People have been asking for my take on RIM's latest quarterly earnings, which were reported last week (link). The short answer is that I am both less worried and more worried than I was before. I am less worried because the company has more strength than I realized internationally, and I am more worried because the situation in North America is worse than I thought.
Before I get into my comments, I should point out that I don't think you can use a single quarter to declare a company either dead or saved, especially when it's as big and prominent as RIM. In the last couple of years, attitudes toward RIM have gone through a couple of cycles in which negative coverage about the company builds up, the company has a good quarter, and the coverage dies down for a while again. I think it's more useful to look beyond the individual quarters and try to see the long term trends.
In that spirit, I think RIM's earnings were good, but I was more interested in the things management said about moving toward new products and services, and by the very rapid changes happening in RIM's international sales. Overall, I wouldn't say the company is out of the woods at all, and 2011 will be a decisive test of its viability. Here's an overview of the earnings, followed by some comments on international and the new products.
Updating the charts
I plugged the latest numbers into the charts from my post on RIM in October (link). They generally look like good news:
Total BlackBerry Subscribers
(Quarters are RIM fiscal quarters)
Continued nice growth. But we'll come back to this one in a minute.
Net New Subscribers Per Quarter
This one is encouraging: additions went up compared to the quarter before. But it's only one quarter; over the year, the rate of additions is flat. Watch the next several quarters to see if there is a trend.
New Subscribers Per Unit Sold
Continuing to decline. If you're looking for bad news on RIM, this is probably the chart you focus on.
Device Gross Margins
Good news, they were stable for the quarter. This is another statistic where you want to look at the trend rather than just a quarter's results. And the trend for the last year looks stable, which ain't bad. (Remember, I have to estimate this number because RIM doesn't report device gross margins separately.)
Device Average Selling Price
Also stable for the last couple of quarters. Good news.
Service Revenue Per User
(Dollars per quarter.)
I didn't chart this one last time, but it's interesting. RIM currently gets about $15 in service fees per quarter per BlackBerry subscriber. That's the money operators pay to RIM per user for the email service. This revenue has been declining slowly but steadily for years, and I don't completely understand why. RIM says it's due in part to a shift toward prepaid customers, which would fit with the international growth they're seeing. But I wonder if also the operators are becoming less willing to share revenue with RIM. Anyway, I think it's a warning sign -- as your market matures you want to find ways to make more money per user, not less.
Adding up all of the results, it looks like a very nice quarter. But remember, one of my main points was that good short-term numbers can mask long-term problems. And in this case, the way RIM reports its numbers hides some challenges.
Looking ahead: A Tale of Two BlackBerries
Two issues really stuck out to me as I looked at the RIM announcement: International sales, and the comments by RIM's management.
In the post I wrote in October, I missed the importance of RIM's international growth. It was a significant oversight. Several people, starting with mobile analyst Dean Bubley (link), pointed out in comments on my blog that BlackBerry has become very popular among young people in many parts of Europe and elsewhere as a messaging phone. RIM also claims it is the number one smartphone platform in Latin America. Its appeal was explained by analyst Horace Deidu, who notes that the BlackBerry Messenger app is more attractive than generic texting because it's free, and because you can see when your messages have been read (link).
Deidu looked at RIM's most recent quarterly financials, and concluded that RIM's revenues had actually declined in North America, a fact masked by the company's rapid growth in other parts of the world (link). That surprised me, because it wasn't featured prominently in most of the reports on RIM's quarter. It was also pretty alarming. All of the charts above look relatively reassuring, but they're a blend of the international business and the North American one. Since the signs of an impending platform collapse are subtle (something I explained in my October post), it's possible that the international growth is disguising big warning signs in North America.
Unfortunately, RIM doesn't report early indicators like gross margin by region, so I had to look for whatever data I could find. I managed to dig out the numbers on the RIM subscriber base in North America vs. elsewhere. RIM doesn't report this directly, but you can calculate it from the quarterly reports. Here's what I found:
BlackBerry Subscribers
About half of RIM's subscribers are now outside North America (the crossover will probably happen this quarter). Growth in North America looks pretty slow. Here's what the subscriber growth rate looks like:
Quarterly Growth in Subscribers
The BlackBerry subscriber base outside of North America has grown rapidly, increasing 15%-25% every quarter for the last three and a half years. North American growth was also strong until about 18 months ago (the second quarter of FY 2010), when growth softened. In the last two quarters, subscriber growth in North America dropped to almost zero.
