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RIM's tailspin

The number of BlackBerry phones sold fell 41% year-on-year in the last RIM fiscal quarter. Sequentially the fall was 30%. Though surprisingly poor, I note that Nokia’s smartphone business fell even more dramatically last quarter (down 50% y/y and 39% sequentially). LG also saw a 44% decline in unit shipments in Q1.

The history of smartphone shipments for the largest vendors is shown in the following chart:

From forecasts made by Huawei it’s probable that they overtook RIM in the last quarter, dropping RIM to 5th or 6th ranked vendor in smartphone units.

RIM’s 7.8 million units is the same level of sales as it had in early 2009. The total market was only about 250 million units per quarter then. It’s around 400 million today. A quick calculation shows that RIM’s smartphone market share has fallen from a peak of 22% to about 6%.

RIM’s stock performance reflects this performance relative to the market.

Hardware revenues were $1.652 billion. Matt Richman calculates the average hardware revenues for the BlackBerry of $203. I include service revenues in my ASP calculations (for Nokia and Apple these are also significant values) yielding $309 per BlackBerry. The history of total revenues, revenues per phone and operating margins are shown below relative to competitors.

Operating margin tells the most sobering story. As I’ve often repeated, historically no company has survived dipping into the grey zone.

To reiterate, the logic of irrevocability in this industry is as follows:

Success depends on three conditions being met by the vendor’s products:

  • consumers trust the platform’s promise
  • operator see the product as creating value to their core business
  • developers offer investment to innovate on top of the platform

If all these factors are present, the vendor enjoys a virtuous cycle of growth. If any of these is lost, the others are also likely to be lost as well creating a vicious cycle of decline.

Loss of operating margin is an early indicator that at least one condition is not met. Usually, a failure of consumer trust leads to a drop in purchases which leads operators and distributors and retailers to flee and then developers defect.

It’s been impossible to recover from this tailspin so far. There is a procedure which works in theory: accelerate downward by investing in a new platform. The move is counter-intuitive but essential in re-building trust, quality and relationships.

However, the reason it does not work in practice is that this struggle is not with gravity alone. While spinning downward, the company is also subject to competitive attack. Competitors fill the void and take customers into locked-in ecosystems. There is neither the time nor the ability to defend.

Cash runs out and customers are divided up between the survivors. Nokia and RIM face this scenario today.

  • RobDK

    At the original iPhone launch in 2007, Steve Jobs said that the iPhone OS was 5 years ahead of the competition.

    In the space of 2 weeks, at the iPhones 5th birthday both Nokia and RIM announced accelerating losses, falling sales and mass firings.

    Poetic justice!

  • http://twitter.com/m4rkusr Markus Ramstedt

    Maybe one can use Nokia as a proxy for the next quarters of RIM. RIM is yet to produce its first product from the new OS asset and looking at Nokia the turnaround takes quite a bit of time after the first product launch (even when Nokia has the support from MSFT and 100,000 apps). Making the products is one thing, making the ecosystem hard reset is another. I’m having a hard time seeing the QNX reboot succeeding, just like Nokia realized with Meego.

    • Charles Knight

      At this stage, can we even assume that they will bring it to market? it’s already pushed back to Q1 2013, RIM may not exist as an independent entity at that stage.

  • http://mattryall.net/ Matt Ryall

    Horace, you’ve pointed out in the past how Apple’s asymmetric move into the mobile phone industry was based on a realisation that the software in the phone could provide lots of new functionality on mobile phones.

    Is there a similar asymmetric move that RIM could make at this stage to regain their status?

    You suggest a new software platform, but that seems to be just competing in the same manner as the new, more agile entrants in the market. Switching to Android or Windows Phone wouldn’t seem to be enough either, even if Heins thought it a good idea.

    • http://www.asymco.com Horace Dediu

      Recovery is made more difficult because it implies a symmetric confrontation with more established and more powerful competitors. Besides a hard reset (which never works) the second prescription for recovery would be to advance along a new trajectory. What RIM could do, for example, is move to automotive or new domains where they could deploy embedded solutions based on QNX. The new business will be very small at first and might be seen as irrelevant by management. This route is a long process and few have the patience to persevere.

