RIM

After processing more than 1500 data points on the performance of thirteen technology companies, patterns are beginning to emerge. The steps so far:

• Visualizing P/E and Growth as time series centered on a point of crisis.
• Plotting P/E vs. Growth with an eye toward any clustering/correlations for the cohort.
• Detecting and measuring any change in the relationship between P/E and Growth before and after the point of crisis.

The final step is to plot the changes in the relationship between pre- and post-crisis for the set of companies normalized to the same starting point and then classifying them: 

The chart shows how the "average P/Es" changed after 9/30/2008 vs. how the companies performed during those periods. An evocative categorization is suggested for the four quadrants.

One way to read the data would be as a degree of effect of the crisis. For example, in the case of HP, its P/E dropped by about 6.5 while its average growth decreased by 41 basis points giving an average of 0.16 drop in P/E for every basis point reduction in growth. That would be a fairly modest impact. In the case of HTC, the impact would be even less. The effect on P/E was zero even though growth dropped by about 78 basis points. At the same time the impact on Microsoft was severe with the P/E dropping as much as for HP even though its growth only moderated by 5 basis points.

Therefore the "slope" (or angle in vector parlance) of each of the lines in the chart above may be interpreted as the severity of discount in value that the crisis invoked. Those values are shown the following chart:

A strong bar on the right half of the chart implies severe impact, a bar around the middle implies minimal impact and a bar in the left represents an inverse relationship where the market priced in opposition to performance[1]. What should be considered along with this chart is the quality of earnings and consistency of performance (which are shown in the posts linked above.)

Discussion

As noted in a previous article, there are really only six companies which had strong separation between pre- and post-crisis valuations: Apple, HP, RIM, HTC, Microsoft and Google. They are also the companies which had strong P/E drops (except for HTC). As a group they are also the companies with the best growth stories historically. This is perhaps the reason for the drop. Basically, because these were strong companies they "had the most to lose". The market "punished" them more severely than the weaker companies because the weak had already been discounted.

The other observation is that Apple and RIM are not treated particularly differently. The drops in P/E are at about 1 for every basis point drop in growth. This means that the the degree of value lost is about the same as a function of growth loss. Microsoft seems to have been the most affected. We can argue that it is perhaps weaker than the others strategically so this is reflected here, but I doubt it's weaker than RIM. Microsoft is also in contrast with Google which seems to have been given a lot of benefit of the doubt.

Nonetheless, this framework offers some hints on how technology companies have been treated after the crisis. There is no rightness or wrongness about this treatment but it may indicate potential for significant reaction in the opposite direction if and when macroeconomic conditions improve. These vectors are, in a way, proxies for volatility or "beta" in terms of correlation to the overall market. The greater the beta, the more amplification to market movement; the greater the slope value

As always, Apple is the canary in the coal mine as far as sentiment is concerned. What should be watched is the pricing reaction as Apple moves from a net reduction in growth to a net increase in growth. How will P/E react? The argument on this site so far has been that growth is exceptionally strong for Apple and it's not being reflected in the price. However, in this analysis we've stretched the time frame and did a longer retrospective. On this new time scale growth is not yet at the levels Apple enjoyed in the heady days of 2005/6. Perhaps this growth will return and when it does we'll get to see which way Apple's vector moves.

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Notes:

1. An inverse relationship with value can happen for various logical reasons, for example that a company has volatile performance which is depending on anomalous events.

The violence with which new platforms have displaced incumbent mobile vendor fortunes continues to surprise.

• Nokia's Symbian platform has gone from 47% share to 16% in three years
• Microsoft's phone platforms have gone from 12% to 1%
• Other platforms have gone from 21% to zero
• Although far less dramatic, RIM's decline from 17% to 12%  is causing acute pain and anxiety

This while entrants have grown share in spectacular fashion:

• Android from zero to 48% (A two year period)
• iOS from 2% to 19%
• Bada from zero to 4% (two quarters only)

 

The picture of platform share over time looks like this:

 

The platform volume growth is shown in the following graph:

Shocking

Or is it?