Yikes. That sure smells like market saturation to me, and the process is a lot further along than I thought.
(Note: I had to interpolate the numbers for a few quarters in fiscal 2008 and 2009, because RIM didn't report them every quarter.)
So at the risk of oversimplifying a bit, the data and the anecdotes from around the world paint a picture of two RIMs: A consumer messaging phone company that has tapped into a new demographic and is growing fast in various parts of the world outside North America, and a prosumer e-mail phone company that has hit the wall in North America and needs very badly to re-ignite its growth through new products and services. It is the best of times, it is the...oh, you get the idea.
This explains a lot of the confusion we're seeing in attitudes toward RIM online. Like blind men feeling the elephant, we see the RIM that's in front of us -- either the consumer RIM that's growing well, or the prosumer RIM that has stalled out. Who's seeing the real RIM? We all are. The phone market is heavily segmented, and it's common for a company to do well in one region and poorly in another (just look at Nokia).
I have to give a lot of credit to the folks at RIM for managing to crank up the growth internationally just as its North American business faltered. I don't know if they were lucky or good, but it's a very hard balance to hit. On the other hand, I don't think RIM is doing any favors to investors by playing down the regional data in its financial reports. That creates a lot of confusion.
What it means for RIM. It looks like the North American business may be closer to a platform collapse than I realized. I think urgent action is needed to keep the company's North American users loyal. The silver lining in that dark cloud is that RIM's growth in other regions can help fund the changes needed. But time is short, and I still worry about RIM's ability to quickly focus on new differentiators and create compelling user experiences.
There's another path RIM could choose to follow -- it could milk its North American prosumer base for profits while accelerating its growth with young people overseas. But if you can trust the comments of RIM's execs, that is not their direction. They seem to believe they are on the verge of succeeding everywhere, in all segments. RIM co-CEO Jim Balsillie was effusive when he took questions in RIM's recent quarterly conference call (you can read a transcript here).
His message boils down to this:
--PlayBook will be a huge hit.
--The new QNX operating system is great.
--Unlike other companies (Apple and Google), RIM will work in cooperation with mobile operators, content providers, and banks to produce services for customers. RIM will not bypass them, so they will steer customers to RIM.
--Don't worry about the iPhone and Android app base, because mobile applications written to a particular OS will become less important in the near future, as users and developers look to support web standards and intermediate development platforms like Flash.
--RIM provides the sort of reliability and security that enterprises want, so it will be the leading B2B mobile provider.
--RIM is growing very fast, and has a lot of plans for 2011 that have not been fully revealed yet. Adding these all together, the company has tremendous opportunities in the coming year.
I was surprised by how relentlessly upbeat Balsillie's comments were -- most CEOs usually hedge their statements to avoid saying something that could be quoted in a shareholder lawsuit. Balsillie sounds like he's either extremely optimistic or extremely anxious to convince people not to write his company off. But I checked some of the previous calls, and it turns out he's always like that.
It's important that you understand the breadth and depth of RIM's ambition, so here are extended excerpts from his comments:
"We have real differentiation and we have real opportunities for extension of the business in a whole bunch of ways. I mean, just the pent-up interest in the PlayBook is really overwhelming, and then you know the whole aspects of carrier billing and value-added services -- you're just going to see a litany of things happening in that area, both for the BlackBerry tablet and the BlackBerry smartphone over the year....
"We're laying in the pieces here to sustain really exciting growth for a long, long, long time....we'll have some pretty pleasant surprises in what we're doing throughout the calendar 2011....
"We're selling lots...We have good products. Our engagement is good. I feel very, very good about U.S. I mean, we're meeting with the guys that run all the carriers, we've got plans, our carrier partners are in place. There is a real desire to do a lot of things and a lot of these things are locked in and new things are being planned....
"I feel great about where we're sitting for 2011 in the carriers in North America, and we've held our base and we've had growth in shipment and we've had okay net adds, but we're positioned to grow very, very strong. We've really knocked the cover off the ball in so many other markets around the world and yet our penetration in those are still very, very modest....We fell very, very good about the future....
"The product roadmap looks great and the application extension B2B and B2C is so strong.... You're going to see a lot of the stuff come out, really over the next month. So it should be very, very interesting....
