Windows Phone 8 Spells Disaster for Blackberry
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Blackberry maker Research in Motion (NASDAQ: BBRY) has seen their share of the smartphone market slide from a peak of 20.8% in 2009 down to 5.2% as their phones fell out of favor with consumers. RIM was slow to innovate and therefore struggled to keep up with Apple’s iPhone and Google’s Android.
RIM is now preparing to overhaul their smartphone lineup with the new Blackberry 10 software set to release in early next year. However, Microsoft (NASDAQ: MSFT) is also revamping their smartphone offering with the release of Windows Phone 8, due out later this month. The two operating systems are set to go head to head to become the third option for consumers after Android and iOS.
Timing is Crucial
Last month Nokia (NYSE: NOK), Samsung, and HTC all announced smartphones running Windows Phone 8 being released this October or November. Since Blackberry 10 has been delayed into early 2013, they will miss out on the important holiday season. Nearly 150 million smartphones were sold in the fourth quarter of last year, accounting for 31% of total sales.
Research in Motion already missed out on the last few years of growth in the smartphone market. Smartphone sales have experienced explosive growth of 275% between the second quarter of 2009 to the second quarter of 2012, sales of Blackberries have only increase by a mere 4% over the same time frame.
Microsoft is also looking to make up for lost time in the smartphone market. It was late 2010 when Microsoft launched Windows Phone 7. Nokia launched their first Windows phones in the first quarter of 2012. Unit sales of Windows Phones have increased 50% worldwide from the first quarter to the second quarter of this year, outgrowing the smartphone market's growth of 6.4%. Though the sales growth is impressive, Windows Phone still only accounts for 2.7% of the smartphone market.
Microsoft is aiming to launch their platform across the world with support for Windows Phone 8 in over 180 countries; a significant increase from the 50 markets Nokia's Lumia phones are available in now. With the global launch of Windows Phone 8, Microsoft is targeting Research in Motion’s key markets.
In RIM's first quarter 71.7% of the revenues came from outside of Canada and the US. Recently RIM has been using international growth to slow shrinking sales in North America. In the first quarter RIM's subscriber base declined in North America, but grew in every other region.
Microsoft and Nokia are poised to compete with RIM in the international market with cheaper units such as the Lumia 610, which was launched in China in April. With the launch of cheaper Windows Phones in China their market share grew to 7% in China within 2 months, selling more units in China than the iPhone.
An Uphill Battle
Research in Motion has found itself competing against a technology giant in Microsoft. Microsoft has over $63 billion in cash on their balance sheet, so Microsoft has the time and resources to let Windows Phone 8 run its course. Microsoft could even run the division at a loss as they try to launch a new ecosystem with Windows 8 tablets and computers, Windows Phone 8, and a new Xbox software platform.
RIM is forecasting a rough transitional period leading up to the launch of Blackberry 10, including operating losses for the remainder of the year. They plan on investing heavily in marketing to gain market share for Blackberry 10 as well as Blackberry 7 in select markets. At the same time they are facing pressure from customers to lower monthly access fees, which accounted for 35% of their revenue. RIM has a short window to launch their new operating system and only $2 billion in cash and short-term investments on their balance sheet at their disposal.
To say that RIM faces an uphill battle would be an understatement. I doubt that a turnaround is possible for RIM at this stage, however they did announce a surprise gain in subscribers last quarter. While a turnaround may be out of reach, I wouldn’t bet against RIM’s stock either. They are trading significantly below book value, with over half of their market cap in cash, short-term, or long-term investments as well as a portfolio of patents that could be valuable. Someone may come along to buy out RIM and sell off the parts if the company has a failed launch of Blackberry 10.
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