      • http://twitter.com/bergie Henri Bergius

        Automotive is an interesting sector, but with a lot lower volumes than smartphones. And the product cycles are so long that it won’t save a company that in this stage of market collapse.

      • KirkBurgess

        A bit off topic, but the auto industry could face quite a boom in a decade. With a billion new potential car owners arising from developing nations, along with electric drive trains negating the need to build a gasoline infrastructure in those areas where the new consumers reside.

      • http://twitter.com/qka qka

        Does these areas have the electric infrastructure needed?

      • KirkBurgess

        Electricity can be generated anywhere, and by many different methods – locally produced power will be even easier in the coming decade – the whole concept of electricity infrastructure will dissapear eventually for all but industrial users, with everyone else able to produce & store on site.

      • KirkBurgess

        Insightful.

        As much as Apple bought its expertise from the computing/software industry to disrupt mobile phones, Rim & Nokia have the option to attempt to enter different markets with their respective expertise in mobile devices.

        What particular markets they could be (in addition to your Automotive suggestion) could be an entirely new topic for discussion in itself.

        The improvements in cloud based AI (Siri etc), computing based comprehension of the physical world (voice recognition, kinect vision etc) and improvements in battery tech, makes me wonder if mass deployment of consumer robotics isn’t too far away, and would suit companies well versed in mobile wireless technology to some degree. Could be a much bigger market than mobile phones, computers & autos combined.

      • https://twitter.com/#!/azulum azulum

        I have to contend with the assertion that a hard reset never works — it seldom works, sure — but saying never only opens you to be blindsided. All it takes to survive this while loop of despair is a break.

        If we look at Apple in the mid-to-late ’90s, a hard reset is exactly what they were facing with their failed copland project and simultaneous annihilation at the hands of windows95, the iMac was their break — they weren’t dead and they were making money, which bought them time to transition slowly to OS X over the next five years.

        If we look at Palm, the truth is that they very nearly pulled it off, but they suffered a huge blow — Verizon screwing them to negotiate a better deal with Motorola for the DROID.

        If we look now at RIM, they have totally botched the slow transition, but they also had less time to pull it off. They need to ‘work their asses off’ to ship something amazing by the holidays, and now that they have come out and said they going to miss it, a sell out is a likely scenario. But it ain’t over till it’s over.

      • https://twitter.com/#!/azulum azulum

        Fascinating tidbit: Apple’s market cap high before the second coming of Steve was just 8.654B in 1991 and plummeted only to in 1.656B on the eve of Christmas Eve in 1997. RIM has fallen from much greater heights — from 83.02B in the June of 2008 (before the Lehman Brothers collapse) to a paltry 3.874B as of Friday. Crazy.

      • Sandeep

        Interesting point, but you have to view the hard reset vis-a-vis the product lifecycle of the PC. Up until the mid 90′s the PC was used mainly for office work, penetration rates into the consumer market were not huge.

        Mid 90′s brought rapid innovation thanks to the internet and usage of the PC was becoming far more ubiquitous. Steve’s Apple in the 90′s rode this new wave and was able to get to positive cash flow very quickly. Remember that the hard reset only materialized in 2001 with the advent of Mac OS X.

        Now contrast this with RIM’s plight, the traditional mobile phone market has been disrupted, we are in midst of the new wave of mobile computing and RIM is caught without a surfboard fit to ride the wave.

      • https://twitter.com/#!/azulum azulum

        I say again — it ain’t over till it’s over.

        My bet is RIM gets acquired for pennies on the dollar, but until that happens, it hasn’t happened. Look honestly at Apple in 1997. They were toast. RIM is probably in worse shape, but they have a bit more time than Apple did (seven months at RIM’s current burn rate to go through 2.2B in cash compared to three months for Apple at their most dire). If they can stem the losses by cutting the cruft and maybe monetize their services more, they might have a bright future ahead of them. Slim, unlikely, but very bright (:))

      • http://twitter.com/WalterMilliken Walter Milliken

        Actually, I think the place where RIM might be able to go effectively is wearable medical devices, along with their central support services. There’s a major potential market there, and RIM’s history of a security story will play well to that market.