The surprising thing is that it should not be surprising. When the iPhone re-defined the basis of competition (at the beginning of the time frame of these charts) it unleashed forces which are still spinning the industry into a new configuration.

In that context, Android is a natural consequence. As iPhone created a threat, the response from all other vendors (other than Nokia and RIM) was to seek something that would sustain their business. Android was salvation.

It enabled the pursuit of better margins and hence better returns. So much so that Android offers the escape up-market they have always sought. It enables vendors to abandon the profit-free feature phones to low-end entrants like ZTE and Huawei.

LG, Samsung, Motorola and Sony Ericsson all took the bait. They are racing as quickly as possible to turn their feature phone portfolios into Android portfolios. This is certainly something that Google also wants to see happen and has been planning all along.

However one of the consequences of the modular (aka "open") approach is that the low end disruptors gobbling up low-end share are also motivated to move into the Android business as soon as it comes within reach.  The only reliably predictable consequence of Android will be the postponement of displacement of the existing brands by the low-end entrants.

Is this fate unavoidable for all brands?

Clearly some vendors see the trap. For all its apparent failings, Nokia saw this outcome and chose to attempt a "Hail Mary Pass" with Microsoft. The strategic point being that because they no longer had faith in their ability to execute on an independent platform, they would pick a platform that gave them at least some control or leverage. There are serious risks and problems with this approach--something which has been covered here already--but the bet being made is a clear rejection of the slippery Android slope.

RIM is trying to resist with QNX which is a similar approach but timing may also be the undoing of this strategy. HP's approach with WebOS and Samsung's Bada are also hedges to avoid this fate.

And what about Apple?

Apple is always skating in a different direction. iOS needs to be seen as not so much a phone platform but a computing platform. Given what we know, iOS was always conceived as the future of computing. Voice, after all, is just an app on iOS. So my expectation is that Apple's iOS will continue its attack on the mobile computing market, skimming (or carving as the case may be) profits from the phone business to sustain its ultimate target of reclaiming the computing universe.

By this thinking iOS lives only by improving more rapidly than anything else in dimensions that redefine the basis of performance. In other words, doing more of what the iPhone did in the first place to set off this disruption.

Nearly all the data on smartphone shipments is now available for the second quarter 2011. Some fragments are still not public, including ZTE and Huawei (and any others) shipments. We also have estimates for the various platforms including an estimate for Windows Phone and Bada (though not for WebOS).

This allows the following chart:

Using the traditional color scheme which separates "integrated" from "modular" vendors, the chart shows overall volume growth and how the volumes are split among vendors.

The market grew at about 73% y/y and 50% compounded over three years and 9% sequentially. The y/y growth rates for individual vendors were:

1. Samsung 525%
2. Apple 142%
3. HTC 124%
4. Motorola 63%
5. "other" 29%
6. RIM 18%
7. Nokia -30%

In terms of unit share, the pie charts below show the before and after (three year span):

And the stacked area below shows every quarter over a four year period.

The story is largely unchanged since last quarter except perhaps in the rapidity or deterioration in Nokia's performance and Samsung's partial exploitation of that decline.

It should be noted that not all of Samsung's volumes are licensed platforms. An increasing share of Samsung smartphone volumes is Bada, an internally developed OS.

In the charts above I arranged the bars to place Nokia and RIM in the middle to show their double envelopment. A pincer movement is only an analogy but perhaps it's evocative of what's happening.

At the end of last year I was saying that the smartphone boom was a tide that lifted all boats. That is no longer the case.

 

But the big story is that there has been a clear non-seasonal counter-cyclical decline in Nokia and RIM's smartphone performance. RIM's steady rise has come to an abrupt halt. Nokia's decline has accelerate precipitously. So much so that Samsung and Apple have overtaken Nokia and RIM and it looks like HTC will overtake RIM within one quarter and perhaps Nokia as well.

