RIM / Blackberry: one upgrade cycle from oblivion

News that the government is close to giving security clearance for use of smartphones other than Blackberry is another small step in Research in Motion’s (RIM’s) seemingly headlong rush into potential oblivion.

When newly appointed ministers in the coalition government came into Whitehall in 2010, the more tech-savvy among them were asking, “Why can’t I use my iPhone?” There was genuine frustration that they were forced to use Blackberry. Since then, it’s only been a matter of time, and the impending changes to the “impact level” security clearance scheme will open up the government market to new entrants.

The pressure and expectation now placed on the forthcoming – but much delayed – Blackberry 10 operating system and its associated devices to turn around the ailing mobile maker’s fortunes is immense.

If BB10 flops, or is even perceived to be a flop, investors will bail out and the chances of the company surviving in its present form are almost zero. Let’s look at the numbers.

RIM’s market value peaked in May 2008 at over $78bn. Today it’s worth just $3.8bn. The company’s book value – its total assets less liabilities – is $9.6bn.

You could buy all of RIM, even at a 100% premium to its current share price, pay off its liabilities, sell all its assets, and be left with a profit of $2bn. You don’t get a much bigger turnaround challenge in business than that.

If the share price drops further after BB10, the firm becomes a bargain too good to ignore for likely predators such as Microsoft/Nokia, Google/Motorola, Samsung, or even IBM – the latter was recently rumoured to have enquired about RIM’s enterprise business.

Look at the numbers another way.

RIM has about 78 million subscribers for Blackberry worldwide. Estimates of the firm’s average revenue per user (ARPU) seem to vary depending on where you read them, but at the most simplistic calculation, with total sales of $18.4bn in its fiscal year to March 2012 (and bear in mind that quarterly revenue since has plummeted), that gives an ARPU of $235 per year.

So if you bought RIM today at, say, a 30% stock price premium (typically sufficient to persuade shareholders to sell), then upgrade only half of the current subscriber base to a new device such as Android or Windows Phone, and even if the ARPU drops by, say, 25%, then your first-year post-acquisition revenue still exceeds the purchase price by $1.8bn.

RIM makes a gross profit margin of around 30% (but a net loss of over $500m in its most recent quarter), so if you strip out much of the firm’s costs, you recoup your acquisition price within three years.

I’m not a stock market expert, but that sounds like a good deal to me.

RIM’s financial report acknowledges that its business heartland is being chipped away by the rise of bring your own device (BYOD) schemes, so it needs to convince consumers that they want a Blackberry rather than an iPhone or Android device. RIM’s competitive edge came from the security of email through Blackberry Exchange Server, but there are security software packages for other mobile environments now too.

Outside of teenagers who love Blackberry Messenger – who aren’t exactly business users – fewer people today turn to Blackberry as their smartphone of choice. RIM is trying to attract app developers to make the platform more appealing, but with limited success. With most mobile contracts lasting between 12 and 18 months, Blackberry could be one upgrade cycle away from vanishing.

And it’s worth mentioning that the latest iPhone 5 is expected to be released before BB10, re-setting consumer expectations of their smartphone yet again.

In the not-too-distant future, MBA students will be reading extensive case studies about RIM. There’s an outside chance they might be reading about a great business turnaround, an example to all firms of how to turn decline into success.

More likely, they will be reading about how a technology company that was once dominant in its market disappeared into oblivion in barely five years, thanks to the relentless pace of innovation and technological change.

Oh, and RIM won’t be the only one.

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