Surrounded by Rivals, Can Research in Motion -- and the BlackBerry -- Prove That It's Hip to be Square?Published: December 08, 2010 in Knowledge@Wharton
Though Research in Motion still occupies a dominant position in the U.S. smartphone market, there are rumblings that the Canadian maker of the BlackBerry -- a phone once so addictive to its predominantly corporate audience that it gained the nickname "CrackBerry" -- is in danger of being overshadowed by its rivals.
As BlackBerry devices became a staple for corporate executives, managers and rank-and-file employees alike, Research in Motion reaped years of strong earnings and revenue growth. At the same time, the company's devices helped to define the smartphone market with text messaging, personal digital assistants and e-mail features.
And then came Apple's iPhone, which redefined the category by focusing on touch screens, mobile applications ranging from the popular "Angry Birds" game to business software, and an ecosystem of third party software developers to assure a continuous stream of new apps. To combat the iPhone, Google launched Android, an open source mobile operating system. Along the way, smartphones increasingly became a staple of users' personal as well as professional lives, and RIM began to see some of its buzz start to fade. Now the company appears to be caught in the crossfire and losing market share. Can RIM innovate fast enough to entice corporations and consumers at the same time?
So far, the data isn't going RIM's way.
In a Nielsen poll released December 1, according to information collected in October, iPhone and Android were the most desired operating systems among consumers with smartphones looking to upgrade. The iPhone operating system, iOS, was given top marks by the largest number, or 30%, of respondents. Android was next with 28%, while the BlackBerry earned 13% of the vote. Meanwhile, September data from digital marketing firm ComScore showed that, while the BlackBerry platform is still No. 1 in the U.S., the iPhone and Android are beginning to catch up. Research in Motion controlled about 37% of the smartphone operating system market during the third quarter of 2010 -- down 2.8% from the previous quarter. During the same period, Apple's share of the sector held steady, ComScore reported, while increased adoption of the Android platform fueled a 6.5% jump in the platform's market share (from 14.9% to 21.4%).
Among smartphone makers, market research firm IDC puts RIM at No. 3 in global market share in its third quarter 2010 scorecard, while Apple claimed the No. 2 spot. Globally, Nokia held first place with 39% of the smartphone market in 2009; that share is estimated to fall to about 34% in 2010, according to IDC data and Susquehanna Financial Group estimates. RIM had the No. 2 spot with a market share of 19.9% in 2009. However, RIM's market share for 2010 is estimated to fall to 16.4%. Meanwhile, Apple is expected to claim 15.7% of the sector by the end of 2010, up from just 3% in 2007. A series of device makers that rely primarily on Android -- including HTC, Motorola and Samsung -- will likely round out the top five.
Many analysts say that RIM is facing challenges similar to Nokia, which is also a dominant mobile phone player that is in danger of being leapfrogged by more nimble competitors. Yet RIM co-CEO Jim Balsillie remains upbeat. In September, Balsillie said the company is well positioned to address concerns about value added services and bandwidth consumption of wireless carriers and customers. "I think in terms of what BlackBerry does, it still has a tremendous number of attributes that really serve the market," Balsillie said during an earnings conference call on September 16.
Despite Balsillie's outlook, skepticism about RIM's future abounds. "I think RIM did all the right things and is, unfortunately, a victim of its own success," notes Kartik Hosanagar, an operations and information management professor at Wharton. "The enterprise route was the right route to approach the smartphone market.... RIM positioned the brand just right given the market it was going after. [But] Apple launched iPhone at the right time [following iPod's phenomenal success]. Now that iPhone and Android have consumerized the smartphone, RIM needs to react."
One way to do that, experts say, is to start setting the pace for the other competitors. RIM is still among the leaders in the sector, they note, and could withstand an assault from the iPhone and Android if the company can score big hits with a few devices. In the coming months, for example, RIM will introduce the PlayBook, its answer to Apple's iPad. "It's hard to imagine a company with such gifts failing to parlay it into an advantage," Wharton marketing professor Peter Fader points out.
