIM's stock is going down without asking every investor in the market for their reasons to buy, sell or short the stock, the sense I get is that it is due to Torch failing to excite either investors or potential customers. Apparently 150,000 units sold in the first three days is now a failure, if you compare these number to iPhone or even a few of the hotter Android models. With OS6 features at best catching up with iPhone and Android, and qualms about OS6 and Torch catching on and reversing BlackBerry's slide in market share, and analysts weighing in with their own doubts, a short term drop in the stock price is understandable. The question now is whether it bounces or breaks to new lows.

The other recent issue is RIM supplying some degree of access by various governments (perhaps not the same access in all cases) to their email servers so that enterprise email can be monitored for national security and other purposes. While there is widespread concern, for the most part it seems that no one is really quite sure if this is good or bad for RIM's future business prospects. On the one hand most people will accept (if reluctantly) that this is necessary.

While free-speech advocates have criticized the crackdowns, a number of BlackBerry users say they understand the governments' concerns.

“It's important for things to be traceable,” said Brad Kollur, 33, an IT consultant who lives in Rockaway, New Jersey, and often travels to India on business. “It's one of those things where you give up certain comforts for the greater good.”
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These other devices, however, don't rely on the same type of sophisticated encryption that appears to have raised concerns, meaning they also don't offer the same level of security that many businesses find crucial.

On the other hand...well, what is on the other hand? After all, it isn't as if most people with other smart phones have any idea whether their email, corporate or email, can be monitored by governments or more local law enforcement agencies. This makes it difficult to know how RIM's competitive position is being impacted.

I can't say that I know the answer, however I do have an idea about how to formulate the question. Let's consider the smart phone business structures of Apple, Google and RIM. In all cases there are two broad categories of revenue for each of them: one-time revenue (the phone itself and related accessories) and recurring revenue (all types of follow-on sales of products and services that are dependent on the device sale). Ideally you want both in your business, with preference for recurring revenue since this is generally much more profitable over the long term, while high margins on hardware are unsustainable. Let's compare the three companies, doing so only qualitatively rather than quantitatively.

• Apple - Initially high margins on the phones appear to be declining as competition heats up. Even so they are able to sustain premium prices (and margins) on the phones and accessories. They are also showing that they can repeat this success by getting customers to buy new iPhone versions. On the recurring revenue side they distribute a large portfolio of apps, tunes and other media content. It has often been said that Apple focuses on the pull through sales these downloadable products, where they make the bulk of the iPhone-related profit.
• Google - They essentially sell no hardware and, unlike Microsoft, they charge no royalties for the Android platform. Their Android-related revenue is recurring, which comes almost entirely from advertising (they take no cuts from app sales). This is a very different business model from the other companies', but it certainly work well for them.
• RIM - Like Apple they sell phone and related paraphernalia. The bulk of their recurring revenue is from enterprise email, not from either apps or media content. This is their differentiator, the one that contributed so much to their success since their earliest days.

The smart-phone derived recurring revenue streams of Apple and Google are at this time under no real threat. For RIM the situation is not so good, and I believe that this is where they are vulnerable due to the granting of email server access to various governments, even if the reasons are justifiable. BlackBerry enterprise email is now looking a lot more like other email services, be it Google Mail or any other, all of which are accessible from any modern smart phone.

As the pressure mounts on IT departments across the corporate worlds to allow use of employees' existing or preferred smart phone rather than always BlackBerry, this loss of email security will make the arguments to open up more persuasive. In an earlier article I speculated that the encryption dispute RIM has with various governments was positive PR, but that distinction from competitors is quickly weakening.

I will also say that the current concerns of some governments over Blackberry email security will not only not harm RIM but will help them; it's great (and free) advertising that their encryption and security perimeter are so strong that even governments can't break it.

When (not if) RIM begins to see real erosion of their hold of the enterprise email market they could be in real jeopardy unless they can pull a rabbit out of the hat. The rabbit will have to be something to replace email service revenue, and it will likely have to be done by taking recurring revenue market share from Apple and Google. That means apps, but especially media and advertising. If it does come to this I don't yet believe RIM is up to the task. They will certainly try but it may be just too far from their core competencies, and the catching up they will need to do is far more difficult than what they've accomplished to date on the platform software and hardware.

It's a little soon to be ringing the death knell for RIM, but it could turn out that the loosening of email security will hurt them far more in the long run than Torch going down in flames.