"The interest in PlayBook in the B2B is uniformly strong....I can't think of an account that isn't just beating down to get units....Overwhelming interest and overwhelming pressure to get units are a pretty fair characterization. So we're very confident just what it's going to do for businesses....
"The core essence of the business is still just moving along so well and growing so fast. So if you layer in this tablet category, and then you layer in advanced services strategies and then you layer in leapfrog future-proved architectures, I feel very, very good about where we are in the U.S. I feel very good about where we are around the world.... Do I think we're in a position to really take where we are and extend it further in a sustained basis in the U.S. and abroad? In my view, without a doubt....Just watch the year unfold and watch 2011 unfold and you should know. I'm fine just letting the proof being in the deliverables. We do keep delivering and we're going to keep delivering, so we're just going to keep it up....
"I think the PlayBook redefines what a tablet should do. I think we've articulated some elements of it and I think this idea of a proprietary SDK and unnecessary apps -- though there is a huge role for apps, I think it's going to shift in the market and I think it's going to shift very, very quickly and I think there's going to be a strong appetite for web fidelity and tool familiarity. And I think there's going to be a rapid desire for high performance, and I think we are way ahead on that. I think, CIO friendliness is...we are way ahead on that....So I think the PlayBook clearly sets the bar way higher on performance and you're going to see more. I think the enterprise stuff, we're seriously extending. I think the BlackBerry is still number one in social collaboration. And I think with the PlayBook and that environment we're going to set the new standard on performance and tools, very powerful tools and we're growing very, very fast."
This is called tying yourself to the mast.
Maybe Balsillie is right. Maybe RIM's on the verge of enormous opportunity and explosive growth. I hope it is (seriously; I like RIM and I'd like it to succeed). But RIM is fighting on an enormous number of fronts, and that scares me for a company that has problems creating high-quality knockout products and is transitioning to a new operating system. The effect could be like flooring the gas in a car with a bad transmission -- you might get a surge of power, or you might leave half the engine on the highway. Restoring momentum to a stalled-out platform is a very difficult task, and it rarely goes smoothly, or succeeds in a single year. With all the hype the company is putting into PlayBook and the rest of its strategy, anything less than stellar success in all regions and all product lines in 2011 is going to be seen as a big disappointment. And that sort of disappointment could be the signal that causes users to turn away from its platform in North America.
As I said two months ago, I think RIM's future depends on its ability to focus, differentiate, and execute. I think the latest earnings just reinforce that.
[Note: This post was revised Dec. 22 to add a paragraph and clarify some explanations.]
13 comments:
Great reading to start the day with...
Can it be that RIM is heading to the "Zone of Death" defined in your 2007 post? ("The shape of the smartphone and mobile data markets")
Could it be they are consuming late adopters of the "information centric users" segment (US market)? Crossed over to "communication focused users" segment (international market)? And are trying to compete with Apple for "entertainment focused users"?
I don't see how RIM can succeed in addressing these different markets using the same brand, product portfolio and organizational structure (wrote about it on VisionMobile blog recently).
IMO, too much attention and hopes are focused on PlayBook. I doubt it will be huge hit. To me it reminds of Foleo, so what's left? Not much. QNX can be capable OS, but there is great distance between an OS and a computing platform based on the OS (you can explain the difference better than me).
Have been thinking about this article and your last on RIM for quite a while now, even before you became a star among the tech crowd last week. :-)
Your analysis jibes well with my own concerns about RIM, which goes back to our days of developing for the platform. I started to write a comment here as my thoughts have come into focus and it became too long, so I wrote about it instead on my blog:
http://eliainsider.com/2010/12/23/why-rim-is-flailing/
Ballsillie pinning the hopes of the entire company on PlayBook is a risky and desperate move. iPad 2 and the onslaught of Android tablets in 2011 will result in disappointing sales imo.
Blackberry handsets will continue to do well overseas on the strength of BBM and low cost but I suspect margins will decline along with mindshare and relevance in N. America.
Why do your charts show data from way into 2011? Are they your projections?
No, those are RIM's fiscal quarters. They are ahead of the calendar. Q3 11 just ended for them.
subscriber growth and subscriber per device sold's lousy numbers is a statistic that can be explained relatively easily. Outside of developed markets customers can't afford to add data plans as easily as developed markets like North America & Europe. So what do they do? well in china...everyone has a text messaging plan and a smartphone...they just use wifi when they get it for data. So as RIMM grows its developing market business they're selling phones but not selling subscriptions!
