The Sunday Brief

Greetings from Kansas City, where we are abuzz with football hopes after Monday night’s Chiefs opening win.  I was reminded that the meteorological summer had not ended on Monday, when the “cash acquisition” theme was capped off with the $460 million cash acquisition of Cavalier Telelphone by Paetec.  That was a very nice punctuation to what had already been a very active M&A summer.  Paetec has been successful at integrating previous acquisitions, and will definitely be able to take advantage of the fiber resources of Cavalier.  And another great headline for M/C Ventures, Cavalier’s primary shareholder.

To carry through the themes from last week’s Sunday Brief, this week also witnessed the resignation of LG Electronics’ CEO Nam Young. LG, like Nokia, has struggled to find its footing in the smartphone world. The feature phone market is rapidly changing and being number three ain’t what it used to be.  Best wishes to the new CEO, Koo Bon-joon.

In a media world determined to pick winners and losers, Blackberry is a favorite target.  The Canadian-based smartphone producer and services provider announced earnings on Thursday, in which revenues grew 9% on a quarterly basis and 31% on an annual basis.  Gross margins were a respectable 44.5%.  They grew their base of Blackberry users by 4.5 million, ending at 50 million users.  Service revenues are now 17% of the company’s total quarterly revenue stream and are running at a $2.9 billion annualized rate.  They are diversifying globally, with 45% of their subscriber base outside of North America.  To satisfy nervous shareholders, they bought back shares at a rapid clip, but still have $2 billion in cash on hand and no debt.

Even with the strong report, many are questioning whether Research In Motion can survive by lumping RIM in the same category as Nokia, LG, and Sony-Ericsson.  If you look at a stock table comparing Nokia and RIM, it’s hard to get excited about either of them (RIM is down 42% vs. last year, and Nokia is down 36%).  But RIM and Nokia are fundamentally different companies with different survival strategies.

The Blackberry is synonymous with consistency and reliability.  It’s a fixture at most businesses, and, at least for now, occupies the position of affordability – the Chevrolet of smartphones.  Few complain about the battery life on their Blackberry.  And in email – the original paid app – they are the worldwide standard.

So why the dismal outlook and negative sentiment?  Three reasons:

1. Blackberry has not achieved a foothold beyond email.  Their applications store has just over 10,000 applications, but 4,100 are wallpaper/ themes (24%) or reference/ eBooks (17%).   Compare that to the iTunes store at 43,000 books alone.  This column has criticized the lack of a serious business applications leader – Blackberry, it’s yours for the taking, but Apple is catching up – fast.
2. Blackberry is not known for bandwidth.  We are in the infancy of 4G phones, while Blackberry touts the upgrading of their two most popular phones, the Curve and Pearl, to 3G.  They have more experience in global applications management (bandwidth, load balancing, redundancy, etc.) than any of their peers.  While they have the pieces in place to forge a 4G product line, do they have the strategy?  Could Blackberry overtake iPhone4 and HTC as a leader in high-end devices?  It’s not an impossibility – a business grade video product would be ideal.
3. Blackberry needs business buddies.  Over the past three years, Blackberry has scaled.  Three years ago when Apple was introducing the first generation iPhone, RIM was shipping 3 million devices in the fiscal second quarter on a total base of 10.5 million users.  Since the iPhone launch, Blackberry shipments have grown four-fold and the base has grown nearly five-fold.  But they got that base on the back of (non-North America) consumer growth.  Consumer distribution has become harder, however, with everyone else jumping on the Android bus.  As we pointed out in the “Android Nation” Sunday Brief, Blackberry has no flagship carrier, and Android has become the flagship for Verizon, Sprint, and T-Mobile.  Blackberry needs business partners – Cisco, IBM, and an even stronger relationship with Microsoft would be a good starting point.  On distribution, they could be the thread that knits cable business product lines together.  Or they could enable challengers to the larger players, combining applications and bandwidth to create a secure, consistent solution for business that is carrier independent (imagine Blackberry as the M2M enabler for a host of business applications – not out of the realm of possibility).

