RIMMing Out?
By Alex Daley, Senior Editor, Casey’s Extraordinary Technology
It’s been over three years since the release of Apple’s iPhone, the shiny touchscreen megahit that marked the launch of the “smartphone” market in most people’s eyes. In recent months, though, the iPhone – whose 3G, second-generation model remains the world’s best-selling single handset – has seen an increased amount of competition from a major new presence in the game: Google.
The Internet giant is now activating more than 200,000 new phones, based on its open source Android operating system, per day. That’s up from 160,000 in June and is twice May’s 100,000. The new guy is stalking the field – and the hunting is good.
Daily activation numbers aren’t everything. But they’re an accurate snapshot of how popular a given phone or platform is at the moment and, if gains can be sustained, of what the market share picture might look like a few months down the road.
Does this mean the iPhone is doomed and Apple’s profitability with it? Probably not. The iPhone continues to ride a formidable wave of popularity, selling over 2.5M units per month. Its app marketplace is a stone killer, a vital force that both attracts initial users to the platform and keeps them there once they’ve bought in.
Just ask any iPhone user if they’d go back to whatever they were using before it. Chances are they’ll chuckle.
Best of all from Apple’s viewpoint, the company makes a boatload of money off each device, starting with a few hundred dollars of margin on each phone:
Now, take the royalties on the contract value from AT&T; shares of the sales of every app from the store; music downloaded from iTunes; and the vibrant accessories business with direct and “Made for iPhone” license fees – add them to base sales, and you have a very healthy business on your hands.
No, Apple doesn’t have to fret much about Google. Who does, then? It’s that other fruit-flavored device, the Blackberry, from Canada’s Research in Motion (RIMM).
Once the most popular executive must-have gadget, the Blackberry clings to its status as king of the hill in the smartphone game, with its line of email-savvy handsets for business users. It still commands a hefty 35% of the global market:
But as you can see, over the past year only the iPhone has been holding steady. Everyone else, including RIMM, has been losing share as Android gulps an ever-larger piece of the pie.
It’s Palm, Microsoft, Nokia (makers of the majority of Symbian OS phones, as cited above), and now Blackberry that are equally sharing the brunt of the Android attack, with unit shipments of all falling while Android rises.
Without a full-featured web browser, and with a surprisingly limited selection of applications for their platform, Blackberry devices have for some time looked clunky and rather antiquated next to the iPhone and Android.
It isn’t as if RIMM hasn’t noticed. Recently, it tried to step up to the plate and produce a truly competitive high-end smartphone, the Torch. A combination of touch screen and hardware keyboard, the Torch was intended to be all things to all people: a quick and easy touch device like the iPhone that was nevertheless acceptable to those who prefer clickable keys for fast thumbing. It may prove to be too much of a reach. Reviews have ranged from lukewarm to downright awful, and sales have been disappointing thus far. Three years on, it may be too little too late.
RIMM’s primary salvation in past years has been its popularity with big enterprises and government. IT managers have long insisted that companies standardize equipment and choose only the most secure and easily maintained devices. So, RIMM focused efforts on cementing its place in the enterprise and growing with add-on offerings.
However, in today’s economic climate, cost-cutting efforts – coupled with the intense popularity of the iPhone for home users – have seen a lot of businesses taking a much more relaxed, bring-your-own-phone approach to accessing email on the road. It’s a corporate win-win, as employees get to choose the device they like best and the company gets to shift that cost burden onto the individual.
In the process, the big loser has been RIMM. Its hold on the enterprise is strong but slipping. The more users get accustomed to the superior experience offered by Android and iPhone devices, the more they are demanding the convenience of using them for work, instead of their Blackberries. That will inevitably shrink RIMM’s cash cow market and hurt its brand with device buyers.
RIMM’s competitors have also begun to attack the company’s other major revenue stream besides devices, the license fees it charges for its email server, the Blackberry Enterprise Server – which organizations put between their email systems and devices, to push out messages quickly to remote users and to encrypt messages for security. Makers of popular email systems, especially Microsoft with its Exchange product line, have begun building those same features into recent versions of their products, obviating the need for the Blackberry server to deliver them. Both iPhone and Android devices support the new Exchange features.
On top of the competitive assault, RIMM also finds itself under close scrutiny by governments around the world, who are demanding that the company allow them to monitor encrypted communications. Saudi Arabia and India both have demanded that the keys to all these scrambled communications be handed over to government officials, or the services will be shut down in their countries.
Add to these items the major service outages for Blackberry phones, which have shut down email access for millions of users for hours or days at a time, on multiple occasions over the past two years, and a storm is brewing for a major decline in enterprise and government reliance on Blackberry devices.
In fact, Morgan Stanley analyst Ehud Gelblum estimates that Blackberry’s market share will contract by as much as 30% by 2013, accompanied by a drop in absolute volume for the first time ever.
Until recently, the main victim of the smartphone onslaught hasn’t been other smartphones, but rather those far simpler devices that the industry dubs “feature phones.” Motorola was once atop the heap in feature phones, with its global mega-hit, the super-slim RAZR cell phone, and other popular models. But for the second quarter in a row, Apple’s high-margin, full-featured smartphone has outsold all of Motorola’s feature phones combined:
Figure 1 - Graph From BusinessInsider.com
That shift in sentiment is reflected in the stock price history of companies like Motorola and Nokia, which took the first iPhone assault head on. They’ve plummeted over the past few years as their sales dwindle and margins slide:
So that war is about over. With feature phones fading, the competition is shifting directly to the smartphone arena, which is heating to cherry red.
Once it was a two-horse race. But the injection of Android into the fray, and its overnight success, have completely scrambled the odds. Despite a rapidly growing overall market -- market researcher NPD says that total smartphone sales in the U.S. are up 50.1% over last year, and web statistics firm comScore says Android usage is up some 400% over the same period – the field is being thinned as many formerly established players suffer severe market erosion.
Bottom line: The losers are falling away, Android is coming on like a gangbuster, and the iPhone continues to evolve. Thus, Research in Motion now finds itself with a huge target on its back, in the crosshairs of both Google and Apple at the same time. That’s an unenviable position for any company, least of all one with so many recent slip-ups.
RIMM’s stock has already fallen from a 2008 high of well over $130 per share down to $47 in recent trading. Yet, despite the 64% loss, its troubles may just be beginning. If it fails to act aggressively, to bring relevant devices to market, and to maintain some semblance of present market share – then it is likely to see its stock price further extend the swan dive, right along with its device sales.
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