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Spillikins №150. Blackberry Runs Out of Ideas

This week was not the best for several established companies. Unfortunately, the end of the year is not only the time to hand out awards, but an opportunity to make figures look better than in real life to receive bonuses and plan for future. Not everyone is good at it, but it was interesting to discuss creative crises of certain companies. I could not stop there, so read about the news from two different companies, which have their backs to the wall. In other words, it was a week of losers.

RIM in Hot Water: No More Ideas

When I speak in front of students I wait impatiently for questions, which characterize the audience better than they way people listen to you. There are questions, which are often repeated, and those you can hear rarely, but they are pleasant to answer. One of such pleasant questions is why I like to work as an analyst. The answer is obvious, because I enjoy the process. You can stop at that without providing too many details, but today I will add more facts. In the telecommunication market cause and effect are more closely connected than elsewhere. The market is very structured and everybody plays by the rules and if you know how to ask you will easily answer questions on future developments in the field. I like this predictability very much, when data correctly fits formulas to come up with accurate scenarios and provide a bit of a follow up. Much depends on companies and their efforts, which can be chaotic at times. Some have a joker up their sleeve and often break traditions (for example, Apple), so my work is not that boring. You have to keep abreast of latest trends and analyze what happens and why. It is a magical mystery tour without repetitions. Every successful company has its own path, but failures often repeat themselves. I think that it is time to speak about RIM and its Blackberry brand.

During the last year RIM was criticized from all corners. The company has a unique management structure headed by two CEOs, who started the business. It was weird when they stopped their interview offended by “unfair” questions from journalists. Such a behavior can be expected from wimpy teenagers, but not business people. We can also remember the Blackberry service outage during several October days and miserable sales of Playbook, which generated several hundred millions of losses. This long line of events produced a clearly negative influence on the company.

Last week RIM unveiled its quarterly figures and they dragged the share prices 10% down. Moreover, financial analysts downgraded RIM shares and it will impact the manufacturer adversely too. The reason behind the bad news is not low sales, but the negative outlook on RIM decision making. You can always find reasons to worry, but let’s analyze data from the third quarter of this financial year.

RIM shipped 14.1 million smartphones and 150,000 Playbook tablets. Income amounted to $5.2 billion, which is a 6% decrease compared to the same period of 2010. RIM announced that the number of users reached 75 million worldwide. Income can be broken down in the following way: 79% - phone sales, 19% - services and 2% - software. The profit went down and stood at $265 million.

It’s time to remark that the majority of market players can only dream about such a performance, which is true to some extent, but the share market works differently and usually looks into the future trying to guess if shares go up or down. This guessing game has its own rules.

I think it is more or less fair to assess the results of companies this way, because rules were not changed during the game. The first sign of danger appears when top managers claim that share prices do not reflect the true situation in the company. It becomes clear that the company tries to change the rules and explain why it will not succeed in future. Frankly speaking no one has ever made the market change its opinion. Instead of taking measures many companies attempt to solve all issues in the PR realm.

The main drawback of RIM now is that its products are not as desirable as before. They are not all the rage in the corporate world any more. In 2007 when Apple iPhone appeared for the first time no one could see RIM troubles ahead. You can view 2007 as the crucial year for Blackberry, but I would associate it with 2009. The world is governed by ideas and not products at the moment. Surprisingly, many successful companies do not understand it and cannot communicate to developers tasks appropriate to generate ideas required by consumers.

2009 was the year when Apple iPhone for the first time was viewed as a possible corporate phone. iPhone is a product based on ideas. In 2007 no one considered this model as a smartphone. Even Apple positioned it as a touchscreen phone. One year after the company realized where the wind was blowing and came up with a smartphone. Did iPhone change a lot? Not really, but the same cannot be said about the idea. The perception of the product was changed and the rest is history.

In 2009 the story repeated itself for the corporate users when iPhone got a business-like makeover and Blackberry started losing fast. The reason was in the long track record for Blackberry, whereas iPhone was new and offered much better ergonomics. Subsequently, many Blackberry users tried iPhone and made the switch. If you look at ideas incorporated by Apple into iPhone since 2007 the list will be impressive: best music player (modeled after iPod), best browser, best screen, best materials, best gaming and corporate device, etc. Apple was never shy to claim each characteristic as the best, while the rivals never adopted this approach. Blackberry had its strong points: best keypad, best mail and best corporate solution. Apple did not compete in the first two areas, but eliminated the main point of Blackberry by providing a different corporate device. The idea impressed the users and the market of RIM was under threat.

We should bear in mind that the consumer electronics market offers ideas first of all. Here when you play on the football field you have to reinvent yourself and switch to basketball or hockey. If people are not ready for dramatic change you will play football, but in a different vein. It is necessary to create ideas, which conquer the world. Handsets themselves cannot achieve that.