Nice post. Blackberry handsets will continue to do well overseas on the strength of BBM and low cost but I suspect margins will decline along with mindshare and relevance in N. America.
I am a bit surprised at the overseas BBM success given the price of BlackBerry handsets. However this Xmas 2010 has seen an avalanche of cheap Androids for the first time so will be very interesting to see what impact that has on RIM in this quarter.
As a comparison here in New Zealand, the 2G only BlackBerry Curve 8520 (cheapest BB) costs NZ$549 whereas there are several good Androids from NZ$299-$399 - all outright purchase. Then there is the BlackBerry service fee on top of this.
I just don't see the BB device range being strong enough to withstand the Android onslaught at entry, mid or high-end.
here in Brazil, the owner of mobile marketing is nextel. They sell more than blackberries.
There is nothing to suggest the PlayBook will be a huge hit with anything more than a niche audience. What average consumer knows or cares about apparently differentiating features like 'true' multitasking and Flash support? The words 'tablet' and 'iPad' are practically synonymous with the large majority outside the tech world.
That may change, absolutely, but to do so RIM needs a tablet with genuinely distinguishing features. The PlayBook is not it.
Here’s what might prove to be a problem with placing RIM’s international situation on the positive side of the ledger: the encrypted nature of BlackBerry communications is under attack by the oppressive political regimes in charge of many of the countries where it has become popular. I don’t know how big a problem this is or may become, but, as seems to be the case with so many other aspects of their business, RIM management is more apt to look bury their heads in the sand than address the problem. When recently questioned on the issue during a recent BBC interview, instead of embracing the opportunity to clarify RIM policy and re-assure his customers, co-CEO Mike Lazaridis characterized the question as “unfair” and terminated the interview.
For those of us lIving in Latin America, RIM was the first company that brought us a real entry in the world of the Smarthphone, most of the funcionality we were looking for, the secure BBM, the 24/7 support, etc.
Other OS were hard to get or not available at all, (Apple specially) but things are changing, our region will follow the US pattern of RIM costumers looking for new OS, either Android or Apple. Just an example, the iPhone 4 was introduced today in Costa Rica, by one of the worst carriers in the world (ICE) and was sold out a few hours later.
Either RIM changes quiet fast or it is the time to buy puts.
The REAL problem with RIM right now is:
1. The competitor (nokia, samsung) is selling a new batch of QWERTY phone @ less than US$ 100.
1a. Some BB user didn't really care about BB or Nokia or Samsung or any other phone brand. Some percentage of them only want an affordable phone (as cheap as possible) with cheap messaging platform. This is the US$200 market that BB have been trying to pursue. The high school student and college student market. And with Nokia introducing the C3-00 and X2-00 and also samsung with their Dual SIM-card QWERTY @ US$ 80, really hurting BB sales.
1b. BB tax is very high. In Indonesia, where I live, I could get Nokia, Samsung, or maybe Sony Erricson android with QWERTY and use the semi-unlimited internet with 500MB FUP (it's 3G speed, but will be lowered to 64kbps once it's reach 500MB) for only a mere US$ 3/month (more MB data plan available). compared to BB US$ 13/month (starting price). So, BB only used by small number of user, they don't have the crowd effect, and old BB user are changing their phone into cheaper nokia/samsung model, or sexier Sony Erricson Android phone.
1c. SMS is very cheap now. Unlimited SMS is only US$ 3/month. and for BB user, they will also use SMS, because not all their friend use BB. So, using BB to avoid SMS is no longer smart move. Some prefer to use SMS, since it's more reliable and cross platform.
2a. BB platform is only good for geek. current android, symbian devices combined with cheap internet and cheap SMS make BB lost it's point.
2b. BB management were stuck up. They comment on (Indonesian) newspaper is making people stay away from the product: their comment... translated from indonesian language in regards of lots of cheap QWERTY devices on the market: "only those who cheap, use cheap BB imitation wannabe (cheap QWERTY devices). If they already use those cheap imitation and got money they will buy the real BB, and will be shy to keep using cheap imitation.".... This really hurt the RIM image in BB wannabe.
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