Watch out for RIM

Based on what you read in the press, you'd think Apple had conquered the entire smartphone market, or maybe that they invented it in the first place. But to me the most surprising story in recent smartphone sales isn't Apple, it's the continuing rapid growth of Research in Motion.

Check out the latest numbers from Gartner (link). As you know if you've been reading this weblog for a while, I have very little faith in third party market share numbers. They're compiled from shipments self-reported by the vendors, and are subject to all sorts of inaccuracies (link). But they do give a very rough picture of what's happening in the market, and the picture they've been drawing recently is mildly astonishing.

Nokia is still the smartphone share leader, with about 41% unit share. But that's down 10 points from a year ago, on a shipment decrease of about 17% year over year. RIM is number two, with over 19% share and shipments up about 85% year over year. Apple is in third: 11% share, up 110% year over year.

So, roughly speaking, in smartphones Nokia is about twice the size of RIM, and RIM is about twice the size of Apple.

I have to put a caveat on that. Quarterly share and shipment growth fluctuates a lot depending on whether a company has just introduced a new product or is clearing inventory in preparation for a launch. So you have to look at several quarters:


Unit smartphone shipments, worldwide, in thousands. Source: Gartner.

That gives a slightly less apocalyptic view for Nokia. It had particularly huge shipments in Q4 of 2007, so it's down year over year, but overall its shipments are flat rather than collapsing. RIM and Apple are both definitely growing fast, though, with Apple's shipments fluctuating a lot as it adjusted inventory before and after the shipment of the iPhone 3G.

But let's put this all in perspective. The definition of "smartphone" is very sketchy; the way Gartner uses the term today, it refers to basically any phone that has an externally-programmable OS in it. Nokia deploys the Symbian OS in all of its high-end phones, so they are all classified as smartphones. So RIM's not really beating up on Nokia's smartphones, it is currently out-growing the entire top end of Nokia's product line. Project out the current trends for a year, and RIM would be close to overtaking Nokia in smartphones. No matter how you parse the numbers, that's pretty amazing.


Why don't you just die already?

This situation is all the more surprising considering that conventional wisdom has said for years that RIM was doomed. First e-mail phones were just a fad, an extension of the pager market. Then they were just a vertical product that only a few specialized groups like stock brokers would care about. Then Microsoft was on the verge of destroying RIM (not once, but every time a new version of Windows Mobile came out). Then RIM was fated to fall into irrelevance unless it licensed Blackberry clones. And on and on...

Fortunately, RIM completely ignored conventional wisdom and stuck to its core business. The rewards have been immense. In its most recent quarterly report (in December), RIM had a revenue run rate of about $12 billion a year, up more than 60% year over year, and profit of about $1 billion a year. The company now employs about 12,000 people. For comparison, RIM's revenue is now about the same as Apple's was four years ago.

Companies with $12 billion in revenue aren't supposed to grow 60% a year, especially when the economy is gasping, so I'll be intensely interested to see RIM's next quarterly report on April 2. In this economic climate I won't take anything for granted. But keep in mind that Nokia is already making ominous noises about its sales (link), while RIM says its unit growth has been accelerating (link).


Face reality

I think the big message from these numbers is that the analysts and press have done a terrible disservice to all of us by creating the fiction that there is a unified smartphone market. That hides the real news. For example, IDG's writeup on the Gartner sales report focused on overall growth of smartphone sales and didn't even mention RIM until the sixth paragraph (link).

I use the term smartphone "market" here for convenience, but as I've said before, there really isn't a single unified smartphone market and there probably never will be, because different people want different things from their phones (link).

If you look carefully at the shipment numbers, this is blindingly obvious. The smartphones from RIM (and Apple) are differentiated products that have special features appealing to particular segments of users (RIM for e-mail fanatics, Apple for entertainment-hounds). They solve customer problems in unique ways that people can value, so their sales are relatively resistant to an economic downturn. Not immune, but I think they're likely to fall less than the others.

And since Apple and RIM serve different markets, they can grow rapidly side by side. One doesn't usually steal sales from the other.

But Nokia has never had a strong play with this sort of product. Most of its smartphones are bought as high-end mobile phones, purchased by technophiles and status-conscious people with money. When the overall phone market slows down, they slow down too.

The analyst numbers told Nokia a comforting fantasy that it was the dominant smartphone company, when in fact it was a very secondary player in the markets served by RIM and Apple. I think this let Nokia avoid the agonizing changes in product development that are required to make a truly differentiated smart phone.

Instead, Nokia has gone off on tangents attacking Google, Microsoft, iTunes, and just about every other target I can think of in computing. It's a bit like a guy at his home putting up wallpaper in the upstairs bathroom while out in the yard his car is on fire.