The loss of RIM was clear at the start of 2011 as I mentioned it before. The company ran out of ideas and the rest followed suit. By entering the tablet market RIM did not know what they were doing. RIM wanted to get a foothold in the market by copying Apple. Everybody failed and lost millions (apart from RIM you can remember HP or Sharp).

Blackberry began to lose ground on the corporate market too. They had not enough ideas and viewed mail as the only cash cow to keep the company running for decades. Mail is important and will stay this way, but it is not the only option users are looking for. They also need games, online services among other things. These are the ideas, which required highlighting. Instead Blackberry promised a new OS (QNX), which should be its silver bullet. The same mistake troubled Nokia: UI is not the main issue. Everything depends on the idea you are selling.

I like that events happen smoothly and over a period of time. When the company is dead and buried it still shows excellent products and boasts impressive financial indicators. It happened at the start of 2008 when I mentioned the crisis at Sony Ericsson for the first time. Others did not see it coming. After three years the company is dead (the brand is still here, but by the end of 2012 it will be gone for good). In 2008 the situation could have been changed, but in 2009 SE was walking dead. The company made splashes and imitated life, but it had no future. RIM can still recover, but it has no more than 6-8 months to make a turnaround and gather all resources (people, money and loyal customers) to change ideas. If nothing happens during the period RIM will fail and lose all its markets. The chance that RIM will do something to save itself is minimal and is likely to follow Siemens, Sony Ericsson and Nokia. For example, RIM mentioned that the new OS will be ready only in the second part of 2012, so customers will only have to enjoy ads of future products. Don’t travel too back in time and remember that Nokia planned to succeed courtesy of MeeGo, which was heavily promoted. At the end of the day Meego was ditched, though Nokia believed into future success and spent 2 years daydreaming. Did Meego smartphones change the game? Of course not! QNX smartphones from Blackberry will not result in a miracle. They have to sell ideas and not products first. Ideas have to be well integrated with hardware, but ideas play the most important role in the eyes of consumers. Blackberry is not the only victim of the trend, because it applies to the entire market. Unfortunately I see no chance for Blackberry to survive. When QNX smartphones finally appear they can be perfect, but ideas behind them will not win over less ideal solutions. This is the way we see the world.

Extra reading:

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Another Hellish Week for Nokia

When you are in a big trouble and every day there is even more bad news for you it is only natural to try to save your career so the exodus from Nokia continues. Employees responsible for NFC development are leaving the company massively as well as the most valued engineers and developers. And all this is only the top of the iceberg. The company is also being destroyed by the management steadfastly depriving Nokia of any chance for a future.

The company is shutting the OVI Contacts ‘cloud’ service that allowed you to store your contacts online (like Gmail and many other services) on January 24. In the end of January the web interface will be gone as well as the possibility to sync your contacts with any service except for your Nokia phone. The company is simply ditching a service that works fine (it is a rather limited service but it worked fine) in order to… well, nothing, they are just getting rid of it for no apparent reason.

The OVI brand is dead – it took a long time to kill it and every initiative Nokia tried to use was a flop. It is not Steven Elop’s flop as the destruction process had been launched long before he was in the company. But it is his fault the company is now getting rid of all its own services only to substitute them with equivalent Microsoft services. Stephen Elop has two objectives: not to leave any chance for Nokia on the phone market and to increase Microsoft’s share of this market and to do that he is ready to sacrifice Nokia.

Last week we heard rumors about Microsoft planning to buy Nokia’s smartphone division. According to a report released by Danske Bank the deal will be announced in the first half of 2012. These rumors made Nokia stock go up by 3% only to continue plummeting a bit later. Last Friday Nokia’s stock price hit the 1998 level of $4.68 at NYSE so the company is now worth $17 billion even though its assets are worth a lot more.

I assume Nokia’s management is trying to reach a critical point when selling the company out will be the only option. Today we may observe preparations for that: the company is leaving its key markets, it is investing into flop products and spends disproportionately large sums to advertise them, ditching own development and closure of all promising initiatives. Many Nokia’s top managers hail from Microsoft and judging by their decisions they are still loyal to MS. I cannot see any attempts of trying to save Nokia. As of today only three Nokia’s departments are still functioning: PR, advertising and marketing. They are all doing their best to convince people that everything’s going to be fine with Nokia. They are a smoke screen of a kind but when it’s gone there will be only Nokia ruins left.

The company is surely aware of how their WP7 products are perceived on European markets but from we only hear triumphant speeches from Nokia’s PR who refer only to their phones being on the home pages of online stores. Independent researches beg to differ – Exane BNP Paribas carried out a potential consumer poll on five markets where Lumia 800 has been released. Out of 1300 people 456 planned to buy a smartphone within a month and only 2% of them were interested in Nokia WP7 phones. It is a fail so big it can only be compared to the size of the PR budget of these products.

