Apple's iPhone will sour consumer Blackberry results

I have been reading through the recent Research In Motion (RIM, ticker symbol RIMM) earnings call transcript on Seeking Alpha over the weekend, and a few data points jumped out at me:

• RIM has sold a total of 20 million Blackberries to date and has more than 11 million Blackberry service subscribers. The word Blackberry is now synonymous with smartphone, and may be even more well-known than the generic term. But based on the subscriber numbers, Blackberry subscribers only account for about 1% of total mobile phone sales per year. And the total of 20 million Blackberries sold put RIM's installed base market share at less than 2%. That's a lot of market influence for a very small community.


• RIM sells through 325 carriers world-wide. Just maintaining 325 carrier relationships, each with their own demands for special features, products, and services, must put incredible strain on a $3.5 billion annual revenue company.


• RIM is expecting 50% of its North American sales to come from outside the enterprise. Corporations distribute Blackberries in much the same way as they do Windows PCs, and that business distribution channel has demanded features such as encrypted transmission, no cameras in handsets, and remote wiping of handsets. Yet, the company is expecting to sell half of its upcoming phones to consumers, who have very different buying criteria.

Now, conventional Wall Street wisdom has been that the launch of Apple's iPhone has been good for RIM because it has raised consumer demand for smartphones. It certainly has been good for its stock price, which has risen more than 160% this year and now sports a trailing earnings P/E of 89. And in fact, when asked about the new competition from other new consumer-focused handsets, RIM had this quite long reply:

Well, it’s a very good question and we try to think of these things as a system. At the core, we think of the devices as the presentation terminal. It’s got IO packaging and it requires a -- you know, and the principal focus is balancing richness and efficiency and scarcity. And then you need a synchronization engine because people view these as network appliances that synchronize generally to a distributed set of server stores in their life.

And then the third thing is you need a channel relationship or you need a direct relationship where the carrier is prepared to be simply a data pipe. And so our view of it is strategically, we endeavor to evolve carriers’ relationships with voice customers to platform relationships on an OEM relationships with BlackBerry, which is the synchronization engine, as I mentioned, in the three different areas that we synchronize to.

Of course, we have a rich channel relationship with them and a comprehensive synchronization capability, and that is to work in harmony with the devices. The devices are not in isolation. So as the transports get richer, as the back-end stores people want to connect to proliferate, and as the kind of applications people want evolve, of course it creates tremendous opportunities to innovate on the device side.

Things like YouTube video weren’t even concepts not a long period of time ago. Even the synchronization of an MP3 from a PC store is a relatively new concept in the hardware world, and then the fact that it’s just a software op on a cell phone is much, much newer. And then you look at the fixed mobile convergence, you look at new user input things where people want a lot of screen real estate with the ability to evolve it to varying forms of input -- you know, there’s a tremendous amount of innovation on there.

But the key is is the efficiency platform of the device and the performance of the synchronization engine and the alignment of the carrier channel in our world are preconditions. And then absolutely a rapidly emerging dimension of innovation is the IO packaging, and that is something we absolutely do well in and we are innovating and we are driving and we have lots of exciting demands and lots of exciting partnerships, but it’s always looked at in a system service, efficiency and channel relationship context.

Chasing pretty packaging is not really what drives us, but that being said, exciting forms of multimedia IO and form factors the complement all the different services that people want and offer in wireless, it’s absolutely a big, big part of our business and it’s hard not to get excited by larger and addressable markets and compelling services and the kind of things that people are prepared to pay more money for to the carriers and churn less.

Did you understand that? I didn't. And frankly, I'm not surprised. Because I don't think RIM can articulate why consumers should buy their phones And when faced with a choice between Apple's iPhone and RIM's Blackberry, consumers will increasingly choose Apple, not RIM.

Why do I think this? Here are four reasons:

1. RIM sold only 2.5 times as many phones as Apple, a company that had never sold a phone before. We estimate that Apple sold about 1.25 million iPhones in this quarter, while RIM sold 3.1 million. And Apple did this with exactly two iPhone products, compared with RIM's 12 or more. Further, Apple didn't have 3G, secure transmission, GPS, and countless other features RIM notes as being critical to its business. When an upstart can sell 1/3 as much product as the market leader in a category, it means that market is changing in a big way.


2. RIM sold through 325 carriers, Apple through one. RIM isn't getting much advantage from selling through so many carriers, when it averages only 10,000 phones sales per carrier a quarter. Yet each carrier relationship requires time, effort, and money to maintain and pulls RIM in 325 directions. Apple will undoubtedly work with more carriers over time, but I suspect they will be more selective in their carrier relationships, and, gasp, might even require that each relationship demonstrably contribute to its business results.


3. RIM has overestimated its ability to connect with consumers. RIM is going after consumers with similar products and features it has used to capture enterprise customers. But consumers aren't businesses, and they buy on more than just features. And expecting 50% of your new business to come from an unproven customer base just doesn't make any sense, no matter how smart and accomplished your company is.


4. RIM has spread itself too thin. RIM is offering 12 different models of phones today, and has more to come. That means that choosing a RIM product becomes a complicated analysis for consumers of which products are best for each application. Yet, RIM must build, stock, and support each of those products for its channels, regardless of how they sell. Apple, on the other hand, reduced its iPhone models from 2 to 1 last month to make choosing its product even easier -- and to improve its business performance. Apple so far is putting all its effort behind one carefully crafted iPhone arrow, while RIM is weighted down by a heavy quiver of Blackberry Curves, Pearls, 8800s, 7200s, and 7100s.

Wayne Gretsky, Canadian hockey great, claimed, "I skate to where the puck is going to be, not where it has been." RIM is still skating toward the old mobile phone business model, where businesses and carriers dictated standards and devices. But with Apple's focus and strategic marketing, it is skating to where the mobile phone puck is going in the next several years, where no-muss, no-fuss direct-to-consumer relationships will eclipse those carrier and business-driven "we know what's best" device models. And unless RIM can do a better job of articulating why its products are better for consumers than it did in the earnings call, it's going to be Apple, not RIM, who will be racking up the goals. And with RIM boasting revenue of $3.5 billion compared with Apple's $22.6 billion, even any loss of market share to Apple will hurt RIM's stock price more than it would Apple's -- a lot more.

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