        The drawback to this market is a long regulatory process in getting devices approved, at least in the US. In Canada, they might be able to negotiate some kind of deal with the government to build a trusted wearable medical platform that wouldn’t need to be individually re-approved for each different application (though each application would probably need approval of some sort). Not sure if that would fly with the US FDA.
        The question is whether Apple would move strongly into that market itself, or just leave it to 3rd-party add-ons. If the latter, RIM would have significant advantages over a lot of potential competitors.

      • DoctorMemory

        The problem here is that the medical/govt/vertical markets have not been even the slightest bit immune to the trends of the last few years. iOS and Android have disrupting those markets just as surely as the consumer one, just a lot more quietly, and more than a few vendors of $3000/seat bespoke medical hardware have found themselves quickly replaced by an iPhone, a $50 app and occasionally a dongle.

        Targeting the medical and similar verticals right now strikes me as skating to where the puck was last year. There’s money to be made there, sure (you can still sell AS-400 hardware to those people), but it’s nothing that the shareholders are going to like, and it means that you’ll be instantly competing with the likes of IBM, HP and Oracle.

      • kevin

        Apple also attacked the cellphone handset makers via a business model “innovation” of going direct to the user (along with one carrier, AT&T) as the customer, instead of having carriers/operators as the customers. Originally, going-direct involved replacing the carrier for marketing, service, warranty, music content, etc, but over time, also included ringtones, apps, and pretty much all other content.
        Google and Amazon are trying to attack Apple’s hardware-monetized business model via business models involving monetary support from advertising and support from sales of content and other goods, respectively. Apple has responded by partnering with entities like Yelp, Facebook, NetFlix, and Baidu. Where Google partnered with Apple’s competitors (like Samsung and Motorola), Google and Amazon’s competitors are becoming Apple’s partners.
        So possibly a RIM recovery can also be catalyzed via another business model innovation.

      • https://twitter.com/#!/azulum azulum

        That didn’t work — oh well

  • KirkBurgess

    As a hardware company, the easiest option on the face of it would be to adopt a successful platform/ecosystem (android or a fork of it) and add your exclusive service (BBM) to your devices. You get a ecosystem of users, apps & developers already in place and seemingly a differentiator in your exclusive service offering.

    The harder option would be to develop a new disruptive UI or device line that leaps ahead of the opposition in such a way that despite a lack of a large ecosystem it still attracts new users from both the opposition platform and the current non-consumers, but that takes time, money & genius – and no guarantee of success.

  • mucinch

    Is there a correlation between open boot-loaders and ease of hacking with growth rates of mobile companies? Even though HTC over-saturated brand presence in 2011, it was also the year in which HTC started locking its boot-loaders.

    • http://www.asymco.com Horace Dediu

      This could be easily answered if you stood on a corner in a busy intersection or mall with a clipboard and asked passers-by if “locked boot-loaders” were important to them when making a mobile phone purchase.

      • Walt French

        Good. But I *DO* know a fair number of Android users who fear Apple as a gatekeeper, or have heard that Android phones are “more flexible” or “more customizable.”

        Many of these are not especially tech-savvy, but follow the news or Android advocates who have translated the “locked boot loader” etc for the lumpens.

      • TheEternalEmperor

        I have to tell you, I’ve not heard that come up from the normal Android users. “Cheap” is the main thing I saw. I think almost by definition, you are somewhat tech-saavy if you follow the tech news.

      • simon

        Just like there were many Android users who swore they’d never buy another Samsung phone after Samsung broke the promise on upgrading Behold II. Or those who swore they’d only buy Nexus phones. Neither has affected the market all that much.

        On the grand scale, locked bootloaders and upgrades don’t matter much if you have a ton of sales retail channel and good products filling those pipes.

