Yet another beat-and-raise quarter from Research In Motion keeps the pundits scratching their heads. This shouldn't be happening: "I went into my local Verizon store last month, and they told me Android is outselling Blackberry almost 10:1. How could RIM beat and raise?"
This reminds me of the reaction to the 2004 election when left-wing activists in San Francisco and Manhattan scratched their heads in surprise over George Bush's big win: "I don't know a single person who voted for Bush, so how could he win by 3 million votes?" If all the people you poll are on the Upper West Side or the UC Berkeley campus, well...
There was so much commentary on CNBC repeating the mantra that RIM must really be doing poorly because Apple iOS (iPhone) and Android are beating it everywhere, that I forgot to count the instances. So with RIM beating and raising yet again, what is it that these pundits don't understand?
First, these pundits don't realize that in most of the countries of RIM's main competitor is not Apple or Android, it's Nokia. The Finnish company has about one-third of the world unit market for mobile phones, even though its market share in the U.S. is very close to zero. This means that in many countries, Nokia constitutes close to 50% of the market.
The U.S. smartphone market is uniquely warped, as Motorola CEO Sanjay Jah rarely forgets to remind us. In the U.S., almost all high-end smartphones sell for $200, while there is a second tier around $100 and then others at zero, all with a two-year contract.
Considering that most smartphone monthly bills run about $100, or $2,400 for two years, the upfront price difference is peanuts. Who cares if it's $200, $100 or zero upfront, when I'm really paying $2,400 after that?
As a result of this warped U.S. pricing, the market has tilted heavily in favor of the smartphones most expensive to manufacture, most notably the iPhone and high-end Androids. Why not get the best for only $200? This means RIM is more challenged in the U.S. market.
In most parts of the world, however, there is no effective credit system. As a result, carriers don't subsidize smartphones in exchange for a contract. In those countries, consumers buy smartphones by paying "full price" (typically a price close to manufacturing cost) and then pay-as-you-go. For the smartphone buyer in, say, Indonesia, here is what his choices may look like:
Nokia -- $150
BlackBerry -- $250
Android -- $450
iPhone -- $700
For this Indonesian consumer, who may be spending $40 a month on mobile communications services, this now becomes a meaningful price difference, unlike in the U.S. market. A BlackBerry is a relatively easy step-up from his old Nokia, and it's ideally suited for SMS, which is the only non-voice service he may be using.
RIM is growing primarily because it is crushing Nokia in most countries around the world, in terms of market share shift. These RIM gains don't look to abate for at least the next couple of quarters. The fact that Android and Apple are also gaining is beside the point because Nokia's massive losses outside the U.S. means RIM can feast from Nokia's share decline in at least 100 to 150 countries around the world.
Of course, RIM has fundamental product challenges that will need to be addressed very soon. RIM's new OS launches in March with attractive 3G/4G support by the second half of 2011. This will include a similar shift for RIM's smartphones. RIM will have to fight hard in order to attract competitive developer support in the battle, not only against Android and Apple, but also Microsoft and Hewlett-Packard.
If RIM doesn't succeed in this transition, or the transition is delayed, RIM will eventually have a huge existential problem.
In the meantime, however, pundits will have to learn how markets outside the U.S. work in order to better predict RIM's demise as evidenced by their local Verizon stores. And keep in mind, RIM's guidance for the February 2011 quarter doesn't include a penny's worth of PlayBook (tablet) revenue, although it includes all the associated expenses. What does this say about the upside potential for the May 2011 quarter?
