Tuesday, May 17, 2005

Will “CrackBerry” addicts soon face an intervention?

Research in Motion (RIM) recently reached the three million user milestone for its BlackBerry products and services and reaffirmed its status as the dominant player in the wireless e-mail market. RIM grew relatively quickly from the small firm that developed and launched the first product in the market to become the leading provider of servers, software, and handheld devices that provide wireless e-mail access and integrate it with wireless internet and mobile phone capabilities. RIM’s status as the innovator and first mover has generated a cult following earning the “Crackberry” nickname. Even as positive news regarding sales and strategic partnerships continues to emerge for RIM, analysts and journalists raise questions as to the company’s ability to sustain its position.
The speculation seems to be driven not only by competitive entry, but also by the way in which newer players seek to redefine the category. Mobile phone manufacturers, such as Motorola, Nokia, and Samsung, are planning to introduce smart phone devices similar to PalmOne’s Treo. These devices can incorporate digital photography and digital music. A number of companies are entering the network and service market as well. Smaller firms offer systems similar to those offered by RIM that include servers, software, and devices. Microsoft has focused its efforts on a software platform that can be run by multiple handheld devices. It currently offers software that supports wireless e-mail, requires no additional servers, and seamlessly integrates with its widely used Microsoft Exchange e-mail server software. According to product reviews like those published in BusinessWeek last month, the point of difference that inspires user loyalty to RIM’s BlackBerry products the “push e-mail” technology that allows a real time connection between a mobile device and an e-mail server. Microsoft is developing upgrades to eliminate that point of difference and will soon launch its Magneto software.
Analysts are divided on the issue of whether RIM will be able to withstand a barrage of current and potential competitive threats. While most analysts agree that RIM’s high share price reflects the company’s bright short-term prospects, the jury is still out on whether the company will be able to sustain its dominant position in the long-term. Hardware currently comprises 70% of RIM’s revenue. CSFB praises RIM’s efforts to shift its reliance on hardware to new applications like CRM and calls it a “key initiative to avoid commoditization and expand the addressable market.” Bear Stearns and Forbes both assert that RIM’s expansion into emerging markets will help it sustain its current market leadership position. Its expansion into China is particularly noteworthy as Deutsche Bank estimates a CAGR of 13.3% in this market. As RIM increases its globalization, it will increase its exposure to the foreign exchange risks associated with multi-national operations. Even currently, RIM’s revenues and raw materials are denominated in US dollars, while a substantial portion of its operating costs are denominated in Canadian dollars. While hedging reduces this risk, Smith Barney argues that it does not eliminate it, especially with the recent volatility of the exchange rate of the dollar versus other currencies.
With respect to competition, Deutsche Bank argues that Microsoft’s Magneto OS for wireless devices will pose a credible threat to RIM. Conversely, Smith Barney argues that the Magneto will not pose an immediate threat due to the time required to develop the necessary hardware and launch a product integrated with the new software. Forbes and Motley Fool contend that larger handset vendors are capable of competing against RIM, and Deutsche Bank states that “despite [RIM’s] award winning design and ease of use, ultimately it is not a very sophisticated device, which could be replaced by a newer design…just as regularly happens in the mobile phone handset space.” Despite the potential commoditization of RIM’s hardware, Forbes and CSFB believe that RIM will be able to defend its territory with its established Blackberry Enterprise Servers (BES) and partnerships with global wireless carriers and software providers. In addition, some argue that RIM’s loyal cult following for its Blackberry platform will serve as a strong line of defense for its dominant market position.
As the first mover in the wireless e-mail market, RIM has constructed some barriers to entry that have protected it from competition. The company has established sales and service partnerships with all of the large wireless service providers in the United States and continues to extend its partnerships around the world. As a result, RIM has been able to build its large customer base of corporations and consumers. Its push e-mail technology has remained unique in the market, and RIM’s partners develop additional applications that can be run on the BlackBerry platform. The superior products and services have allowed the company to retain and grow its share of the market.
RIM’s dominance of the market seems poised to fade. Excess profits draw competitors to the market, and entrants are ready to redefine the category that RIM created. RIM is vulnerable because competitors have the ability to offer products that provide both core email service and features that BlackBerry devices do not currently offer, such as digital cameras and mp3 players. While some might argue that these features are unimportant to RIM’s traditional demographic, market trends clearly demonstrate that consumers increasingly seek such features. Consumers are confronted with the discomfort of carrying multiple devices, and all-in-one devices resolve this tension. PalmOne and Hewlett Packard have slowly started attracting RIM’s traditional demographic (professional consumers). Such competition increasingly fragments what will have once been predominantly RIM’s domain. These devices may also appeal to new demographics, such as teenagers and young adults. It is unclear whether RIM has the technological resources to produce such an all-in-one device. In addition, RIM has and will continue to experience difficulties in its attempts to transfer BlackBerry software to devices manufactured by outside firms. RIM, therefore, is not well positioned to defend itself against competition in the hardware portion of its business or in the software and service business segment.
While some argue that RIM’s established “Blackberry Enterprise Servers” (BES) create high barriers to entry that enable it to maintain its position, this argument presupposes that competitors will be unable to offer technology that achieves a similar, if not better, result. While it may be some time before a competitor like Microsoft is able to achieve the same level of performance in its e-mail technology, competitors will benefit from the foundation that RIM has built and eventually catch up. Nintendo provides an example that illustrates the sequence of events that may occur in the wireless e-mail market. Nintendo once overwhelmingly dominated its market due to its ability to restrict access to desirable games. Ultimately, it surrendered its position to Sony and Microsoft, because the competitors were able to build on the concepts Nintendo had developed and capture market leadership by creating new metrics by which consumers evaluated products.
Though competing devices and software may usurp RIM’s market position in the future, BlackBerry’s branding has built a legacy that will stay with addicts as they adopt new products allowing them to remain in denial. The products have been culturally entrenched through widespread use across American corporations and through celebrity endorsements, particularly the inclusion on Oprah Winfrey’s 2003 list of her favorite things. Customers use BlackBerry as a verb, and compulsive users have inspired the “CrackBerry” nickname. This cultural identity implies that while competitors may redefine the market, RIM will always be credited with the original definition. The brand will likely be the next Rollerblade© as users purchase other brands of devices but refer to them as BlackBerries.
Anita Arbogast, Kate Hacker, and Aarti Patel

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