Going beyond 'Apple Envy'
Fader was upbeat about RIM's prospects, noting that "I look at my 18-year-old daughter, and all of her friends have a BlackBerry. The BlackBerry has importance in that group." But he suggests that the company has thus far failed to produce a strong marketing campaign that plays to its strengths and its core customers, namely "people who primarily use the phone for communication -- texting, talking and e-mailing. It's a big segment." Instead of targeting that group, RIM has "Apple envy," Fader notes, with products that incorporate features that Apple pioneered, such as touch screens and mobile apps. "RIM is spending too much time chasing Apple," he adds. "RIM will never be Apple. It's not a fight RIM can win."
According to Fader, RIM should focus on its BlackBerry Messenger (BBM) application, which integrates various communication systems, such as instant messaging, text messages, e-mail and phone calls. "In most cases, companies use advertising to gloss over functional shortcomings. RIM has functional advantages and doesn't advertise them. The BlackBerry has a unique place in the market." RIM has to redefine a mobile productivity message that has thus far been tailored to corporations, Fader notes. BlackBerry productivity, if described correctly, could just as easily appeal to a mother trying to schedule soccer practices or a group of teens planning a party. "BBM me" should be the company's primary marketing message, according to Fader.
Meanwhile, RIM has been circulating videos on YouTube comparing the PlayBook tablet with Apple's iPad, while RIM co-CEO Balsillie and Apple CEO Steve Jobs have publicly derided each other's products. During an October 18 earnings call, for example, Jobs noted that Apple shipped more iPhones during the third quarter of 2010 than RIM shipped BlackBerries. "We've now passed RIM, and I don't see them catching up with us in the foreseeable future. They must move beyond their area of strength and comfort into the unfamiliar territory of trying to become a software platform company," Jobs said. "RIM has a high mountain ahead of them to climb." The next day, Balsillie questioned Jobs' figures on unit shipments as well as the Apple CEO's comments about 7-inch tablets (the size of the RIM's PlayBook) which Jobs claimed were "dead on arrival." "We think many customers are getting tired of being told what to think by Apple," Balsillie wrote in an October 19 blog post.
Protecting the Corporate Niche
As RIM tries to expand its customer base, the company also has to make sure it retains the business-focused users that helped the BlackBerry gain a dominant market position. The BlackBerry is a corporate staple, but that lead may not exist forever. Why is RIM's corporate market share so important? Experts at Wharton say that corporate customers don't transition to new devices that quickly and they tend to be less price sensitive than the average consumer, which means that corporate customers are more immune to turnover. "The first job for RIM should be to expand its viability in the enterprise market," notes Wharton marketing professor Eric Bradlow. "Companies will be the next target for Apple."
While some analysts say RIM should focus more on corporations and retreat from the consumer market, Wharton director of new media Kendall Whitehouse maintains that the company needs to master both markets to stay relevant. "RIM can focus on the business market, but it has to at least take a stab at embracing features that many consumers find compelling," because, he says, people don't want to carry multiple devices. "RIM has to attract consumers without abandoning the characteristics that made it a leader in its core business market."
Indeed, the challenge for RIM is a trend experts refer to as the "consumerization" of information technology. The days where companies handed out free BlackBerries to every employee are over and, as a result, workers are more likely to use their Android devices and iPhones for work. As companies begin to support those new devices, the appeal of the BlackBerry may diminish, experts suggest.
According to Andrea Matwyshyn, a Wharton professor of legal studies and business ethics, RIM must create new products that retain the features -- such as information security systems -- that made its devices so appealing to business users. She says that RIM can lock down the corporate market by providing just enough applications and features to satisfy workers who want to blend their personal lives with work.
"RIM's big advantage in the last decade was the integration of a mobile device with enterprise mail, a calendar and hardware really dialed in for typing and reading e-mail," notes Karl Ulrich, a Wharton professor of operations and information management. But both of those advantages have waned in recent years, he adds. First, the original "push" e-mail technology, in which new messages automatically pop up on the BlackBerry at the same time that they are delivered to a user's e-mail inbox, is not really necessary anymore. "The iPhone and Android platforms have e-mail clients that work quite well with conventional mail servers," Ulrich says. "Second, the cost and performance of touch-screen displays have improved so significantly that many people prefer a large, bright display for use with a variety of applications over a QWERTY keyboard and a [smaller] display."
Jennifer Fritzsche, an analyst at Wells Fargo, agrees. "RIM is known for its foothold in the enterprise segment. This has proved to be a very lucrative segment for RIM," she wrote in a research note. "As a result, every competitor from Apple to Android to [Microsoft's] Windows Phone 7 wants a piece of the enterprise business."