The fortunes of vendors is now clearly tied to the fortunes of their platform choices. Android has a spotty record with Samsung[1] and HTC having accelerated growth with Android, Motorola and Sony Ericsson have not rallied to a similar degree (though they did remain operational). But it's at least very clear that BlackBerry OS and Symbian are now a burden to their owners.

The fact that not all vendors benefit from a boom indicates that the early, happy days are over. People are noticing that there is a difference between smartphones and are not buying any and all. An era of competition will follow. I hinted that such a shift would happen when a "tipping point" was forecast and that point has been reached in several mature markets.

The consequences are that weaker platforms and vendors will come under increasing pressure.

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Notes:

1. Samsung decided to stop reporting the number of smartphones they sell. They also refuse to report the break-down between different platforms--they sell Windows Phone, Bada and Android devices. The figure I gave to Samsung is 19.9 million units, higher than 19.0 and 19.3 million from other analysts.

The major publicly traded phone vendors have all reported results for the second quarter. Based on the data available so far we can begin putting together a picture of the market.

The first picture I'll draw is usually the last: profitability. The following chart shows operating profit from the sale of mobile phones among the eight vendors I follow (Nokia, Samsung, LG, Sony-Ericsson, Motorola, HTC, Apple, RIM).

This quarter saw a slight sequential decline in overall profit for the sector, but four vendors did not manage a profit from selling phones. Nokia, Motorola, Sony-Ericsson and LG all saw losses. The other vendors split the slightly decreased pie with Apple getting two thirds of it (66.3%)

This share is up from 57% in Q1 and 50% in Q3 and Q4. Samsung's share went to 15%, though that's not a peak level historically. In Q1 2008 the company was at 21%. RIM was at 11%, a level in a range that has been unchanged for three years. Finally, HTC captured 7.4%, a new high and an increase from 6% since last quarter.  The profit share chart follows:

The ranking chart for profitability follows:

Finally, the "before-and-after" view of profit capture showing the change in profit share over a four year period.

 

The story remains largely unchanged from last quarter: Three companies which captured 11% of the profits before the modern smartphone era started (four years ago!) now capture 84% of the profits. Only one global brand phone vendor selling non-smart voice-oriented feature phones is still profitable however, as we shall see later, the only reason profits still exist for any vendor is due to the strength of their smartphone portfolio.

About 10 years ago I met an advertising executive in New York who explained the difficulty of advertising a new brand of deodorant to consumers. “Most people never change their deodorant,” I remember him saying. “They pick one brand when they are young, and stick with it for a long, long time. If it works, why switch?”

The same theory can be applied to customers who are making the switch to smartphones today. Once they have picked a type of phone, whether it’s Apple iOS, Google Android or something else, it’s difficult, and often expensive, to switch. Consumers become comfortable with the interface and design of the phone and the apps they have purchased on that platform. If it works, why switch?

Many Smartphone Customers Are Still Up for Grabs - NYTimes.com

This quote says a lot. The notion that customers remain captive to a platform is well understood. After all, it seems impossible to get people to switch out of Windows (or Mac or iPod). Platform vendors are aware of this as the land grab for users seems to be running at full pitch.

However, there is a critical condition described in the quote above: "If it works, why switch?"  The condition which keeps users loyal is that the product they chose is good enough--i.e. "it works." That's a symptom of over-service and commoditization. If a product, like deodorant, is good enough you won't be tempted to move to another brand even if it's marginally better since the new brand has switching costs in the form of uncertainties ("Will it be as good? What if I don't like the smell? etc.) People are inherently conservative and you can't compete with comfort and familiarity by launching a marginally better product.

So with that in mind, why is it that millions are switching mobile platforms?In this blog I've cataloged the massive shifts occurring away from mobile platforms that have been around for years with deeply entrenched user bases. Microsoft's Windows Mobile, Nokia's Symbian, Palm's PalmOS and RIM's Blackberry have collectively lost tens of millions of users. A net of half a million Blackberries are being abandoned in the US every month.