On the conference call, the first question on Q&A was “Can/ how will you remain competitive?”  Here’s how their co-CEO answered the question (full Seeking Alpha transcript can be found here):

Sure. I mean, there’s such an interesting dynamic going on in the market because first of all, I mean, I think when you talk about sort of platform and design and future aspects, and I think you’re going to be pleasantly surprised at Dev Con in a week Monday, so I can’t really give you too much here but I think you’re going to be really interested there. So I think the more aspects design philosophy are going to come out there.

And I think in terms of what BlackBerry does, it still has a tremendous number of attributes that really serve the market in the way that we align it for the service and for the carrier and for the segment that’s supposed to address, and I think it’s dangerous to frame all this in a high end arms race and I think you’re going to see our capacity to go beyond what could have been expected by anyone and yet, still address the issues of cost effectiveness, security, efficiency, and desired form factors, so our specialty has been in resolving a paradox and if you don’t resolve that, if you don’t innovate to resolve that paradox, robbing Peter to pay Paul isn’t really a solution because you’re just shifting strategies and so the feature phone is upgrading to a Smartphone.

You know I think our guidance just shows what’s happening and if you saw the road map and you saw the engagement strategies you would see that we’re being very prudent in our approaches but this is really a promising space.

And we can address lots of segments and we can still respect carrier alignment and efficiency and different price points, but I think you’re going to see the ability to I don’t know how to say it better than – other than resolve the paradox because if you make these things so high end that they’re not addressable to the market or they are so consumptive of the networks they can’t scale, that’s not what we originally designed our business for and what we’ve done is innovate to really avail the capability but still not sell out our lineage and that’s the paradox that we’re resolving. So, but be careful that just because you don’t jump to Peter and abandon Paul, to sort of carry on with that sort of approach, that we don’t have an answer, but you know we’re trying to innovate forward our business, not be strategically erratic.

So the core BlackBerry aspects are well defended and while it looked after and protected but it’s in a space where people have mushrooming expectations of what these things can do, and that’s the essence of the paradox and all I can say is it won’t take long before you see how we’ve done that and I think Torch and BlackBerry 6 is really an excellent step forward and that’s why you’ve seen – you know the promo campaigns are just starting but that’s why you’ve seen the jump in guidance and subs in fact.

So, you know, I hope I answered your question. It’s a bit of a, it’s hard for me to answer too directly without sort of violating confidential road map stuff.

While it looks like we have the seeds of a strategy from this answer, it’s not hard to see why many analysts are sanguine on the company.

Bottom line: Google and Apple have moved beyond the carriers, drawing a line for control, but still demonstrating cooperation.  Blackberry, in order to survive, needs to grasp this change and understand that carrier penetration does not equate to success in the smartphone market.  They need to use their base as an asset and grow beyond email.  They cannot do this alone – they need partners.

Next week, we start to look at 3Q headlines.  There are many to choose from.  Thanks for your continued interest in this column – if you have ideas to make it better (topics, etc.) I am all ears.  We are heads down rolling out Mobile Symmetry and very excited by its prospects.

Now for five you may have missed:

1. Google bullying?  Skyhook seems to think so.  More from this TechCrunch article.
2. iPhone devotees are rejoicing that a Google Voice application is now returning to the iTunes store.  Hmmm.  Next up – Google Voice that is non-discriminatory? C’mon, FCC – you can do it.
3. (This one may be a few weeks old – apologies).  Verizon released their restated financials excluding the Frontier spin.  It’s rough out there in the wired world.  Look at the “Wireline-Qtrly” tab.  More on this as we look at 3Q results.
4. Samsung pulled a distribution coup with the announcement of their tablet distribution across AT&T, Sprint, Verizon and T-Mobile channels, garnering much applause.  However, if you are the AT&T sales rep, which one are you selling – the iPad, or the Galaxy?  I get it for Sprint, Verizon and T-Mobile (see “Android Nation” column), but the AT&T channel – don’t count on it.
5. We have noted in several previous columns (notably the “Three Headlines No Telecom CEO Wants to Read” column from last spring) the combination of Chinese ingenuity, pre-paid distribution and Android operating system.  Well, Huawei announced the launch of several new Android-powered phones with cost points between $100-200.

And one:  an excellent analysis by Ars Technica on Apple’s loosening of its programming restrictions.  Have a great week!