      • http://www.BarnesFamily.com/ davebarnes

        “locked boot-loaders”could get a lot of positive responses if you asked if they were important to maintaining our (in the USA) right to bear arms.

    • Space Gorilla

      I would guess the number of consumers that care about boot-loaders and ease of hacking is so small that the impact on sales/growth would be very, very close to zero.

  • http://twitter.com/fivetonsflax fivetonsflax

    Of the three conditions for platform success — customers, operators and developers on board — is there any example where customers and developers are happy but operators kill the platform?

    • http://www.asymco.com Horace Dediu

      Yes. Palm’s WebOS. Verizon pulled the plug in favor of the Droid brand.

      • Tatil_S

        I don’t know if we can say that customers were happy. There were some hardware issues reported later that professional reviewers initially overlooked.

      • Walt French

        Reviewers liked the WebOS model, but nobody liked the speed and there was of course no significant customer support for the OS. How could there be, before rollout, and even after Sprint’s adoption, responses were tepid. It tested well for customers who bought it (big duh!), but too many others passed on it for a variety of reasons.

        Of course Verizon factored in the need to concentrate on Droid, but ultimately the company — and Orange, which cancelled its European rollout of the Pre — must’ve made the decision that WebOS was not safe as a longer-term partner that both needed. Those decisions would’ve certainly included both reviews & customer sentiment, as well as their own evaluation of how deep the appeal really was.

        My take is that the WebOS reliance on HTML meant it was unlikely to improve rapidly in speed, leaving the Pre looking under-powered. Verizon would’ve felt Palm did not have the resources to address this, while Google had the resources to make Android attractive & powerful.

      • http://twitter.com/WalterMilliken Walter Milliken

        Another issue with Palm may have been that it was too small a company for Verizon to be happy with, especially as a sole-source. VZ likes having multiple vendors and worries a lot about whether its vendors can produce at scale. I don’t know offhand how big Palm was by the Pre days, but I’d bet VZ was a lot happier relying on Motorola.

      • TheEternalEmperor

        Well, some customer’s were satisfied, but I would define a happy customer as one who spends money. It seems that they weren’t buying Pres in sufficient quantities

        As for developers, I suspected from the beginning that this js/css/html front-end framework would doom it. Far too slow, not flexible enough, not powerful enough, not rich enough and the attempt to let “anyone” write an app, would allow just that, attracting the dregs.

  • http://www.subprint.com joemccann

    Great post, yet again, Horace. I wrote something tangentially related to the long term health of RIM and Nokia (and how they are finished) and it has to do with their competition building ecosystems as opposed to *just* hardware.

    http://subprint.com/blog/it's-the-ecosystem,-stupid

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  • El Aura

    I am still a bit puzzled by how poor the non-Samsung Android vendors are doing (apart from the low-end of ZTE and Huawei). Motorola seems to be the only one to at least hold steady (and having the US as their home market and Google as their backer probably helps).

    Is this just a winner’s bonus for Samsung? Is it largely economies of scale? Is it mismanaged carrier relations (eg, the HTC bootloader issue)?

    • monkeyrun

      it’s mainly because Samsung is the “Nexus” right now.

      Of course Samsung having their own fanbase helps also.

      • simon

        HTC used to have a very strong core of dedicated fanbase too, most notably the XDA forum, and I believe they still do have some.

        Samsung really delivered with their sheer number of devices and ability to fulfil every carrier’s requirements, and in volume too.

        Also the fact Samsung is situated in South Korea helps them a lot. That’s a huge advantage over HTC as Taiwanese just don’t buy as many smartphones as Koreans do. Case in point: http://www.digitimes.com/news/a20120104PD221.html 450,000 smartphones sold in December 2011. Samsung sold two million Galaxy S2 in Korea in two months and of all 7 million Galaxy Notes sold over the world, nearly half (3 million) of them were sold in Korea alone. Those are high margin products that greatly boost Samsung’s profit and thus the Korean market is a critical factor in Samsung’s success. Even LG is showing some signs of recovery due to the popularity of their LTE phone in the homeland.

