There is an old saying: "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails."
It's time for Research in Motion (RIMM) to adjust its sails.
RIM preannounced an in-line (with consensus) quarter last Friday, but lowered its outlook for FYQ4 -- again. The stock is under further pressure, and the few supporters the company had left appear to have thrown in the towel.
At my firm, we are not experts on the consumer handset market, but we are very experienced in the enterprise software sector and have been spending time on the enterprise smartphone/smart device space -- specifically from the angle of IT, successfully dealing with the "consumerization" of IT and the integration of these alternative computing devices into the enterprise infrastructure.
Consumerization is no doubt a big problem for IT, and vendors are responding. However, today's IT departments have to assemble a patchwork of solutions to address security, management and provisioning of these new, non-PC devices. RIM has the opportunity to be a holistic solution to this problem if it moves decisively.
From that angle, we have a few observations about RIM's strengths and weaknesses, and what the company might do to turn things around and solve the thorny problem of smart device integration into the IT infrastructure.
*Push messaging is superior to pull messaging. RIM has been long known for its push messaging service. Push is more immediate and productive. It uses less battery power. Importantly, Push messaging could be a real plus for the corporate applications (especially workflow oriented) that everyone wants to build and deliver to tablet devices. We believe that RIM's most valuable IP is in its secure, push messaging and the network that delivers it.
*RIMM's network that delivers push messaging is very efficient. In areas of lower bandwidth (emerging markets), this capability has to been very popular with carriers. RIM generates approximately $4 bln in annual fees for use of its network.
*RIMM's messaging platform and its network are very secure. We have not heard of any hackers that have "jail broken" the BB operating system or BBM.
*RIM has the best mobile management platform in the business. Its recent announcement to extend management to iOS and Android is a smart move, and if sold properly will be a big hit. RIM has many thousands of system administrators that know and like BES. BlackBerry Balance technology that enforces the separation between corporate and personal data is big plus for "Bring Your Own Device" shops.
*BB6/7 is optimized for the old Blackberry design (physical keypad) and works poorly in gesture designs. Hence the move toward QNX/BBX (which is better on gesture form factors).
*BBX is very powerful, but it has little application support. BB6/7 is light on applications to begin with (when compared to iOS / Android), and few BB developers have moved to BBX yet. RIM has announced that Android apps will be able to run on BBX 2x (with a recompile). If this works really well – problem solved. If it doesn't – big problem.
*BBX is power/resource hungry. With great power comes a costly platform. Therefore, a big battery, big processor, big memory...
*RIM is not the low cost producer or fastest cycle time designer in a business that is fast demanding both (at least in the non-Apple (AAPL) category). The new model cycle times and production capabilities of the Android manufacturers is outstanding.
*RIM has shown that it cannot compete with the consumer hardware companies (Apple, Samsung, LG etc.) in consumer design and marketing. RIM is a business oriented company in the world of rapid Consumerization of IT.
Imagine If RIM Management Adjusted Its Sails
From a user perspective, when they choose the iPhone (or Android) they are making a trade: application flexibility over security… a sexy, diverse user experience over Push messaging. IT departments are in a bind because it's very hard for them to reverse this equation even though they would choose security and manageability over sexy and diverse any day.
What if both users and corporate IT got what they wanted? This is what RIM could provide, and all the company would have to do is:
*Sell its handset assets to Samsung (or enter ambitious consumer manufacturing company here) – including BB7 & BBX if they want it,
*Become a focused software and service provider by keeping its Messaging / Management / Network solutions, and
*Introduce a cross platform, secure, messaging and management platform that charges on a per user basis.
By shedding its proprietary roots (handset and OS), RIM is everyone's friend and potential partner. Management would almost instantly position the company as the solution to a problem every company is struggling with today: "How do I manage and deliver enterprise applications to smart devices?" Instead of trying to be everything to 70 mln users, why not be something important to 300 million?
We believe RIM's strength is in its secure messaging platform, its robust management platform, and its worldwide network for efficient message delivery. Port messaging and management to Android, iOS, Windows and Lion. Let the hardware OS companies duke it out. Instead of fighting for a 10% share of a fast growing market, drive for a 50% share of all the market.
As a standalone provider of secure, efficient messaging, notification and management, RIM becomes the ultimate enterprise mobile SaaS solution. Enterprises would adopt their service to deliver secure, workflow enabled, mobile applications to any platform – including ultrabooks and laptops – using any email application. Build a workflow engine that allows easy configuration of policy and rules (and insure delivery) via BES, and RIM would become the heart of massively mobile computing for the enterprise. It would be like having a worldwide, vendor agnostic, secure workflow and management platform – for $5 month per user!
No other smartphone company has these assets. No enterprise software or SaaS company has these assets. Stripped of proprietary hardware and OS, the company becomes a very, very profitable $4 bln + and growing SaaS provider. Moreover, a divesture would immediately unleash value for long suffering shareholders. The company is now selling for 2x Reoccurring. As a SaaS/Software provider, that's incredibly cheap. We would expect a 4-5x multiple would be more appropriate. SFSF was just bought for 10x Reoccurring. Imagine a service that can charge $60/year and get 300 mln subscribers? That's $18 billion in reoccurring revenue. You think Microsoft (MSFT) might be interested in owning this business for Office 365? Or Google (GOOG) for Android and Gmail? Microsoft is already partnered with RIM for a low-end version of BES.
If the company decides not to divest its handset business, its future will come down to a couple of things:
1. Can BBX run Android applications better than native Android?
2. Can RIM compete with consumer hardware manufacturers on their turf? Can they out design and out market one of the best companies in the world?
Can RIM convince the consumer buyer that secure, push messaging is better for them than having the latest sexy, phone accessory? We think not. The wind has changed from east to west for RIM. It's time for RIM to adjust its sails.
Hopefully RIM management has a topflight strategy consulting company engaged to help it sort out the future. If it is really open to change, the course we outline above has a high probability of success. RIM's current path is a steep uphill battle.
(See also RIM: A Low P/E Does Not a Cheap Stock Make.)
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