How Research In Slow Motion can get on the Fast Track Again

NASDAQ:RIMM stock chart with volatility as at September 29, 2011

Demonstration of how Apple’s FaceTime works on iOS devices, which is now also supported with Mac computers. Source: CNet

Demonstration of Skype for BlackBerry, only available in the U.S. for Verizon customers. International users are not able to use the app to make VoIP calls or chat with Skype friends. Source: CrackBerry, via YouTube

Adobe engineer demonstrates how developers could use Adobe Air to create a single code base for applications that can be used to run the apps on multiple operating systems. Source: Adobe, via YouTube

RIM’s overhauled BlackBerry Bold 9900, includes capacitive display and keyboard. Source: RIM, via Bloomberg

The Ontario-based BlackBerry maker, Research In Motion LLC (RIM), continues to disappoint investors, as sales and free cash flow to equity significantly declined in the pervious fiscal quarter as a direct result of still not having released a competitive device more than a year after Apple launched its iPhone 4 – in fact, Apple will announce the next generation iPhone next Tuesday.

Investors largely blame top management for being too slow to innovate coupled with a corporate structure filled with intermediaries and lack of accountability that works counter-intuitively in facilitating efficient information flows, decision-making, and innovation.

Despite the significant downturn, the company holds over 2,000 patents, and is the market leader in providing enterprises with the most secure mobile communication and management infrastructure. However, competitors are now able to offer many of those core BlackBerry features in their own products with a better user experience and on a more cost-effective basis.

But, it isn’t too late for RIM just yet.

Here are some of the most important things RIM should consider to remain a going concern.

1. Take back control of your own platform:

Apple has been criticized for being notoriously controlling over what apps work on its iOS platform to the point where competitors have raised anti-trust concerns.

Although being too controlling might not be a good thing (and Apple isn’t as controlling today), at least it provides a very consistent user experience, but the same cannot be said about the BlackBerry user experience.

For example, the U.S. telecom Verizon reached an exclusive deal with Skype to make the Skype VoIP/chat app available exclusively only to Verizon BlackBerry customers. As a result, millions of other international Skype/BlackBerry users do not have practical access to Skype (even in Canada) because of the exclusive deal reached between Skype and Verizon in the U.S. – this would have never happened with any Apple product.
As another example, after you’ve restarted your BlackBerry, have you ever noticed new app installation icons (like mobile commerce app Zoom on Telus) on your menu? That’s courtesy of your carrier that has pushed the apps to your device after reaching a deal with the app makers, in the process re-arranging your menu configuration. Even if you delete the service books, after another restart, those apps re-appear. Could you opt out? No.

2. Focus on the user & innovate

One thing Apple really understands is consumer wants, and as a result, people are willing to camp out in front of stores to buy new Apple products.

 RIM needs to re-focus on understanding what consumers want from a mobile device, and to realign focus on allocating resources to meet those wants, instead of focusing on meeting requirements from carriers, partners, and regulators.

The company needs to streamline innovation. BlackBerry Messenger has essentially remained unchanged over the years, how long did it take for RIM to add HTML support in emails, how come a BlackBerry with a front facing camera hasn’t been released yet (albeit we have confirmed RIM is working on a FaceTime competitor that will be integrated in BBM starting with QNX devices)?

3. Facilitate app development & close the “app gap”

Consumers opt for competing handsets largely because of the “app gap”.

Upcoming QNX powered BlackBerry devices will include an Android simulator, allowing applications designed for Google Android to run on QNX. It is unclear just how well the simulation would work and if developers will easily be able to port apps (see Adobe’s new tool that allows developers to build a single code-base for a single application, and utilize the tool to convert the app to run on multiple operating systems) directly for use on QNX.

In order to encourage developers to adopt the platform, RIM needs to simplify the App World registration process and remove needless excessive fees associated with creating an account and managing developed applications.

RIM should also make the development process more seamless by consolidating the required tools and SDKs into a single system (as is the case with Apple and Google) and should also offer additional tools to developers, including analytical tools, to facilitate app development.

