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Five Reasons why RIM should embrace Microsoft

Mircosoft RIM

There is an interesting battle that is on in the American smartphone market between Apple, Blackberry and Android based phones. Blackberry has been the leader in the smartphone category for last one year but with the increasing popularity of Apple and Android, the future of Blackberry is under suspect. In the US smartphone market, RIM had a market share of 34.3% in in Q2-10 (down from 53.4% in Q2-09) with volumes of a little under 5 million contributing to almost 45% of its worldwide sales. Any problem in the US market would severely cripple Blackberry putting a question mark on its existence. Gartner predicts that in 2011, RIM would sell 15% fewer handsets at 62 million and expects that by 2014, RIM’s smartphone market share would have fallen to 11.7% from the current level of 18.2%. These are all worrisome statistics and need urgent attention but it seems that the problems of RIM are much larger than current statistics.

A quick look at the falling share price would reveal that the company has lost over 50% of its value (refer to first chart below).

However, what is more surprising is the fact that in the last one year, RIM has lost more value than Nokia (refer to the second chart above). Nokia has been the fall guy for the last one year and has been beaten down by almost every analyst. RIM losing more value indicates that the problems at RIM are much deeper. Lower market value also means that it becomes an easy acquisition target.

In my opinion, RIM has a difficult choice at hand – Remain independent and focus on improving the solutions or sell itself to somebody. I clearly do not see a bright future for Blackberry if it were to remain an independent entity and my reasons are as follows:

1. Employee activism forcing enterprises to think beyond Blackberry

RIM has been known to offer ugly looking handsets but many had no option but to use Blackberry as it was mandated by their companies. Many enterprises allow only Blackberry on their networks as they believe that it provides them higher security than any other handset vendor. They were unwilling to listen to the pitch of other vendors as Blackberry had the first mover advantage. However, this is changing now with the employees especially in the US pushing the companies to allow them to use iPhone. Executives buy iPhones for personal use and like them so much they bring them to work and tell their IT departments to service them. If the companies in the US start to allow use of iPhone instead of Blackberry, then the things would change in other countries very fast as the offices of US based companies would also start to use other phones instead of just Blackberry. Apple has been working has on its Enterprise offering and this has started to yield results with Standard Chartered bank giving its employees an option to use iPhone to access official mails.

Sanford C. Bernstein Ltd. survey found more companies opting for rival devices such as Apple Inc.’s iPhone. Of 200 companies in the U.S. and U.K. surveyed, 74 percent now let their employees use devices other than Blackberry.

2. Poor Brand Loyalty

A recent Nielsen study showed that only 42% of current blackberry owners desired another blackberry, compared to 89% for iPhone users and 71% for Android users. “I carry one because my company gives me one” is a common refrain that we hear from Blackberry users.

ChangeWave SurveyAccording to a survey by ChangeWave Research, consumer interest in the BlackBerry is declining at a time when demand for smartphones is on the rise. Just six percent of survey respondents planning to purchase a smartphone in the next 90 days intend to buy a BlackBerry. That’s fewer than half the number that were planning to do so during ChangeWave’s last survey, taken in March. And it is dwarfed by the 52 percent of respondents planning to buy an iPhone (up from 31 percent) and the 19 percent planning to buy an HTC handset (up from 12 percent).

Customer satisfaction with the BlackBerry is on the decline as well. Just 30 percent of respondents who own the device say they’re satisfied with it. That’s a record low for RIM after a seventh consecutive quarter of decline, compare this with iPhone where 73 percent of owners rate themselves very satisfied. (Click on the figure alongside to see the larger image)

3. The much touted RIM security is under threat

RIM is having to compromise with various governments over access to its email servers, even its key advantage over Microsoft – the famous security of its messaging platforms – could be diluted. Recently, RIM had to reassure its Wall Street customers (read Goldman Sachs and JP Morgan Chase) about the security of its Blackberry e-mail service as countries including Saudi Arabia and India press for more access to its network. Corporate customers such as Wall Street banks favor RIM’s Blackberry because its encryption and other safeguards protect communications from prying eyes.

It is a difficult choice for RIM as 37% of its revenues now come from emerging markets and India is the 2nd largest market after China. If RIM were to bow to the Indian Government’s demand, it risks losing enterprise customers.

4. Inability to improve the operating system

Developer Preference for OSRIM is facing severe issues with its archaic operating system and is nowhere near the sophistication of iOS or the functionality of Android. Even its web browser is nothing comparable to browsers in other handsets. Blackberry OS 6 tries to address the touch as well as the browser capability issues but it has failed to  make a mark so far.

Smartphones are becoming a platform business in which third-party developers rule the day. RIM has been unable to attract the developers its operating system. A survey conducted on Telecom Circle a couple of months back, revealed that only 6% people think that Blackberry OS would be the mobile operating system that would win the smartphone war. This was lower than even Windows. RIM has been working on this aspect and brought an application storefront developer company, Cellmania and application developer DataViz (DataViz is one of the largest independent makers of Exchange and Office solutions under Microsoft licenses) in last one month. However, it remains to be seen if Cellmania would be able to transfer its developer base to RIM’s fold.

5. No patent in GSM or CDMA

RIM has no patents in either GSM or CDMA which means that it has to pay license fee to other vendors who hold patents. This reduces its ability to hold on to its high gross margin in the event of higher competition. It is increasingly getting evident that RIM would need to vacate the high end and can only hope to be present in the mid end. This is certainly going to put pressure on its margins. Should its ASP were to drop from the current level of $300, it would start to eat into its gross margins. Android is likely to go down significantly in price points and has a good security for enterprise which means that the potential competition from Android is going to give RIM a run for money even in mid end.

What should RIM do next?

RIM should seriously think about the opportunities and the resources required to exploit the opportunities. Playing catch-up can be expensive. The competitive landscape in the enterprise is also expected to increase as Microsoft launches Windows Phone7 with tight exchange and office integration, and HP revamps its Palm product. In such a scenario, the best option for RIM is to sell itself to Microsoft. RIM should sell itself now before it gets too late and its market value goes down even further.

Microsoft is a cash rich company and is looking for acquisitions in the mobile handset space. With more than $37 billion (and counting) in cash reserves, Microsoft has the means at tis disposal to pull off a RIM purchase involving a combination of cash and stock. RIM now has a market capitalization of $24 billion. Microsoft would have to pay a premium of 30-40 percent to complete a deal. A $34-35 billion offer, with the right inducements, might suffice.

Microsoft is very strong in the enterprise space and so is Blackberry. Microsoft is strong on the PC side while Blackberry on the mobile side. If the two companies can come together and offer the entire MS office suite seamlessly to the corporate customers, then they can form formidable entry barriers for other players. Through Blackberry, Microsoft would get to control the user experience. RIM can help solve Microsoft’s own problems in mobile space and its recent acquisitions of Cellmania and DataViz makes it a much more attractive buy for Microsoft.

Please let me know your views on this topic. Do leave your comments and participate in the poll.

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Disclaimer: The views expressed in this article are my personal views and do not reflect the views of my employer.

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