  • GAzagra

    Samsung the new bubble

  • dpgj

    Samsung is selling their pricey display cheap to get market share. But history told us that with the technology mature, at some point consumer will see not much different from other Android manufacturers and the Galaxy will fail. I guess it will be around Galaxy 5.

    • xynta_man

      This is actually a good point. Who says that Samsung won’t be killed in a few years by even more “hungry” Chinese companies, like ZTE and Huawei? Companies that will accept even slimmer margins, companies that will accept any carrier demands? Companies who can capitalize on the same Android ecosystem, which Samsung has helped to build up with their popular Android handsets?

      I predict that unless Samsung starts building up its own ecosystem (maybe a deep fork of Android, with its own store, etc), in a few years it may end up just like Nokia.

      • http://twitter.com/mytradingrobot mytradingrobot

        You are also assuming that Apple does not have the same fate as others.

        History of technology overall has shown that no company has been able to control for more than about 10 or so years in a given field. Look at IBM, Compaq, Dell, etc as examples, there are many more. Each had their heyday they got overtaken by shifts in the marketplace by more nimble competitors and shifting customer demands and could not keep pace.

      • xynta_man

        You are right that this can happen to any company, but it’s not guaranteed to happen, if the said company can do the right thing. Just look at the iPod — it’s been more than ten years and the iPod didn’t lose the “king of the hill” title to any media-player competitors. Yes, the iPod market has been decreasing because of the smartphones, but it didn’t hurt Apple, since they started to make smartphones themselves, which made Apple even more successful.

        Yes, this can definitely happen to Apple in the future, but at least Apple has a better position to counter it, when compared to the army of Android manufacturers, with the most significant factor being that they control their own ecosystem, hence their competitors can’t capitalize on their work.

      • http://www.asymco.com Horace Dediu

        Successful companies do not fail because their competitors are more nimble or because customer demands shift. They fail because the basis of competition shifts away from the business models they rely upon. Competitors that succeed typically have asymmetric business models or make money in ways that destroy value for the successful incumbent. The speed of change is a factor but it’s unlikely that an organization can change to accommodate disruption no matter how slowly it happens.

  • Walt French

    Certainly it must also matter that as of this week, no responsive IT department in the country will be sitting on a sole-source contract with RIM. Despite issues about security, provisioning tools, whatever, it’d be suicidal to not have alternatives.

    Which means that BlackBerry’s most profitable business in the US is unlikely to slow down. It will simply stop.

    Call it network effects, leverage, whatever: it cuts both ways.

  • melgross

    Horace, the charts are nice, but as we know, Samsung hasn’t released numbers for quarterly sales of smartphones (or tablets) since early last year. This makes any numbers related to them more than a bit suspect, as there is no way to check whether the guesses made by the companies doing this are in the ballpark. For this past quarter, for example, the guesses are from 32 million shipped, all the way up to 44.5 million. It’s almost useless.

    In addition, I keep seeing shipped numbers compared to Apple’s sold numbers. As Apple gives the number of days of supply in the channel, that should be added to their sold numbers to come up with a number that better relates to what is being given by other companies. But I never see that done.

  • maccouch

    What i’m curious is with the sharp decline in Apple that can be seen in the last (2?) quarters on smartphone shipments and smartphone revenue. It’s pretty accentuated. What’s up with that?

    • http://www.asymco.com Horace Dediu

      It’s called seasonality. See previous product cycles.

      • maccouch

        yep, i thought it could be that but it seemed to accentuated to be a simple “seasonal effect”, although if it’s consistent in percentage of the market share, then it seems ok.

        Does the “ever launching new stuff to the wall to see what sticks” behaviour from Samsung and the others explain their absence of this? What i mean is this seasonality created by the regular once-a-year launch of a new iPhone by apple or is it “seasonal” in the classic term of spring/summer/… ?

