What's Next for RIM?

Several people have asked for my thoughts on RIM's financial troubles.  A computing platform runs on momentum.  When the platform's growing, there's a virtuous circle between the growth of the customer base, the introduction of new products, and the arrival of new developers.  Each one reinforces the others, and it produces strong, resilient growth.  Look at Apple's current expansion for a great example.

But if that momentum breaks, the same forces that help you grow can create a self-reinforcing decline.  The loss of customers reduces your resources, so you can't spend as much on new products, so developers are less excited, so you lose more customers, and so on.  I lived through those cycles at both Apple and Palm, and they are very difficult to reverse once they gather momentum.

Based on RIM's latest financial report, it looks to me like the company may have fallen into a declining pattern in North America.  Sales in the rest of the world seem to be doing better, which is masking the severity of the problem in the US.  It's hard to say any of this for sure, because RIM doesn't release all that much detail.  But here's what I think I am seeing in the numbers:

--As the chart below shows, sales were down compared to last quarter, only the second sequential revenue drop since fiscal 2006. 

Revenue per quarter (RIM fiscal quarters)

RIM pointed out that sales were up year over year.  They were, but...

--The year over year revenue increase was driven by a 67% increase in sales outside North America.  If you look only at North America, sales were down about 18% year over year.  (RIM didn't announce that number, but you can back it out from the reported increase in international sales compared to total sales). 

In other words, RIM is growing strongly outside North America, but declining sharply in North America.

The most disturbing thing about the revenue decline is that it came in the quarter when RIM shipped the PlayBook.  That should have increased revenue.  The fact that North American revenue dropped anyway means the decline in North American BlackBerry smartphone sales was even worse than it seems.  Edit: I did a back-of-the-envelope estimate of the revenue from PlayBook, and BlackBerry smartphone sales in North America must be down by well over 20% year over year. 

--Device gross margins are down to 28%, a drop of three points from the quarter before.  I suspect this is another sign of the mix shift away from North America -- RIM's sales in the rest of the world tend to be lower-cost units sold to young people, and those devices would have lower margins.  It may also mean that RIM has been cutting prices in an unsuccessful effort to prop up sales in North America.

Company and hardware gross margins (RIM fiscal quarters)

As you can see from the chart, RIM's overall corporate margins (the blue line) did not drop as much as its hardware margins.  That's because the company had a big increase in services revenue.  Perhaps the service revenue from those international customers is better than the device revenue.  Unfortunately, RIM doesn't release enough data to let me dig into that.

--Average sales revenue per device dropped $20, to $279.  That is an all-time low.  This may be due to the shift to international sales.  It may also be due to price-cutting in North America.  I am astounded that average revenue per unit sold dropped in the quarter when the (relatively expensive) PlayBook shipped.

Average revenue per device sold (RIM fiscal quarters)

--The shoe that hasn't dropped yet is channel inventory.  RIM told us it had shipped 500,000 PlayBooks, but it didn't say how many of them have sold through to customers.  It's easy to have one good quarter when you load the channel, but what matters is the sales in the next two quarters.

We also do not know how many BlackBerry units are sitting around in the channel.  But one thing is certain, every time RIM's executives talk about how great their upcoming products will be, it gets a little bit harder to sell through those existing devices.

Netting it out, the sales pattern in North America looks disturbing.  Pricing actions in North America don't appear to be increasing sales, and the PlayBook has not rescued the company.  The silver lining for RIM is that its international sales are growing.  But North America is half of RIM's revenue, so it has to be fixed if the company is to go back to rapid growth.

What happens next?

To restore momentum in a faltering platform, you need a hit product.  Can RIM generate one?  The company says it will accelerate the introduction of new products, which sounds sensible in the abstract, but if it's possible to develop products faster, why didn't RIM do it before?  And considering RIM's history of shipping buggy devices, I tremble at what its products might look like if they were developed even faster.

RIM says it is going to do layoffs, which is probably necessary given the drop in revenue.  But I wonder where the cuts will come from, and how big they will be.  Do you lower staffing in North America, so you can focus more on the fast-growing international markets?  If so, you may blow your chances of ever recovering the North American half of your business.  Do you cut R&D?  If so, I don't know how you get products to market faster.  Do you focus on being a youth messaging phone?  If so, how do you prevent Apple's new iMessage service from eating your lunch?  Or do you try to do an across-the-board haircut of a certain percent of employees in every department?  I went through some of those at Apple.  They are easy for management to implement, but their net impact is fewer people trying to do the same work, and doing it poorly.