More good news for the company: in Russia which Nokia loves to quote without providing any actual numbers data on Nokia 800 sales has been released. It looks pretty good as compared to N9 sales which has become the least successful Nokia flagship ever. New Nokia WP7 phones have made 70% of cash N9 has made so far in just two weeks. For the same period of time Nokia 800 has not yet reached even the sales level of Nokia N9.

To understand just how disastrous the situation around the market’s former leader is I want to quote sales numbers of Nokia 800 for the first two weeks and compare them to Apple iPhone 4s figures for just one first day in Russia. Nokia sold 2000 handsets in two weeks while Apple sold 4000 iPhone 4s in just one day. I must remind you that Russia used to be Nokia’s largest market and Nokia still has a significant presence there but losing it rapidly to Samsung.

Soon Nokia will have to give their phones for free as its partner Microsoft has been practicing recently to get rid of all those stockpiles of unsold phones. Microsoft is coming up with good ideas of how to give them away and keep their faces. Last week they were giving WP7 phones for free in the US to people who had experienced malware issues on Android phones (they did not have to give their Androids in return). I think it is the perfect distribution model for WP7 and why would you pay for something that you will eventually get for free?

I also want to quote Niels Munksgaard, head of Portfolio, Product Marketing & Sales in Nokia Entertainment Global: “What we see is that youth are pretty much fed up with iPhones. Everyone has the iPhone," he said. "Also, many are not happy with the complexity of Android and the lack of security. So we do increasing see that the youth that wants to be on the cutting edge and try something new are turning to the Windows phone platform.”

This opinion was voiced exactly when SMS exploits were found in Windows Phone 7 and when US sales data was released proving that the youth overwhelmingly choses Android over WP7. The abyss between reality and Nokia managers has grown out of any proportion.

Further reading:

A Nokia’s fan sentiment over the news of OVI Contacts discontinuation

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Microsoft and WP7 – Trouble in Paradise

While Nokia is going through hell Microsoft, quite contrary, is resting on a rose bed. While Nokia is self-destructing trying to promote WP7 Microsoft does not need to do anything at all to promote their phones. The first trouble in their paradise became the news of the SMS exploit found by an accident. An SMS with a series of certain characters kills the Messages app on any WP7 phone. It is not that big a deal but the funny thing is this trick worked for Siemens phones ten years ago so old exploits somehow migrate to new systems. But the news did not become very spread so there was no massive phone crashes or complaints. I killed two my phones using this technique and a couple of my friends’ phones who refused to believe it were possible at all. But media should not exaggerate the seriousness of this problem too – things like this simply happen.

It is more interesting that WP7 division head Andy Lee got a new job – now he will report to Steve Balmer directly. One of the company’s inside memos says that Lee was transferred to a critical project indirectly mentioning Windows 8 integration with WP7. This news was followed by many discussions of Andy Lee’s role as the head of Windows Phone Division but I don’t think it was the reason (the KIN flop alone means a lot). For some reason Microsoft seem not to understand that all the ideas used in WP7 were obsolete even before WP7 was released so WP7 phones cannot become game changers as is. The problem is not technical the problem is with ideas. The biggest problem with Microsoft is the corporate culture targeted at creating stars making it really hard to hear sound critique when it’s needed most. So success of WP7 turns into a mirage of success brilliantly presented.

From afar we may speculate on what Andy Lee is going to do in his new position. I personally think he is to supervise Nokia-Microsoft deal. Anyway he is the contact between Stephen Elop and Steve Balmer on business matters. It often seems to me that Elop reports to the Microsoft board instead of the Nokia’s (although it is outrageous to assume something like that). It is Andy Lee who is responsible for the company’s decision not to use dual core processors in the next generation of their phones which was supposed to be released in fall 2011. If we try to see a pattern in the news around the companies we might assume that Microsoft is working on a new structure for its assets (both for development and production). But anyway we can surely congratulate Andy Lee with the promotion.

Probably the most convincing proof of WP7 unpopularity is the fact that Microsoft is launching its own services for other platforms, most importantly for iOS and Android like SkyDrive and integration with XBOX 360 (WP7 has some unique features concerning this console so far). But basically Microsoft is depriving WP7 of any unique features that could be its marketing advantages due to the very limited size of WP7 market. It is sad because it leaves this OS very few hopes for a future.

P.S. Have a nice week and holiday fuss. Be inventive with gifts for your family and friends but most importantly – smile.

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Spillikins №150. Blackberry Runs Out of Ideas

Contents:

RIM in Hot Water: No More Ideas

Another Hellish Week for Nokia

Microsoft and WP7 – Trouble in Paradise

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