Understanding RIMM #1: Problem in One Word
Thursday, the Wall Street Journal headlined: In Australia, Companies Flee BlackBerry for iPhone. What is happening? Research in Motion (NASDAQ: RIMM) used to be such a darling company. Revenue from 2002 to 2011 increased 67x, and EPS climbed from -$0.02 to $6.34. Its Blackberry Enterprise Server was the darling of the enterprise noted for its security and ease of use. What happened? The answer can be found in a single word that has implications for the investor.
I should state that I am a big Apple fan (though hopefully not a fanatic), but I wish RIM no ill. In fact, I have always hoped that they would develop a good line of products to keep Apple on their toes. After all, Competition is good!
What Happened – A Lesson in Psychology
The simple answer is that they have totally flubbed the move from feature phones to the modern smartphone and tablets. The Blackberry Storm did not go over well, largely due to quality of interface issues, and the PlayBook tablet was a total flop.
But for the investor this information is not enough. This is 20/20 hindsight. By the time RIM dropped to a four year low on June 17, 2011, it was too late. We want to know: How did such a smart company make such a huge mistake? What where the early warning signs?
To my mind there is a simple answer, that ancient character flaw: hubris!
For a decade RIM was riding high. They had the answers. And so when Apple (NASDAQ: AAPL) entered the phone business with the iPhone, they quickly dismissed it as an upstart. This, however, was a huge error. For the next several years, the co-CEOs Lazaridis and Balsillie came out with a series of completely asinine statements regarding the iPhone.
- Balsillie on the iPhone in February 2007: “It’s kind of one more entrant into an already very busy space with lots of choice for consumers … But in terms of a sort of a sea-change for BlackBerry, I would think that’s overstating it.”
- In May 2008, Mike Lazaridis called QWERTY keyboards the most exciting trend in mobile.
Statements such as these indicate that the people are simply out of touch with reality. You did not have to be an Apple fanboy to see that the iPhone was a game-changing product. You did not have to be a wizard to see that Google’s (NASDAQ: GOOG) Android platform had legs. No one really guessed the extent of the revolution the iPhone would cause, but it clearly was not something to be taken lightly.
Yet from their statements, they apparently did. It is clear that they were in total denial regarding the situation. This may be very natural psychologically, but it is also a recipe for disaster economically. So I think there is a good lesson here. Watch out for signs of delusion in CEOs.
As they say, Pride goes before fall.
Non-technical people do not understand one very important thing:
- To create an operating system is really difficult!
Apple floundered for many years trying to build a modern OS before finally buying NeXT to become OSX – and that is based on Open BSD Unix, a pre-existing core. This is the source of Windows problems (IMHO), they keep trying to reinvent the wheel. (But I might be mistaken here.) In any case, my point is that most people do not understand the incredible complexity of a modern OS, there are literally hundreds of engineer-years, maybe even hundreds of engineer-centuries of work involved. There are layers upon layers of concentric levels, like an onion. [Perhaps I will explain all this in a future set of articles.]
I believe that this is one of Research in Motion’s problems. They, too are trying to reinvent the wheel with their own OS, QNX. (But that is another story.)
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