I continue to be intrigued by parts of Nokia's strategy, especially the Ovi services suite. Nokia will be able to push Ovi out to hundreds of millions of mobile phone users. In theory, that might be a very powerful way for the company to build a mobile data business. But it could be crippled if the most data-hungry users have already been siphoned away by Apple and RIM.


What happens to RIM?

The question about RIM is what are the natural limits on its growth. Not everyone wants an e-mail phone, although RIM has already stretched the market a lot more than I thought they could. But I think the bigger threat may actually be within the company. Beyond about $10 billion in revenue, a tech company starts to require different management techniques. There's enough going on that management has to delegate much more than it did in the past, and processes have to be set up to ensure quality work and smart decision-making in the lower reaches of the company. That transition is incredibly hard for the leaders of a startup to make, and I wonder if the bug-filled launch of the Blackberry Storm wasn't a symptom of a company growing beyond its processes.

On the other hand, RIM has such a long history of beating my expectations that I'm not going to bet against them again.

11 comments:

Tsahi Levent-Levi said...

It's the same story with Windows Mobile and the iPhone - WM did better than the iPhone in Q4 2008.
It's funny how reality is different than the hype around it.

frafam said...

Could be Nokia sales are also flattening out as users like myself wait for Android to become available in their area

Harel said...

As you mention there is no smartphone market, maybe there was but now, definitely, there is not.
I can sense a reason for RIM growth as more people are trying to understand what "true" smartphone is all about.
The missed piece is Google that will try to turn all mobile phone into smartphones, than RIM will be in trouble

Gringo said...

RIM is to be congratulated for their achievements to date but there is risk in their current move into Consumer markets. On the one hand all their business software and devices have slipped or had issues, and on the other they don't have the on-line services to support this Consumer play.

At the moment there is really only the Social Networking clients and iTunes connector - no on-line file synch, Contacts or Calendar sync, no music or other content services as they try to play nicely with the mobile carriers. This carrier relationship does limit them more than Apple.

After initial launch hoopla the Storm is not selling as well as expected and RIM is still slow to expand the 3G device range - e.g. 8900 Javelin is STILL only 2G. It is still very much a business device range.

Despite RIM's claims the 'beyond email' story for business customers is not taking off. They are long Sales engagements and then long project implementations with carriers having to work with 3rd party developers who don't have much carrier loyalty, i.e. tell the customer that the solution will work on any carrier - which of course it will.

On the infrastructure side how much longer can RIM continue to run all messaging data and a lot of the rest through their centralised infrastructure?

And finally there is the BlackBerry revenue share - the approximately US$4-5 for each active user each month that the carriers pay to RIM which will make BlackBerry data prices that bit more expensive.

Is it harder to move from Business market into Consumer or other way round? Is it harder to move from messaging into web/multi-media or the other way round? Very interesting year coming up.

Anonymous said...

Excellent posting - I love this type of analysis that you make, Michael.

What worries me the most about all of these smartphones is the apparent collapse of software. Sure, a lot of developers wrote apps for the iPhone and made some money. But now the prices are dropping to nothing and no one is selling much.

It's even worse for the other platforms. Software has become de-valued.

So what is everyone going to do with all of these smartphones? Is it just about running the installed applications? How many facebook interfaces do we really need and how many fart-generating apps can really sell?

What is going to happen when the developer community starts going away?

VB at MyCaption said...

Nice article. An under-appreciated fact about the BlackBerry is the solid set of business-friendly features supported by the BlackBerry Enterprise Server. They make it easier to manage enterprise deployments -- remote application control, user access policies, encrypted links among enterprise users, and so on.

Avi said...

Michael,

Not all firms have understated this - I have consistently rated RIM higher than Nokia. Three comments:

There's also a geographic component to this. Nokia is badly underexposed to North America, and that market has held up much better than Europe. RIM is overexposed to North America, and Apple is either balanced or U.S.-centric depending on the quarter.

Nokia's smartphone product line peaked in 2007. The 10 million+ Europeans who bought an N95 two years ago have seen nothing compelling them to upgrade within Nokia's product line, while Apple, HTC, and Samsung have offered touchscreens.

RIM is also gaining consumers who are messaging-centric, not necessarily email-centric. That should give it room to run beyond just enterprise and email-centric consumers.

-avi

Michael Mace said...

Thanks for all the comments, folks.


Tsahi Levent-Levi wrote:

>>It's the same story with Windows Mobile and the iPhone - WM did better than the iPhone in Q4 2008.