So we would need to say that the condition of "it works" or being good enough was not met with those platforms. The attraction of something better is clearly greater than the switching cost.

So this highlights a good test for how to tell if smartphones are good enough: If users are fiercely loyal with a given platform then it's probably good enough but if they are willing to switch (i.e. disloyal) then it's probably not good enough. It seems like a trivial observation but it's a very important clue to the bigger question of whether we can "call the end" of the market. Just like it would have been premature to call the end in 2006 when Symbian and RIM seemed unbeatable, it will seem premature to call the end now in the event that a significant innovation is yet to appear.

The correct calling of the end has profound investment implications. Do you (like Microsoft) invest billions in a new platform if you know that there is no more room for entrants? Should Samsung bother with Bada or HP with WebOS if the game is already over? Even more, should Apple even bother to improve iOS if they have no shot at switching a billion likely Android adopters. Why not just nurture the current installed base and work on building walls and moats around them?

So with this hypothesis in mind, it makes sense to analyze whether Android or iOS, the current presumed champions, are "good enough" on the basis of how often users switch out of them. My bet is that neither is good enough and that there will be increasing churn between platforms. I imagine that Android is less sticky (and hence less than good enough) based on app consumption but there is little evidence of churn because most phones in use have been bought less than one device generation ago. More importantly, there have been few opportunities yet for switching as many Android buyers don't even have the choice of other platforms either due to where they live or how much income they have available.

To really tell where we stand, we would need to collect stats on switchers to know just how satisfactory the platforms may be. Remember that a choice of a new deodorant on the same shelf at nearly the same price is the test for loyalty. For an adequacy test we need to see better distribution and more choices for consumers. It's still very early even in the US for any conclusions to be drawn about the adequacy of Android.

Технологии и наука | Хорацио Дедиу: Никой не иска да купи Research In Motion RIM - Капитал.

My thanks again to Andrian Georgiev for interview questions [Bulgarian] related to RIM. My answers to his questions (in English) are below:

Q: What should RIM do to reinvent itself? Should it stray from its business-oriented image?

RIM had begun to move away from a business image already in 2005 or so when it started its "Pearl" brand and a consumer-oriented strategy. The company probably foresaw that business customers would not be enough to maintain the growth they had become accustomed to. The strategy has led to a growing popularity in Latin America and other regions like the Middle East where the product is used as a low-cost alternative to SMS for avid texters. Even in the US, many teenagers use Blackberries instead of iPhones because they can use it for the BBM service (at a lower cost). I believe that it is not coincidence that iMessage was launched.

The company's salvation is not in branching into new markets but in establishing a credible platform. When Nokia announced that they would be the "third option" after the iPhone and Android ecosystems, they did not even mention the Blackberry. The fact that Blackberry is not seen as an ecosystem is the root of the problem.

Q: How should RIM accelerate the introduction of QNX?

QNX is a solid operating system and I believe RIM should have begun developing with it much earlier. By waiting long after the iPhone launched (and even after Android) to upgrade its OS, RIM missed a great opportunity. The foothold market the company had was wasted by not leveraging it into building a mobile computing ecosystem.

There is little that can be done to move any more rapidly now. Product development cannot be done any faster. What the company could do is to very carefully define why QNX based products are better than the competition and not rely on specifications. In other words, what jobs does their platform solve for users that current solutions don't address? I note that this is the problem with the Playbook. It's not differentiated on what it does to improve the life of the user.

Q: Should RIM move on with just one CEO?

The problem is not the number of managers but their view of the world. What would benefit the company is a better marketing manager where marketing is defined as understanding of user needs. Engineering expertise is not enough.

Q: What would you advice RIM to do in terms of R&D?

