Canada’s Research in Motion used to be the leader of the smartphone pack. Sure, there were a handful of Windows Phone devices, there were flashy Symbian handsets from Nokia aimed at corporate users, and early smartphones from the likes of Palm were showing promise, but for years RIM’s keyboard-packing BlackBerry devices and their addictive blinking LEDs ruled the smart device landscape. Heck, when President Obama moved into the White House, one of the major security kerfluffles was that he insisted on keeping his BlackBerry, noting someone would have to “pry it from his hands.” That’s a pretty high-profile product endorsement.
My, how times have changed. RIM has just announced a $500 million loss for its most recent fiscal quarter (PDF), and the bad news doesn’t stop there. On top of seeing device sales drop through the floor, the company says it will be laying off some 5,000 of its estimated 16,500 employees to save money, and won’t be delivering its make-or-break BlackBerry 10 operating system until 2013 — effectively putting it a year behind schedule. This follows its former co-CEOs stepping down, as well as the departures of numerous key executives.
How bad are things for RIM? And does the company have any hope of rekindling past glory?
Grim news from grim numbers
RIM’s latest quarterly results landed with a thud. The company’s fiscal quarters are offset from calendar quarters, so on paper the results are for the first quarter of the 2013 fiscal year, although the cover the second calendar quarter of 2012. For the latest quarter, RIM lost $518 million — and it’s the second straight quarter in which RIM has lost money, following a $125 million loss last quarter. Putting that in perspective, for the same quarter a year ago the company posted a profit of $695 million. That was off from the company’s recent high quarterly provide of over $910 million in the second fiscal quarter of 2011, but not so bad, really: After all, the company was still making money!
Losing money isn’t necessarily a bad thing. Wildly successful companies like Amazon barely turn in any profit at all. The catch is that the successful ones are continually expanding their businesses and revenue.
Meanwhile, RIM is seeing its revenue base shrink dramatically. The raw amount of money flowing into the company during the latest quarter was $2.8 billion. There are millions of firms that would love to have that kind of cash flow, but it’s actually bad news for RIM. In the previous quarter (its fourth fiscal quarter of 2012, covering the first calendar quarter of the year) RIM had revenues of $4.2 billion. So in the space of three months, the company saw the total amount of money flowing into the company drop by a third. Lots of businesses have seasonal fluctuations — for instance, the consumer technology businesses historically slumps in the first calendar quarter of a year following end-of-year holidays. But the second calendar quarter of a year is when consumer spending starts to pick up again, and RIM’s revenue drop for its latest quarter is far in excess of the post-holiday slump it experienced.
RIM’s operating losses and steep revenue declines come at a time when RIM’s fundamental industry — smartphones and mobile devices — is experiencing phenomenal growth. Sales of smartphones to both consumers and businesses have never been higher. And while it’s still probably too soon to talk about a tablet market separate from the iPad market, tablet computing is indisputably a hot commodity, with Apple currently dominating the field but Amazon, Microsoft, and Google.
How have RIM devices been selling? Not so well:
At a time when smartphone sales are exploding worldwide, RIM has seen its handset sales plummet back to levels it first achieved in its fourth fiscal quarter of 2009. (And remember: RIM’s fiscal quarters are offset from the calendar year, so those figures are from the first calendar quarter of 2009: e.g., three years ago).
According to RIM, the company has managed to sell 1.61 million PlayBook tablets since the devices went on sale a year and a half ago. During roughly the same period, Apple sold nearly 60 million iPads. That puts RIM’s PlayBook sales at about three percent of Apple’s iPad sales, and doesn’t factor in sales of devices like the Kindle Fire and the Barnes & Noble Nook Tablet, which some industry analysts consider iPad and Playbook competitors.
Stay the course?
For now, RIM seems intent on staying the course and betting that the eventual release of its BlackBerry 10 operating system will re-invigorate interest in its platform and propel the company back to a leadership position in the mobile industry.
In the meantime, the company is cutting costs to keep its head above water. RIM estimates that laying off 5,000 employees will save the company about $1 billion in the course of the next calendar year. Right now, the company has about $2.2 billion in cash assets on hand. If RIM keeps losing money at about $500 million a quarter — and that’s a questionable assumption, given the company’s revenue trajectory — that means RIM will run out of money by mid to late 2013, if things continue as they are.
However, that’s actually a best case scenario if things stay on the current track. Before RIM starts flipping over couch cushions looking for change, banks are going to cut the company’s credit ratings, and both customers and employees will jump ship. In other words, once a company in RIM’s situation is on a steep downward slide, it tends to get even steeper very quickly. And RIM’s revenue slide, above, looks pretty steep.
