The Downfall of Research in Motion’s CrackBerry
by Tony D’Altorio, Investment U Research
Thursday, August 5, 2010
When Canadian manufacturer Research in Motion (Nasdaq: RIMM) launched the BlackBerry in 2002, it did very well, (commonly referred to as the “CrackBerry,” given its addictive nature).
The smartphone’s built-in security features – including encrypted email – were huge selling points. In fact, RIMM’s top-level system is so secure that Britain allows its intelligence community to use the BlackBerry to send and receive certain urgent information.
So you can bet that 007 carries one, as well as his suave and deadly compatriots.
Likewise, executives, politicians and U.S. government agencies have also become attached to the device.
Yet despite its popularity, the very security features that make it so desirable also makes it less marketable. In fact, it could be the BlackBerry’s downfall altogether.
Insecure Security Agencies
You may have read it in the news recently… Saudi Arabia and the United Arab Emirates are regarding the BlackBerry with suspicion.
Ironically, they don’t like the BlackBerry because it is so secure. They can’t monitor traffic on the devices, and so have threatened to ban them altogether unless RIMM allows them access.
North America and Europe largely require local telecommunications network operators – and therefore device manufacturers – to provide their security agencies with the ability to intercept and monitor such chitchat.
That isn’t a difficult task with most smartphones. But BlackBerry traffic automatically encrypts sent messages and decrypts those received. In addition, it travels via the company’s data servers in Canada, so it poses a particular challenge.
RIMM insists that it doesn’t have the ability to allow anyone else to view encrypted traffic. At least not for its corporate clients; its consumer services don’t get the same top-secret consideration.
Most counties have managed to negotiate agreements all the same. But details of those arrangements have proven to be a sticking point every time it enters a new market.
And besides that, providing security agencies that kind of information is a double-edged sword. It means that such organizations can potentially access diplomats’ BlackBerrys… hence the reason why the National Security Agency balked so badly about President Obama wanting to keep his.
That puts RIMM in the awkward position of deciding which requests are legitimate and which aren’t. It may even have to start hiring ex-CIA agents as employees!
In addition, if it does yield to demands from countries like Saudi Arabia and the UAE, others will “review” their stance on BlackBerry. After all, security is its key competitive advantage among the wealthy and powerful.
RIMM’s Growth Problem
Unfortunately, RIMM and the BlackBerry have more than just security problems to worry about.
In the past, it has relied heavily on the U.S. market. For its 2010 fiscal year, $8.6 billion of its total $14.8 billion came from the United States.
And that market is waning, as evidenced by the company’s latest quarterly earnings reports. Competitors like the Google (Nasdaq: GOOG) Android operating system and the Apple (Nasdaq: AAPL) iPhone are eating away at RIMM’s profits.
Research firm Canalys reported that Android second quarter sales went up nearly 900% year-on-year. That represents 34% of the smartphone market in the U.S.
Sure, in comparison, Apple had 22% and Research in Motion had 32%. But last year, RIMM had 45%.
RIMM did just unveil its new BlackBerry Touch to woo consumers back. But most industry insiders don’t think it will blow away the competition.
That isn’t good news. Nor is the recent poll showing that 29% of BlackBerry users have considered switching to the iPhone.
Carolina Milanesi, an analyst with technology research and advisory firm Gartner, says that volumes for RIMM shipped outside of North America and Western Europe have doubled from a year ago. But those groups account for only one in five devices shipped last quarter.
Research in Motion’s Bottom Line
When it comes down to it, Research in Motion needs its BlackBerrys to do well overseas as its primary North American market slows dramatically.
The Asia-Pacific region should overtake North America and Western Europe as the biggest smartphone market within five years. But many of those foreign markets that it has to have are very politically and security sensitive.
The governments in question fear BlackBerry as a weapon of mass dissemination.
Meanwhile, RIMM is losing its first-mover advantage, which has produced compound revenue growth of 70% since 2004. And competition has forced it to drop its selling price by $57 to $300 year-on-year in the last quarter.
Some of this already shows in the stock price, down 18% year-to-date and about a third from its mid-2008 peak. But Saudi Arabia and the UAE have just provided investors another reason to steer clear.
Good investing,
Tony Daltorio
Related Investment U Articles:
- Can the BlackBerry Messenger Save RIMM?
- Growth in Net Earnings Per Share: The Only Thing That Matters
- Nokia and RIMM: The Next Patent War Takeover Targets
- Apple vs. Google: Who Will Win the Battle of the Smartphones?
- Cyber Security Investments 2012
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