RIM is an engineering led company. Many successful companies rightly develop their engineering skills first because that is what allows them to create new products more quickly. This is true of Nokia and also of Apple and Microsoft in their early years. What is difficult is to allow marketing people to define products after that early phase. This is partly due to the fact that there is less respect for "Marketing" among engineers. Many see it as a "soft" discipline where there is little rigor. But this is not an accurate or fair picture. Great marketing determines what products should be built not just how they should be sold. Engineering can discover new products based on new technology becoming available, but Marketing can discover new products based on unmet user needs. Both need each other.

My advice would be to allow a way for R&D to absorb input from marketing.

Q: Do you think that RIM could be bought by a bigger company in the short-term?

Mature companies are usually bought for their assets and not so much for their vision or priorities. The opposite is true for young companies who are selling themselves to the public via IPOs. For young companies the vision or priorities of business models is seen as more important. When companies are only valued for their assets, they are usually very under-valued. When companies are only valued for their vision, they are usually over-valued.

RIM's challenge is that nobody believes they have any vision and their assets are weak (no good ecosystem as I pointed out above.) So the price anybody would pay for RIM today would probably be far lower than what management thinks it's worth. And since they are still profitable they won't sell the company at a deep discount.

So my guess is that we won't see any acquisition soon.

The second quarter ends in less than two weeks. When it does, I expect Apple will have over $70 billion in Cash, Cash Equivalents, Short-term marketable securities and long-term Marketable Securities. That figure has been growing predictably.

Also predictable has been the decline in value of Apple's mobile phone competitors. Most spectacularly Nokia and RIM. The enterprise values of the public companies selling 75% of all phones sold world-wide are as follows:

• Nokia $22.6b
• RIM $13.8b
• HTC $25.4b
• Motorola Mobility $4.2b

The values of the profitable phone-making subsidiaries are a bit more difficult to estimate but we can use multiples of trailing operating profits. I generously use the multiple applied to HTC (14).

• Sony Ericsson $0.21b x 14 = $3.0b
• Samsung $3.76b x 14 = $53b

That leaves valuing LG's phone business which has not been profitable in the last four quarters. I assume a nominal value of $10b. These data points are shown in the following chart:

Given the current valuations, it would not be difficult for Apple to acquire every phone vendor except for Samsung with cash alone.

The more remarkable thing is that as market values of phone vendors continue to decline, Apple's cash will continue to grow dramatically. Indeed, a time may soon come when Apple's cash will be worth more than the entire phone industry.

In their monthly survey update on US phone usage, comScore reported that by the end of April 74.6 million people in the U.S. owned smartphones. In the same period a year ago only 48.1 million did. The percent of smartphone users out of total phone users has reached 32%.

The following data points can also be deduced:

• 2.1 million or 474k people/week became smartphone users during April.
• 62% of smartphones in use in the US are either Android or iOS. The sum a year ago was 37%.
• There are about 20 million iPhone users and 27 million Android users in the US today. A year ago there were 12 and 6 million respectively.
• RIM's US user base peaked at 22 million in Sept 2010. It is now 19 million and dropping.
• Usage of Microsoft mobile operating systems in the US is in steady decline dropping from 7 to 5 million users in one year.
• During April 475,000 people abandoned their Blackberries.
• Android and iOS gained 3 million users in April. One million switched from other smartphones and 2 million switched from non-smartphones.

The following chart shows the evolution of installed base share of platforms among users of smartphones in the US.

The impressive share gains for Android are apparently at the expense of RIM and Microsoft. Over the period shown, Android gained 25 million users while RIM gained only about 2.8 million.

Although perhaps comforting to see some growth overall, the situation for RIM is more grim than that. During the first half of the period (December 2009 to August 2010) RIM had gained 4.6 million users. During the second half (Sept 2010 to April 2011) RIM lost 1.8 million users.

