There is no doubt that the wide moat stands as one of the most durable metaphors of investing. It’s important to
remember, however, that a moat will only repel a ground assault. The invention of aircraft pretty much made moats and trenches worthless in warfare.
Similarly, moats around businesses can give investors and management a false sense of security. Even after the enemy rappels down into the castle, its inhabitants are at a loss to explain what has occurred. This pretty much sums up the dynamic between Research In Motion(RIMM) and Apple(AAPL). The biggest risk to a moat is not from incremental improvement, but from the creation of an entirely new product category which makes the moat and castle obsolete.
John Gruber has a wonderful post at Daring Fireball, explaining how Clayton Christensen, author of The Innovator’s Dilemma, got the iPhone wrong. But while, Christensen later realized his mistake and explains it in a recent interview. RIM still doesn’t get it. The company continues to sell the product it knows how to make, rather then the one people now want. They continue to make phones with email, when people want small computers with phone apps. There should be no surprise as each quarter is progressively worse, and as the company repeatedly misses targets it had lowered just weeks before. The company’s trajectory is inexorably towards zero. The only wild card is whether someone jumps in to buy it for its intellectual property before it gets there. But, as Eastman Kodak owners and others have found out, sometimes, that doesn’t happen. It is true that RIM has a big cash pile and does not have the legacy pension obligations or debt that Kodak had, but in a downward spiral caused by disruptive technology, the business decline is generally steeper than the most pessimistic projections.
In our mind this is a huge value trap, and we find it difficult to see any bull case other than the hope of a white knight. We’re sure, however, that some of our readers will disagree, and we look forward to hearing the bull case, and perhaps even being convinced.
Disclosure: The author holds no position in any stock mentioned
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The way I see it, most of the money that will be made in the smartphone market will be in selling software (most importantly the operating system). Historically this has been the case as manufacturing PC hardware (e.g. IBM, which created the PC market) hasn’t been as profitable as making the software (e.g. Microsoft). Software has the greatest opportunities for value creation since it costs so little to duplicate/make after your R&D costs.
I definitely think that RIM will lose market share to iOS/Android/Windows in the operating system market. But, there is the possibility that it can carve out a profitable niche in the corporate/enterprise market.
They also have a base of loyal consumer customers who love the physical keyboard and BBM. And in iPhone’s early days a lot of users switched back to Blackberry for these reasons. Blackberry may be able to make money by putting this business in ‘harvest’ mode and milking what’s left of its dying consumer market. Its phones also do well internationally and that may be why its subscriber base grew (insignificantly).
2- Balsillie was supposedly going to transform the company into a software company but he was forced out. He wanted to open up BBM to other hardware manufacturers.
2b- It seems that the current CEO will try to fight for the overall smartphone OS market and this may be a bad move. Technically, they are developing an entirely new OS based on the QNX acquisition (historically, rewriting software usually does not end very well… look at Netscape). Financially, the return on investment may be questionable. If RIM tries to fight to maintain market share (and I think it will) then I guess I won’t be a happy camper. RIM is trying to do this while slashing its workforce.
3- The problem with RIM may be its board of directors. They are too concerned with keeping their own jobs and engaging in that political game than trying to make money. RIM can and should throw in the towel on fighting iOS, Android, and Windows Phone. It doesn’t have to make hardware. It will make more money by focusing on software.
RIM naysayers may be correct about the death spiral.
(Unfortunately, I own RIM stock.)