Monday Note

A sad coincidence provides a stark contrast between the fortunes of two high tech companies, titans present and past. Last week, on (almost) the same day that the iPhone celebrated its fifth birthday, RIM issued very bad quarterly numbers: Down 43% year-to-year to $2.8B; a $518M net loss compared to a $695M profit in the same quarter last year.

A short five years ago, the BlackBerry was sine qua non in the smartphone world. Today, the future looks gloomy: RIM admits that they expect “the next several quarters to be very challenging”; they announce “a global workforce reduction of approximately 5,000 employees”; and, last but not least, they tell us that the new BB10 OS, initially promised for the end of the year, will be delayed until Q1 2013.

The downward trend has been evident for some time. It led to the replacement of RIM’s historic co-CEOs, Messrs. Lazaridis and Balsillie, with former co-COO Thorsten Heins – and it leads us to ask a series of questions about RIM’s survival.

Will BB10, RIM’s answer to iOS and Android — the company’s “number one priority” — ever ship? And, if it does, will it matter?

Probably not…and probably not.

To start with, BB10 isn’t a next-generation OS, it’s not a version N+1. It’s a whole new infrastructure based on QNX. Certainly, QNX is robust, venerable, and respected — but over its nearly 30 years, it has evolved into the premier OS for real-time applications embedded in consumer electronics, medical devices, and automobiles, not smartphones. From the QNX website:

QNX software is the preferred choice for life-critical systems such as air traffic control systems, surgical equipment, and nuclear power plants. And its cool multimedia features have QNX software turning up in everything from in-dash radios and infotainment systems to the latest casino gaming terminals.

When RIM acquired QNX from Harman International in 2010, the OS came with a handful of sophisticated but narrow, focused tool kits and libraries. Tool kits that let developers build “high-value consumer-grade solutions that range from simple media players to multiple-node systems with intra-vehicle multimedia sharing.” Algorithms that “improve the clarity, quality, and accuracy of voice communications for the most challenging acoustic environments … from conference rooms to automobiles.”

Admirable, certainly, but can they do Angry Birds?

What QNX lacks is a general-purpose application framework for developers. This is the most important (and fattest) part of the smartphone operating system. To app developers, the app framework manifests itself as APIs (Application Programming Interfaces). There are more than 1,000 APIs in Android and iOS. Building such a framework is a complex, time consuming task. A vital one, too: No app framework means no developers, no apps, no sale in the smartphone era.

RIM’s CEO saw that the company’s engineers needed more time, bowed to reality, and announced that BB10 would be delayed until “Q1 2013”.

In normal times, delaying an OS release by a few months is almost routine, part of an always arduous development process. But these times aren’t normal: In the smartphone wars, nine months is a very long time. And we suspect there will be further delays: How many of the company’s software engineers will lash themselves to the mast as RIM continues to lose money, market share, partners, credibility? How many of their best techies have already fled to companies where their work will have a chance to matter, to be enjoyed by fellow app developers and by legions of paying customers?

But let’s assume BB10 finally ships (and that it doesn’t suffer from too many early release bugs). Will it matter? By Q1 2013, Android and iOS will be even more entrenched; BB10 — and whatever new hardware RIM can manage to produce while it sinks and lays people off — will have to be strikingly superior to reverse the company’s slide into insignificance. RIM will have to build a real ecosystem (app store, media, companion devices, payment system) that can compete with what Apple and Google deploy…to say nothing of what Samsung appears to be building.

We could stop here. If BB10 doesn’t matter, that’s the end of the road for RIM. Investors seemed to agree. The day after the quarterly earnings release, RIM shares lost 19% of their value. Subtracting RIM’s $2.2B in cash from its latest $3.8B market cap, the company is left with a (putative) enterprise value of $1.6B. Since its high in June 2008 — a mere four years — RIM has lost about 95% of its value.

Which raises another question: Under the circumstances, why are investors now buying RIM shares? (78M shares last Friday, more than 4X the average daily volume.) Are they philanthropists and necrophiliacs…or astute traders? What prospective endgame justifies the uptick?

There are two theories.

First, RIM will be cut up and sold in pieces: A BB10 licensing business, a BBM (BlackBerry Messenger) operation, an entry-level hardware unit. On closer examination, however, this doesn’t make much sense.

– CEO Heins says RIM licensing will be “fully open”, by which he probably means even more open than Android. Right. Who needs a fledgling OS — without an ecosystem?

– BlackBerry Messenger is/was well-loved, and for good reason, but it doesn’t make sense on its own. Which smartphone platform would it run on? Android, iOS, Windows Phone? Or Tizen for high-end feature phones?

– As to the hardware unit, Huawei, ZTE, and others already produce low-cost BlackBerry killers sold in developing countries and, soon, everywhere. They don’t need RIM’s imprimatur, particularly if BBM and BB10 are no longer part of the brand.

Which leads us to the second theory: RIM sold as a whole to a muscular player such as one of the Chinese companies already mentioned. This could present a different sort of problem: BlackBerries are still popular with many government agencies around the world and Huawei, for one, isn’t. As for other wholecloth buyers: Samsung is busy with four platforms already (Bada, Tizen, Windows Phone, Android). Microsoft has its own story with Nokia. Who else?

Speaking of Ballmer & Co., yet another line of thought is that RIM will ditch BB10 and jump on the Windows Phone platform. Easier said than done, we saw what happened when Nokia osborned its Symbian and MeeGo devices. The move would need to be done in secret and quickly. (Allegedly, Nokia got its first Windows Phone devices from Compal, an experienced Taiwanese supplier; that might be a place to look for a quick transition.) Running BBM on top of Windows Phone 8 would please customers. Microsoft’s ecosystem would also help.

Would Microsoft want to see RIM join the Windows Phone party? Probably…but RIM’s CEO nixed that move. Moreover, Heins nixed all such moves, including joining the Android camp: He wants RIM to stay on its own platform.

Can Heins stick to his guns? We’ll see what he has to say after his brand new (effective July 1st) General Counsel, Steve Zipperstein, takes him aside and whispers in his ear about shareholder lawsuits. For almost 10 years, RIM’s new legal eagle worked for the US Department of Justice as a federal prosecutor…

RIM’s $2.2B in cash, no debt, gives it a bit of maneuvering room: It’s a lot easier to sell your company, or parts of it, when there is money in the bank. Further, the 55 days (of average sales) in channel inventory isn’t completely bad news, some of it could be flushed — at a loss — to generate additional cash and more “runway”. But for how long?

—JLG@mondaynote.com

Be Sociable, Share!

• 

No related posts.