The odds of RIM hitting BlackBerry 10 out of the park are long. Although some initial impressions of the BlackBerry 10 developer alpha are positive, RIM initially promised to have BlackBerry 10 out the door in the second half of 2012… so pretty much today. It delayed that until the second half of 2012, and now has delayed again, saying it now expects to ship BlackBerry 10 in the first calendar quarter of 2013.
Furthermore, from the consumer point of view, that means BlackBerry 10 will miss the lucrative end-of-year holiday season entirely. And by the timeline above, that means BlackBerry 10 won’t ship until RIM is a handful of fiscal quarters away from bankruptcy. It’s also important to remember RIM’s competitors won’t be sitting still all that time. BlackBerry 10 was conceived to compete with things like iOS 5, Android 4, and Windows 7. It will be entering a market against iOS 6, Android 4.1, and Windows Phone 8—with iOS 7 and Android 5 likely not very far off.
At that point, RIM won’t just need a hit: It probably needs a home run. And laying off up to a third of the company is likely to have a negative impact on the morale of the BlackBerry 10 development team.
Can RIM succeed without BlackBerries?
One reason RIM is determined to stay the course (for now) is that it has a hidden gem: Its private, global, more-or-less cryptographically secure network.
Unlike consumer smartphones like the iPhone and Android devices, RIM’s Blackberry devices have been designed for secure communications from the start. QWERTY keypads and blinking lights may have popularized the phones with users, what made the BlackBerry popular with enterprises and government was its secure communications capabilities. For enterprise, BlackBerry messages and communications are encrypted and delivered via RIM’s own secure network, rather than the public Internet. The start point and end point of the chain may be on mobile providers or ISPs, but it’s encrypted, and everything from email to calendar items to documents is transmitted via RIM’s own network operations centers, rather than third-party or state-controlled networks.
RIM’s network remain’s highly regarded and, so far as anyone knows, is largely secure. At least check, RIM’s BlackBerry network was operating in more than 90 countries. It’s reach and security make it a unique asset in the mobile world.
Right now, only BlackBerry devices use that network. So as long as businesses and governments continue to value that network, they’ll continue to buy BlackBerry devices. But corporate and government users are increasingly bringing iPhones and Android devices into the workplace, and insisting on using them, making a potential nightmare for IT administrators. RIM basically has two options: Open up its network to embrace devices from other manufacturers, or make BlackBerry devices so compelling that users will happily forego iPhones and Android (and Windows Phone) devices to use it. Right now, RIM is betting on the latter.
If RIM were to decide to let non-BlackBerry devices securely access its private network, Windows Phone 8 devices would be the most likely candidate. Unlike consumer smartphones like the iPhone and Android devices, Windows Phone 8 will incorporate support for a Trusted Platform Module (TPM). Basically, a TPM is a separate chip that can be embedded in a computer, phone, or other device to securely store cryptographic keys. Organizations can use them to build secure networks that are linked to specific hardware items, rather than something entered by a human, like a username and password. And, unlike humans, TPM modules don’t use their cat’s name for a password, nor can they be spearphished with a get-rich-quick link. TPMs can also be used for things like data encryption that can keep organizational data safe in the event a device is lost or stolen.
RIM and Microsoft would seem to have interests in common: Although both want to be players in the consumer arena, both of them make the bulk of their revenue from enterprise, corporate, and government customers. So, on one level, RIM could broaden its appeal to Microsoft customers by letting Windows Phone 8 devices tap into its secure network.
But there are obstacles. The first is that RIM does not currently support TPM. Its security and device management solutions are a proprietary, closed ecosystem, and RIM has always liked it that way. Like Apple, RIM prefers to control its own destiny rather than put crucial pieces of its platform in the hands of consortiums or competitors.
Second, Microsoft is supporting TPM largely so it (and its customers) do not have to build their own global secure network for communications. Sure, Microsoft is very interested in locking those customers into its own cloud-based products and services, but it its communications and device management solutions for enterprise are designed to operate over the public Internet, via cryptographically secured tunneling systems like virtual private networks (VPN). And if device makers (like Samsung or HTC or Acer and others) want to integrate TPM, their gear will work with Microsoft’s solutions right out of the box. Right now, the only device that work with RIM’s BlackBerry network are BlackBerry devices. So Microsoft has few reasons to want to embrace RIM’s technology or network. And with the launch of Windows Phone 8, it may have an opportunity to bury it.
No easy answers
RIM is caught between a rock and a hard place. It owns a platform that still has value to enterprise, governments, and large corporations, but consumers have largely failed to embrace it. Microsoft has been in a similar boat for years. The Redmond giant famously failed to embrace the Internet, portable media players, and smartphones until well after the ship had sailed, and it really isn’t making much money on its most successful consumer offerings, the Xbox franchise.
The difference is that Microsoft had its vast Windows desktop monopoly to fall back on to fuel years of investment, retooling, and product iterations. At this point, RIM’s checkbook might only keep the company running for months.
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