RIM: the long, slow death spiral begins
Commentary: Co-CEOs seem to have missed their best opportunity
By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) — The long, slow death spiral for Research In Motion Ltd. has begun.
It may take awhile, but RIM (NASDAQ:RIMM) seems to be clearly headed in the same direction as Palm Inc., towards eventual extinction, unless its board of directors does something soon to change its direction.
At this point, it seems that would have to entail getting rid of one or both of its co-chief executives, Jim Balsillie and Mike Lazaridis. These leaders dilly dallied while the iPhone changed the face of the smartphone market, and now may have squandered any hopes for a rebound with the launch of a new operating system for a next generation of devices they have called “superphones.”
Those “superphones” may not look so super when they finally hit the market in the latter part of 2012. At that point, they will be going up squarely against an inevitable iPhone 5 from Apple Inc. (NASDAQ:AAPL) and likely a slew of new phones using Google’s (NASDAQ:GOOG) Android platform. At that point, analysts concede that even Microsoft (NASDAQ:MSFT) may be in a better position.
“Yes, even Windows Phone should now be a concern for RIM,” Brian Modoff of Deutsche Bank wrote in a note to clients last week after another dismal earnings report from the BlackBerry maker. Read full report on RIM's results.
In the earnings call last week, Balsillie and Lazaridis pushed back new smartphones designed on its next-generation BlackBerry 10 software until the latter half of 2012. They based the move on the desire to incorporate a more power-friendly chipset that will work on faster LTE networks.
“In the meantime, a lot of super smartphones with poor battery life will be sold by other brands,” said Matthew Robison, an analyst with Wunderlich Securities, in a note. “We find it surprising that management has chosen to delay a competitive entry.”
Modoff of Deutsche Bank said that the delay will create a huge opportunity for the competition. Many other analysts were likewise surprised for the rationale behind the move, as the first BlackBerry 10 devices were expected to come on the market in the early part of the year.
“We know that U.S. carriers are asking smartphone vendors to have LTE in their devices, and RIM is likely responding to that,” said Tim Long of BMO Capital Markets in a note. “However, we estimate that in the November quarter, about 20% of RIM’s units were sold in the US.” He added that the other 80% of RIM’s phones were sold to markets where LTE will not be meaningful next year or even in 2013.
Long and others have noted that there is a still a place for RIM in the global smartphone market. But too many tech behemoths have stumbled and completely lost their footing after missing a major product window.
On top of that issue, the co-CEOs again told investors they were doing a major analysis of the entire company and said they are “leaving no stone unturned,” just after doing job cuts in a “streamlining.” They each agreed to take a pay cut and receive a salary of $1 a year, effective immediately.
Last week, The Wall Street Journal reported that the company’s sharply declining stock price has put more pressure on the company’s directors to overhaul RIM’s management structure, which has allowed its two chiefs to also serve as co-chairmen of the board. Read “Pressure Mounts on RIM” in The Wall Street Journal.
A RIM spokesperson declined to address the issues raised in this column directly. The company instead provided a link to the most recent earnings conference call and several excerpts from the presentation, including this one, referring to the current generation of BlackBerry products:
“It is early days for BlackBerry7 and we expect that the significant marketing and promotional programs we are planning around the product will help drive consumer awareness of these products and drive demand and sell-through in calendar 2012.”
But both CEOs seem to be in denial about market realities. In addition to its decline in smartphones, RIM’s foray into the tablet market has been a complete fiasco. The company originally tried to sell its 7-inch PlayBook at the same price as the 10-inch iPad, and customers predictably balked, leading to an anemic 150,000 units sold in the November quarter and a write-down of $475 million for inventory costs for the load of devices that it has had to drop the price to sell.
RIM is taking a page from the Hewlett-Packard (NYSE:HPQ) “playbook” and slashing the price of the device, which can now be had for as little as $200 at Best Buy — coincidently on par with the Kindle Fire from Amazon.com (NASDAQ:AMZN) , which is essentially the same device with a version of Android and a far larger content ecosystem.
When analyst Tai Liani of Bank of America asked on last week’s call, “at what point do you kind of give up?” Lazaridis said the tablet market is still in its infancy and evolving.
“We’re really, really pleased with the increased demand with the PlayBook promotions,” he said.
While management noted its subscriber count grew 5 million sequentially to 75 million, its growth has been entirely outside the U.S. As BGC Partners analyst Colin Gillis pointed out, over the last year, RIM’s share of the U.S. smartphone market has been consistently declining. It fell to 17.2% in October, down from 33.6% in November 2010.
“The company is on a declining trajectory and there is little reason to think this is going to change under the current management and with the current strategy,” Gillis wrote last week. “It is possible that the ecosystem keeps breaking down and doesn’t recover with the carriers focusing on other hardware, customers viewing the brand as yesterday’s phone, and developers moving on to other platforms.”
RIM is still too pricey to be acquired, with a market cap of around $7 billion, even at its battered stock price of around $13. But when the price gets low enough, its assets, especially its secure BlackBerry network, which many analysts have argued it should license to its rivals, may look attractive, for the right price — so long as the subscriber count doesn’t begin to significantly fall.
The two embattled co-CEOs have argued to investors that in the middle of this major transition to a new operating system, they are the ones who can best lead RIM and that any changes in the leadership structure would cost the company in the middle of this difficult time.
“Neither of us could have taken the company this far alone,” Balsillie told investors on RIM’s June earnings call, when it also announced a company streamlining plan and its shares were around $35. “Completing the transition and taking the company to the next level of success and growth is also something neither of us can do alone. It’s something that would be incredibly challenging for someone from outside the company to manage.”
Later in the call, when an analyst asked about whether the co-CEO structure was the right one in RIM’s situation, Balsillie said, “I just don’t know, you know, if you sit there and say let’s just change a business card, I don’t see how that changes anything. I don’t think it changes anything in what we have to do.”
But since that call, things have only gotten worse. RIM has not done much of anything right for several quarters in a row now. It’s time for a serious shake-up at the top, if there is any hope to save this company from eventual extinction.