The net user gains and losses for the various platforms is shown in the following chart:

Note how RIM (green bars) went from being a consistent net usage gainer to a consistent net usage loser during this 16 month period. In addition, note how Microsoft's platforms (yellow bars) have had a very poor showing with very small gains during four months and moderate losses during the others. The losses in usage even increased after the release of Windows Phone late last year suggesting no traction whatsoever for Windows Phone.

The other point to be made is that if we assume smartphone users remain smartphone users, then those platform losses are gains by other platforms. In other words, the areas less than zero in the chart above represent smartphone "churn" or switching between platforms (As a percent of all smartphone users that number represents 1.35%.) That number is far lower than the total smartphone gains, so it's safe to say that most of the iOS and Android gains were at the expense of feature phones rather than other smartphones. And since iOS share is consistent (and supplies are constrained), few if any Android gains are at the expense of iOS.

There are many interesting patterns to observe in the data, but I think the most evocative is the erosion of Blackberry usage. If the Blackberry peaked, and a follower platform not yet in sight, the question is how long will RIM survive?

"Jim and Mike brought the company to where it is ... which is part of the biggest problem they're facing," said Charter Equity analyst Ed Snyder, who has covered RIM since its public listing in 1997, two years before the BlackBerry was launched.

"They're stuck in the past. They know what worked and keep playing that card and it's not working any more, and they don't seem to have any ideas," he said.

via BAY STREET-As RIM struggles, talk of a change at top surfaces | Reuters.

In the case of Apple, the departure of the founder is considered a grave threat to the continuing success of the company.

In the case of RIM and Microsoft, the continued tenure of the founders is considered a grave threat to the success of the company.

Clearly, the theory that founders of successful companies can assure continuing success is flawed. Coupled to that implied causality is that departure of founders is always a problem.

Both are reflections of the idea that companies are predominantly successful (or fail) because of the skill (or incompetence) of a small group of individuals.

What the idea fails to explain is why companies fail (or succeed) as a cohort. RIM's troubles are similar to Microsoft and to Nokia's. Did they conspire or collude to fail simultaneously? Historically, incumbents fail simultaneously, regardless of who's in charge.

And what about the problem that a company goes from success to failure (and vice-versa) while the same management is in charge. The "smart manager" theory of company success is as pervasive as the "stupid manager" theory of company failure. The perplexing thing is that while both of these theories are applied within the lifetime of a company, the management does not change.

In the last post, I highlighted the difference between smartphones and non-smart device sales last quarter. The trajectory of share growth for smart devices would appear to have accelerated due to Android.

The following charts show the evolution of smartphone vendors and platforms over the last few years.

Like in the past, I used color clustering to show the separation between "integrated" (in green) and "modular" (in brown) platforms and their users.

Unlike the non-smart market where "other" make up 30% of the market, smartphones are still a big brand business. "Other" make up only 11% of units. and that number has been trending down. It would seem that the age of unbranded Android phones is still not upon us.

Comparing three years "before and after" here is Q1 2008 vs. Q1 2011 by vendors share:

 

Apple added 15% of share, Samsung 13%, Motorola 4%, RIM and HTC 2%. Nokia lost nearly 20% of share.

From a platform point of view, the unit chart looks like this:

Note that Android's growth came at a time when Symbian had a terrible quarter. The evidence is visible in the share chart:

Android's gain seems to be at the expense of Other, Windows Mobile and Symbian. In the pie chart snapshot over a three year period the transfer seems clear.

Android took 35% of share, iOS 14% and RIM 1%. Windows Mobile/Phone has collapsed to 2%.

But again I would caution about drawing "sustainability" conclusions from looking at this market with a share perspective. As it's growing at a huge rate (73% year/year) it's bound to be become so large that single digit share numbers still amount to vast ecosystems while huge shares of fragmented products don't amount to much of value. To emphasize the point, I would remind that in 2008 Symbian was not just Nokia but a lot of "Other" was made up of Symbian in Japan. The combined fragmented footprint of Symbian was well over 60% of the market. It did not do much good for the platform.