      • http://www.asymco.com Horace Dediu

        For the iPhone and iPod Apple tunes its product development and production ramps to the global holidays of Christmas and Chinese New Year. iPad is tuned to educational purchase cycle which begins in the spring. The Mac is not tuned to any season. Competitors are increasingly tuning their cycles to be out of phase of Apple.

  • Ian Ollmann

    “It’s been impossible to recover from this tailspin so far.”

    From your data, it looks like LG is putting up a good fight.

  • http://twitter.com/ScottyRad Scott Radimer

    Horace, I’m curious about your thoughts on the brief blips into profitability that SE and Motorola made before falling back into losses and finally both being bought out. How come these two companies could get back into profitability but could not sustain it? Do these examples help provide any road map for Nokia or RIM in how to change their trajectory?

    • http://www.asymco.com Horace Dediu

      Profitability is only a litmus test. It’s an easy rule of thumb to summarize many factors. The underlying operating businesses were never healthy even when there were momentary recoveries in profitability.

    • xynta_man

      I think they started to capitalize on the Android smartphone boom, just before Samsung made its big push in the market, essentially grabbing all of the profits that were left from Apple.

  • NeilM

    It may be premature to lump together all companies who have fallen into the grey zone of negative operating margin. LG, for instance, is part of a bigger company who may be willing and able to sustain the cell phone operation to profitability, and Motorola (now owned by Google) certainly is. On the other hand SE’s parent company Sony has even bigger problems of its own.

    Nokia and RIM still have a few coins in the piggybank, but alas no wealthy parents to borrow from. And perhaps Nokia might yet marry well? But there seems little hope for RIM, whose IP family jewels we may eventually see auctioned off, as was the case with fellow Canadians Nortel (Northern Telecom).

    • xynta_man

      Even companies like LG won’t keep paying for their dead mobile phone departments for too long. It’s only viable if there is some chance of future success. The market is still growing and there is a slight chance that LG (or any other unsuccessful company) will have a break, but in a few years any hope will be lost without some asymmetrical answer.

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  • Thomas

    “Cash runs out and customers are divided up between the survivors. Nokia and RIM face this scenario today.”

    Along with — at least — LG, Motorola, and Sony, unless my eyes deceive me. (And assuming SE = Sony.) A changing of the guard.

    • xynta_man

      LG, Motorola and Sony didn’t have any major market position for the last few years, their death won’t surprise anybody, unlike Nokia and RIM which were the top dogs just a few years ago.

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  • davel

    “As I’ve often repeated, historically no company has survived dipping into the grey zone.”

    Thank you for the reminder.

    I wonder if Microsoft/Nokia will be the first to break the rule. The reporters all seem enamored of the upcoming OS. Microsoft has a good strategy and no product. The big question is can they execute? Can Nokia provide high quality hardware to go with the Microsoft OS? Will customers want the promise of Microsoft? In other words is there a value to having Word and Excell on a 4″ screen?

    Microsoft has this vision of Windows everywhere. I can see how this may work on a tablet although the screen is rather small. I am not sure how this plays out on a 4″ screen or smaller.

    There will be a lot of virtual ink spilled about the new platform over the coming months. Will this be enough to reverse Nokia’s trajectory?

    Of course many Nokia/Windows fans ignore that Nokia is not the only Windows vendor. They speak as if somehow Microsoft really cares if Nokia survives.

  • Matt B.

    In tech a rising tide does not lift all boats — instead it usually creates a tsunami wave of destruction. I don’t think Sony will survive the handset business either.

  • actualbanker

    So the 24th has been confirmed as the date for the earnings call. Still sticking with your AAPL numbers Horace?

    • http://www.asymco.com Horace Dediu

      I haven’t seen any data to change my expectations. Did something happen?

      • actualbanker

        Nope. Nothing. I know last quarter you went with a slight tweak/update. Just wondered if you might do the same. I’ve seen nothing that would suggest any changes needed.

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  • Howard Thomas

    One of the most clear and brilliant analysis of their woes. Well said. Sad, but true. I worked at Samsung for years and saw how quickly winning products overtake inferior ones.

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