The company has yet to make these changes, and the results are clear when looking at PlayBook sales since developers are not adopting the platform. As QNX will power the next generation of BlackBerry devices, what will push developers to adopt BlackBerry devices if they haven’t already adopted the QNX PlayBook?

4. Finalize products before launch

RIM was heavily criticized for bringing the BlackBerry PlayBook to market without basic core features, including a native email application.

As a result, the PlayBook was really only useful to existing BlackBerry users, as those core features were available after the PlayBook was paired with a BlackBerry device.

Fast forward many months to today after the initial April 2011 PlayBook launch, RIM has yet to release a significant upgrade to the PlayBook QNX operating system, only saying it would do so in the near future.

As a result, PlayBook sales have been very disappointing for the company, prompting a recent report by an analyst that claimed RIM was going to exit the tablet market. RIM immediately refuted the claim saying the rumor was purely fiction – remember the HP touchpad?

To encourage sales, RIM discounted PlayBook prices for a limited time, offering the 16GB version for $299.

5. Keep BBM relevant

BBM is the main driver (it’s not the apps, right?) that keeps consumers loyal to BlackBerry, especially for those people who have accumulated a significant number of people on their list.

Apple is about to release a BBM competitor, iMessage, that will include Read and Delivered receipts, and it will even sync conversations across all iOS devices, including the iPad (you can’t even use BBM on the PlayBook without having it paired with a BlackBerry device).

If users have a significantly better user experience on iOS, with the advantages of BBM (and more), coupled with cost advantages vs. BIS/BES, people will quickly defect to iOS.

RIM’s challenge is to keep BBM competitive and relevant, somehow.

6. Enhance e-mail experience

As an email centric device, the BlackBerry does not offer a highly integrated email experience. Users are still not able to retrieve past emails on BIS, and Gmail isn’t as comprehensive as the web version.

7. Ease data compression

BlackBerry routes and compresses data flow through its servers, making load times slower compared to competing products. This method, although cost-effective, also compresses data for YouTube videos, resulting in very poor quality video playback. Consumers hate that.

8. Provide more consistent investor guidance

On several occasions, management revised forward expected earnings per share (EPS), and even entirely missed PlayBook sales forecasts in the last fiscal quarter. Investors rely on management guidance in developing pro forma valuations, forecasting free cash flow and intrinsic value in order to make investment decisions. How can analysts and investors rely on management guidance if even internal information is not reliable and consistent? They can’t.

9. Increase Research and Development expenditure

RIM is already moving in the right direction by investing more in R&D, which is up 9.1% over the same period last year to $381-million in Q2 2011.

10. Continue to drive down costs

11. Buy back additional shares

The company repurchased $187-million of outstanding common shares in Q2 2011, up almost 17% year-over-year.

Firms buyback shares if management believes shares are undervalued relative to current market value.

A share buyback could dilute EPS if it is financed with leverage, but serves as a defense mechanism against a hostile shareholder.

It was reported that billionaire investor activist Carl Icahn purchased a significant stake in RIM, but it has yet to be confirmed by either Icahn’s camp nor RIM.

Some could argue that a patent sell off, or an acquisition would maximize shareholder value.

Saying it would be exceedingly difficult for management to forecast future expected sales and earnings today would be an understatement, but top management maintains they have things under control, implying anything other than buying back shares today would not be in the best interest of shareholders.

12. A closer look at Return on Equity (ROE)

Return on equity is equal to net income divided by total equity, but, through Du Pont analysis, we can break down ROE to better understand the driving factors that change ROE.

The extended ROE formula equals Tax Burden * Interest Burden * EBIT Margin * Asset Turnover * Financial Leverage

Looking at financial data from Morningstar, the driving factors dragging ROE down is Operating Income (EBIT, down 62.32% in Q2 2011 YoY) due to lower profit margins, and the substantial decline in cash that is putting downward pressure on total assets.

It is clear that RIM must invest in R&D to innovate in order to drive gross profit up, hence increasing EBIT and to generate more cash. Tax burden, financial leverage, and interest burden are more marginal in explaining ROE.