Meanwhile, there will be a morale problem at RIM.  Ideally, you should announce layoffs on the same day you conduct them, so employees don't waste time worrying about whether they will keep their jobs.  Instead RIM pre-announced the layoffs, which probably mollified investors but which will distract every person in the company for the next quarter while they prep their resumes.  I have lived through that sort of uncertainty, and it is a productivity-killer.

The other hit to morale is going to be RIM's announcement that it will buy back up to 5% of its shares.  At current market value, that is about $900 million in cash that could have gone into R&D or marketing or price cuts but will instead be used to prop up the stock price.  If you're a RIM employee, the combination of layoffs plus stock buyback seems to say that management thinks the stock price is more important than the work you're doing.

What is the plan?  You can't cut your way to broad growth; you have to cut and then focus on some key initiatives.  Apple is a good example to keep in mind.  It was in far, far worse shape than RIM, and came back very successfully.  RIM can too.  But Apple slaughtered huge numbers of projects and teams so it could focus on brand advertising, the iMac, and eventually the iPod.  

So I'm waiting for RIM to tell me what its master plan is for restoring growth.  So far all management has said is that the layoffs will be a "streamlining exercise" rather than a reorganization (link).  That may imply an unwillingness to make hard choices, or it may just mean they are not yet willing to discuss their plans.  Either way, before we can evaluate RIM's prospects, I think we need to know more about what it's going to kill (if anything), and which initiatives it will focus on obsessively.


gzost said...

A huge problem that RIM has at the moment is that they don't have a consistent story. Blackberries used to be enterprise messaging devices, had excellent keyboards, were the only devices that ran BBM, and had to be coupled with a BES.
Now they're enterprise and youth messaging. There were devices without keyboards. BBM may now run across other platforms. BES may be used with other phones. The Playbook was announced as an enterprise tool, but the name and subsequent marketing call that into question.
There are currently three OS versions at least partially incompatible OS versions on the handsets, and the Playbook has something different again - which may or may not completely replace the handset OS within the next year. Development for Blackberry can mean JavaME, Adobe AIR, HTML5/javascript, depending on the device.
Blackberry had a strong story, anda lot of goodwill. The story is gone, the goodwill being eaten up be mediocre handset updates and buggy launches. The urgently need a unified story again, and communicate this effectively, to get back on track.
Staff cuts and doing more of the same chaos they currently represent are not going to help.

Anonymous said...

Concur on the handling of layoffs. When I see early announcements of layoffs, I think, "They are more concerned about the investors than their business." This is rarely a good thing. Having been subject to downsizing via sniper and via death-row process, the former is much preferable for all concerned.

Matthew said...

Lay off half of the CEOs. That should save some big bucks!

Anonymous said...

RIM deserved it, just like Nokia.
RIM released Blackberry 9000, 9700, 9800, 9780, all with the same processor, they only added extra memory.
Nokia release 5800, N97, X6, 5530, C6,..., all with same processor and memory.
While for short term it's great because of cheap r&d cost but these hurts consumers

GeorgeS said...

There is a common factor in all of this: a major failure of leadership. Why didn't the vaunted "co-CEOs" do all these things they're promising earlier? Why are they taking huge salaries and bonuses, vainly trying to buy hockey franchises and making public statements that require a PhD in geek language to decipher?

Note that I do NOT mean a failure in management. There have probably been those, too, but this is about leadership, about steering the company into the future. RIM seems to have no idea of WHY it does what it does--what its' all about. (See SImon Sinek's book, "Start with Why.")

The PlayBook is a great example. It seems that RIM doesn't know what the PlayBook IS, much less what it is MEANT to be. Apple DID have a vision for the iPad--to make people's lives easier and more enjoyable. What Apple didn't see at the start was just how popular the iPad would be as people figured out OTHER ways to use it (e.g., medical diagnostic tool, sales tool, education), which caused the sales to quickly explode beyond the early adopters, even faster than the iPhone did.

To understand this, ask yourself one question: Do people stand in line to get a PlayBook months AFTER it was released?

Anonymous said...

Is it a bad thing that I'm almost enjoying seeing this gigantic slow-motion train wreck transpire?

Michael makes the point that a turnaround is possible, but we all know nothing short of a drastic and complete change at RIM is necessary if they still want to be relevant in 5 years.

