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.