They did indeed in Q4, but that's the problem with looking at just one quarter's numbers. Microsoft has been pretty much flat for more than a year, while Apple has been growing rapidly. Based on Apple's momentum, it looks like they'll be decisively ahead of Windows Mobile in the future, unless they do another inventory fumble.


frafam wrote:

>>Could be Nokia sales are also flattening out as users like myself wait for Android to become available in their area

Could be, but I think most mobile phone buyers -- even smartphone buyers -- are not tuned-in enough to be waiting for Android. Especially since no really exciting hardware has been announced for it.

Besides, wouldn't that stall Apple and RIM sales too?


Harel wrote:

>>The missed piece is Google that will try to turn all mobile phone into smartphones, than RIM will be in trouble

Maybe. I know there are a lot of folks online who feel like you do. I'm a bit more cynical -- I haven't seen any Android hardware that I think would move millions of people to buy. I like the TMobile device, but it was pretty vanilla and didn't set me on fire.


Gringo wrote:

>>And finally there is the BlackBerry revenue share - the approximately US$4-5 for each active user each month that the carriers pay to RIM which will make BlackBerry data prices that bit more expensive.

The interesting thing is that most of the operators I've looked at do not pass that extra Blackberry cost along to the customer -- the Blackberry data plans are usually the same price as the Windows Mobile data plans.


>>Is it harder to move from Business market into Consumer or other way round? Is it harder to move from messaging into web/multi-media or the other way round? Very interesting year coming up.

Great question.

Third option: do they continue to stay separate? I'm not at all sure that either company can invade the other's core right now.


Anonymous wrote:

>>What worries me the most about all of these smartphones is the apparent collapse of software....now the prices are dropping to nothing and no one is selling much.

I think there are probably at least two different software markets on the iPhone. The most visible one is a casual entertainment market, kind of like ringtones. The prices there are very low, and the customer base high. Then there is a smaller market of vertical software for specialized needs. The prices there are higher because the software is actually valuable, but the sales volume is lower.

It's hard to push both markets through the same store.


>>Software has become de-valued.

Dude, it was never valued in the first place on mobile devices. And for that matter, have you looked at the financial model for web apps?


>>So what is everyone going to do with all of these smartphones? ....What is going to happen when the developer community starts going away?

I don't know that the community will go away, but RIM and iPhone both sold extremely well before they had any third party apps. I'm not convinced that apps actually help to sell mobile devices; most are bought as appliances.

I hope apps will make a difference in future sales, but so far the evidence doesn't prove that.


VB wrote:

>>An under-appreciated fact about the BlackBerry is the solid set of business-friendly features supported by the BlackBerry Enterprise Server. They make it easier to manage enterprise deployments -- remote application control, user access policies, encrypted links among enterprise users, and so on.

Good point. Just like Apple makes it incredibly easy to buy music.


Avi wrote:

>>Not all firms have understated this - I have consistently rated RIM higher than Nokia.

You're the exception that proves the rule.

I don't really count you as just an "analyst," Avi. You work on a higher level. Same thing for Gartenberg.


>>The 10 million+ Europeans who bought an N95 two years ago have seen nothing compelling them to upgrade within Nokia's product line

Do you think the N97 will help? The hardware's nice, but I haven't seen the finished software yet.


>>RIM is also gaining consumers who are messaging-centric, not necessarily email-centric. That should give it room to run beyond just enterprise and email-centric consumers.

Good point.

niti bhan said...

Nokia's strategy seems to take its global market into consideration, not just those served by RIM and Apple. Apple in particular focuses on the creamiest of layers. Perhaps this is why their attempts to cover all bases in the broad 'mobile/computing/services' arena don't seem to make sense in the context of the analysis which focuses primarily on the mainstream consumers who are the focus for RIM and Apple.

Once we step away from that and look at the global mobile market as a whole, Nokia's ridiculous penetration rates, brand equity and commitment to the emerging markets of the developing world (over looked and under served by major brandname manufacturers) one can see their comprehensive adn cohesive attempt to leverage this loyalty for whatever services and products they choose to launch.

Just take the teeming millions in INdia for example, where chauffeurs buy smartphones and the word nokia is synonymous with mobilephone.

It'll be interesting to see how it all plays out a couple two three years going forward. Btw, they've just invested in Obopay, a mobile payment company very popular in India.

Michael Mace said...

Thanks, Niti.

Those are all good points.

I think this all just underlines that the definition of "smartphone" is impossibly broad. I think Nokia has a great chance of selling a ton of voice phones that add some data into the mix. But that's very separate from the sorts of devices/markets Apple and RIM are addressing. Lumping all of that into a single smartphone "market" is borderline absurd.

niti bhan said...

Yes, agreed, their phones aren't really in the same category at all, as you've pointed out.

Though one would wonder if "smartphone" might turn out to be a transition category of products anyway?