Anonymous said...

When the iPhone was introduced, my first thought as the live updates were posting on my screen was that RIM is dead, they just don't know it yet. I didn't base it on any great familiarity with their products or corporate plans or anything else other than the fact that RIM has little to no experience selling a consumer tech device and Apple, the supreme consumer tech device company, had just put RIM in their sights.

And the confused, panicked flailing that we have seen from RIM since then was just that: the actions of a company that had no idea how to compete for the tech consumer's dollar. Compounded by a peculiar organizational structure that saw a two-headed hydra occupying the corner office. What, they were too scared to hurt one another's feelings to put in a proper command structure?

Aaron Klein said...

I've been a RIM fan for a long time. I so desperately wanted them to succeed. My blog actually used to be named Crackberry Addict.

But I finally had to let go and switch to the Droid Pro. I absolutely love it...a well integrated experience where everything just works and 95% of the apps I need are available.

RIM needs to adopt Android now, build their enterprise email on top of it, and focus on hardware. They STILL build the best smartphone hardware in the world.

There are two, MAYBE three mobile OS choices now. BlackBerry or QNX are not in that mix.

Alex said...

Things are even worse than many realize. Developers don't like RIM. It's a horrible platform technically and doesn't have nearly the reach it claims - sure there are over 50mm devices out there, but hardly anyone uses the web or apps. At this point, if you own a blackberry you do so because(a) you have no choice; your company gave it to you, (b) you're a curmudgeon and don't even want to know what an app is, or (c) you're cheap (and either a carrier gave it to you for free, or (a) applies too).

Not only is management out of touch, but also the rank and file are too. Their arrogance makes them ignorant: they don't understand open developer ecosystems, stable APIs that anyone can use, or - as mentioned above - consumer marketing. (Verizon's running a campaign for Playbook now that says "Your wife will love the dual core processors." I'm sorry, but whoever wrote that must not be married.)

People clearly loved their devices and the company could, perhaps, turn things around. But the smart money is fast realizing that RIM may be in terminal decline; pre-announcing layoffs and rushing development are only more symptoms, not cures. If they come out with a hail-mary device, I'd chalk it up to luck - another Razr - not repeatable skill of Apple.

Mobile phones are a fashion item; RIM is soon going to be out of fashion, in more places than on Wall Street. And that's something that even dual core processors can't fix.

Anonymous said...

In addition to all these, RIM has a cultural problem. They are right next to a treasure chest of software engineering talent, University of Waterloo. Yet, they are not willing to pay the right salary to top Waterloo grads and use them. As a Waterloo Alumnus, I know students at Waterloo laugh at their offers from RIM.

The dominant work culture at RIM seemed to be a 9-5 one. If you do want to take it easy with work and raise kids, RIM would be a good place. But if you are a young savvy engineer willing to work 12 hours a day, RIM does not want you. I have no hope for this company.

Anonymous said...

Easy fixes:

- change executive structure, RIM needs a new head honcho - I'd get someone from the old Palm
- re-align business to support modern strategy
- streamline the portfolio of products - 1 low cost, 1 business full keyboard, 1 touchscreen

Deasy said...

Blackberry sunk in Asia where Samsung's Androids becoming people's favorite.
Whatsapps is a very good application in connecting Androids with Nokia and BB users.

Josh said...

Interesting article. I am marketing student and personally believe that RIM need to have a combined strategy of developing more consumer-orientated phones mixed with a business brand image.

I have researched and wrote about the topic in quite some detail if you would like to read my thoughts on my blog http://manifestedmarketing.com/2012/04/06/research-in-motion-how-branding-can-save-blackberry/

Anonymous said...

The android os is the bom, RIM needs to improve on the os, os4 to os7 has much in common. they need to try a device with the android os.

Unknown said...

It’s sad what’s happening to RIM . I myself still have my old Blackberry phone, as I find it to be an awesome phone for work, and am a big fan of the non-touchpad QWERTY.

You have to give it to RIM to sticking to their guns, but unfortunately that is what’s killing their product fast. The main problem really, as what a lot of people in the comments have stated, is it’s somewhat unwieldy OS. Developers have been having problems creating new apps for it, and updates have been sporadic in coming. If they would like to maintain their original OS for their future line of products, they have to step up in development and make it more open if not malleable to outside developers, like what Android has done.

Doug Leven