Closing the Software Gap
RIM recently launched a new operating system, BlackBerry OS 6, but experts say that the company merely narrowed a sizeable gap with Apple's iOS and Google's Android. Ulrich maintains that RIM missed the curve on software innovation. While Apple was focused on building an application ecosystem, RIM was focused on keyboards and hardware. "The unanticipated vulnerability for RIM in my opinion has been the importance of the app ecosystem," Ulrich says. "Apple got that mostly right. My guess is that Android will be at least as successful as the iPhone operating system. I don't think there is room for a third operating system."
But Matwyshyn suggests that RIM doesn't have to match the Apple or Android platforms on diversity of apps and features, but instead needs to identify the software programs that matter most to users. "Some people only need five to 10 apps on a regular basis," she points out. "RIM needs to figure out what those apps are and really focus on them."
RIM executives have said that the company is addressing its software issues. In addition to rolling out BlackBerry OS 6.0, the company is also touting QNX, an operating system it acquired in April through the purchase of QNX Software Systems from another firm. Some analysts say that QNX, which will make its RIM debut as the operating system for the PlayBook tablet, could be a game changer for RIM. Peter Misek, an analyst at brokerage firm Jefferies, recently upgraded shares of RIM and described QNX as "better and earlier than expected." Misek argued that RIM can solve its software issues with QNX.
Meanwhile, RIM is also buying companies to improve its software. On December 2, the company acquired The Astonishing Tribe, which focuses on creating easy user interfaces for software. That purchase follows the acquisitions of QNX Software Systems and Torch Mobile, which specializes in mobile browsers.
Others argue that RIM should punt on software and perhaps adopt Android. After all, RIM's core competency is hardware. "If I were to do things differently, I would also launch an Android line of [RIM] products," Hosanagar says. "It's the right hedging strategy in my opinion. Let the Blackberry [OS] remain, but nurture an internal competitor with RIM's hardware and Android OS." Bradlow agrees that RIM should consider an open-source operating system to cultivate a developer ecosystem, noting that "Android is certainly one strong possibility."
Getting the Job Done
Concerns about RIM could dissipate quickly if the company generated a must-have device that appeals to a business audience and the mass market.
One of RIM's current attempts at a hit is the BlackBerry Torch. Launched in August, the phone combines a touch screen with apps, web browsing and RIM's well-known keyboard. The Torch is available through AT&T and now sells for $99.99 with a two-year contract, down from $199.99 when the device launched. It is unclear how many BlackBerry Torch devices were sold in the most recent quarter. RIM reports its third quarter earnings on December 16 and that release may shed light on the Torch's sales. For Whitehouse, the Torch represents "the right approach" because "RIM has taken a stab at trying to embrace the features many consumers find compelling without abandoning the characteristics that keep the core [business] market happy."
While reviews of the Torch were solid, the device failed to generate the buzz associated with the iPhone or the latest Android handset. "Despite RIM's dominant position, its products don't seem to really thrill people," Matwyshyn notes. That lack of enthusiasm could change with the launch of RIM's PlayBook. When the PlayBook was announced on September 27, RIM co-CEO Mike Lazaridis said the 7-inch tablet would appeal to corporations and consumers and could function as a multi-purpose utility. The tablet will start at $499.99 to match the iPad's pricing.
Aside from demonstration videos, however, the PlayBook largely remains a mystery. According to Matwyshyn, RIM could take on the iPad with Playbook if it can court the business market. "The PlayBook would be a natural choice for businesses," she notes, adding that if RIM can create a tablet with an integrated phone and communication tools, it could carve a profitable market niche. Jeffrey Fidacaro, an analyst at Susquehanna Financial Group, said RIM is expected to ship 10 million PlayBooks for the fiscal year ending February 28, 2012. Given the competition -- there are roughly 80 tablets set to launch through 2011 -- RIM may have trouble selling that many units, experts warn.
Can RIM be functional and cool? Maybe it doesn't have to be, Matwyshyn suggests. "I'm not sure that RIM needs to be too cool. It needs to be reliable and meet business needs," she says. "RIM products have to be functional. Do you want the cool kid or the boring nerdy kid that gets the job done? Many people will take the nerdy kid."