How RIM’s very success can boomerang
Just a few years ago, Research In Motion Ltd. (RIM-T24.260.140.58%)network of servers was a world-beater.
The company spent millions of dollars building an infrastructure that allowed it to deliver “push,” or near-instant e-mail messages from one BlackBerry to another. And carriers that partnered with RIM didn’t have to worry about data traffic putting pressure on their own networks, since RIM did a lot of the heavy lifting.
But today, push e-mail is more of a commodity service than a premium perk, and carriers have invested billions into beefing up their own networks to handle the massive data traffic generated by iPhones, iPads and a slew of other mobile devices. At the same time, the reputation RIM has built for secure, reliable communication has turned into a double-edged sword – while few people blink an eye at the occasional carrier network outage, the BlackBerry brand’s reputation for near-constant uptime means users react with much less patience when the system does go down.
Never has that been more clear than this week, as service outages hit tens of millions of BlackBerry users around the world for up to three days.
In a conference call on Thursday, Research In Motion co-chief executive officers Mike Lazaridis and Jim Balsillie were asked whether it was fair to say that this kind of outage couldn’t have happened with any of the other major smart phone platforms, such as Android and iPhone.
“I would not characterize that as fair,” Mr. Lazaridis replied. “We run a global, secure push environment that provides the kind instant messaging that’s made BlackBerry so compelling and so valuable.”
In a way, both the reporter and Mr. Lazaridis were right. Other smart phones tend to transmit data through individual carrier networks. So, for example, if there’s a crash in the servers other firms uses to route iPhone traffic, only those firms' iPhone users are affected. But in the case of RIM, which routes all BlackBerry data internally through its own servers, a system crash can cause disruptions to most or all BlackBerry users on entire continents at a time.
“Some of the premium has bled out [of the BlackBerry network infrastructure],” said Colin Gillis, senior technology analyst at BGC Financial. “No one really cares about bandwidth savings, and their high security has raised issues in some countries.”
The issue of security and encryption perhaps best illustrates the double-edged sword phenomenon RIM now faces. The company’s mobile devices, originally designed for corporate and government clients, have by far the strongest security features of any commercially available smart phone. But what has long been a major selling point for corporate clients isn’t as big a lure to the growing consumer market. Instead, RIM’s best-in-class security has often caused the company headaches, as governments of numerous countries around the world threatened to shut BlackBerry services down in their jurisdictions last year because they were unable to monitor traffic among the smart phones.
But while RIM’s infrastructure put the company in the spotlight for all the wrong reasons this week, it has also given the company one of its most powerful weapons in the smart phone war – a large base of extremely loyal, valuable customers.
“RIM trades around $180 (U.S.) per user. It may sound expensive, but these users generate $60 of service revenue each year and about a third of them are high value, low churn corporate users,” Bernstein senior research analyst Pierre Ferragu said in a recent note analyzing the value of RIM as a takeover target.
“I would also believe that if a lot of them probably plan to drop BlackBerry soon because current phones do not compete with other smart phones, most of them also somewhat value the quality of BlackBerry’s e-mail and messaging experience.”
By comparison, Mr. Ferragu noted, Microsoft recently paid about $50 per user in its acquisition of Internet phone company Skype. The average Skype user, however, generates about $5 of revenue a year.
Fortunately for RIM, the black eye their infrastructure suffered this past week will likely soon be forgotten. The company has a chance to regain a hold on the news agenda this coming week with the start of its annual North American developer’s conference in San Francisco. During that time, RIM is expected to launch a number of major improvements to its Playbook tablet, and possibly release new information on its new lineup of phones running on the QNX operating system.
“For them the real issue is, can they pump out some compelling QNX-based phones?” Mr. Gillis said. “Their big transition is still in front of them.”
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