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Summary:

Research In Motion shares took a beating on Friday and several analysts cut their ratings on the stock after the company posted disappointing sales for its fiscal second quarter and ratcheted down expectations for the current one. But while increasing competition and ever-dwindling price points may […]

RIM Co-CEO Research In Motion shares took a beating on Friday and several analysts cut their ratings on the stock after the company posted disappointing sales for its fiscal second quarter and ratcheted down expectations for the current one. But while increasing competition and ever-dwindling price points may make for a rough few months in the smartphone market, RIM’s long-term prospects will hinge on the success of its new app store.

Smartphone manufacturing is becoming a cutthroat business as the space heats up. Verizon Wireless — which has provided a huge boost to BlackBerry sales with its buy-one, get-one offer — is slated to launch several competing devices in the coming months, and the iPhone appears to be making substantial headway into the enterprise. In the meantime, margins are thinning as carriers look to target data-hungry customers with high-tech handsets that sell for less than $100. Those factors don’t bode well for RIM, whose products aside from the Storm are “largely unchanged from a year ago,” Deutsche Bank analyst Brian Modoff wrote in a research note released today:

“We see several dozen new smartphones coming on stream in the next six months. This includes solid offerings from Motorola, Palm, HTC, Samsung and LG. Our checks with carriers indicate that they are looking to drive smartphone prices to subsidized levels below $100. RIM may be able to manage its bill of materials down in this environment, but we think price declines will have an impact on gross margins. And this transition will likely be a painful process.”

The BlackBerry has deftly morphed from a business-focused handset to a more consumer-friendly device, and sales have been impressive even as Apple’s iPhone has taken consumers (and the entire smartphone industry) by storm. The Curve actually outsold the iPhone in the first quarter of the year, and RIM claims that more than 80 percent of its new customers last quarter were non-business users who chose the BlackBerry over devices such as the iPhone, Palm Pre and Android devices. But with a slew of attractive new smartphones coming to market and pricing continue to fall, I think that kind of momentum will be impossible to maintain, and I expect RIM to lose ground over the next few months.

Which is why RIM’s app storefront will be key to the firm’s long-term success. Just as Apple’s App Store and iTunes drive sales of the company’s hardware, App World — which has received generally positive reviews — must be attractive enough to lure users away from all the other smartphones on the market. And while Apple has built its empire largely on the strength of free or cheap gimmicky apps, I think RIM has a real opportunity to market App World as a high-end retail for on-the-go users — allowing the company to polish its image as it creates a lucrative new revenue stream with premium mobile applications.

That won’t be easy in the fiercely competitive space, of course, especially when carriers like Verizon Wireless are trying to elbow it off the app distribution playground (GigaOM Pro, sub required). But if RIM can continue to attract developers and build out an attractive storefront — and if it can churn out sexy, user-friendly handsets — it will fare well in the superphone era.

Photo courtesy of Ndevil via Flickr

This article also appeared on BusinessWeek.com.

  1. The Blackberry OS is archaic which greatly limits what can be done with app development.

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  2. it may seem RIM is doing well with 80% of its customers being non-biz. While I’m not sure I completely believe that number. The more important aspect I think is how much of the 80% is from Verizon Wireless – where they do not have a choice of iPhone, Palm Pre or Android. Wonder how many “consumers’ choose RIIM when they can choose among these ? If I were RIM, that is what I’d worry about …

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    1. @WK24

      Given that Verizon is going to soon launch Pre and an Android phone from Motorola, we should soon see how things are going to work out for RIM over on Verizon.

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  3. Interesting question is whether any of the device specific ’boutique’ stores (other than iTunes) will compete with the appstore ‘department stores.’ If you look at the numbers that people like Getjar are putting up (Yes, we are an investor, so we are biased), hard to see which of the current “boutique” stores are keeping up. Chris Dury has a great preso comparing the stores and their incentive systems at … http://blog.getjar.com/developer/marketing/an-app-store-comparison/

    Rich Wong
    Accel Partners

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  4. [...] As I was loading up my blog to post this, I saw a very relevant argument that Blackberry needs to step up their efforts in the app store.  Worth a read… Share and [...]

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  5. Apple didn’t build its mobile “empire” on “free or cheap gimmicky apps”. It built its empire on the strength of its interface, web browser, multimedia capability, and the fact that it was the first truly mass-market friendly smart phone to address the consumer marketplace.

    If RIM can augment its messaging strength and use App World to provide much of the same fun and functionality as the iPhone, it will continue to get its piece of the consumer pie while holding off Apple in the enterprise market.

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  6. @wk24

    You’re right that VZW subscribers are pretty limited in terms of handset choices, but I think that represents a huge opportunity for RIM. If they can build a gotta-have device on the nation’s largest, most solid network, they’ll be in the catbird’s seat.

    @deverwarner

    I don’t mean to disparage Apple, and I’ve consistently acknowledged the company’s role as a revolutionary force in mobile data. But a linchpin of the iPhone’s success is the App Store, which teems with novelty apps sold for a few bucks apiece. I think that only demonstrates the potential that exists for players who can build a top-notch marketplace for useful, life-enhancing apps sold at a premium.

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  7. Maybe I’m misreading, but you make it sound as if App World, the storefront, is the most important part — not everything that is required to make App World itself a success: a strong, broad API with an attractive SDK; a large, productive developer community; an efficient and practical “approval” process; a number of successful business cases, large and small; and… an attractive, efficient storefront.

    The storefront itself is a difficult challenge. Apple’s App Store is far from perfect, but I don’t think it’s broken. There’s also a long way to go in improvement and innovation, but it’s not “broken” broken. Copying seems like it should be easy to me, but then again, everyone seems to be having a hard time copying. Android and Pre have their own touches but still haven’t duplicated many of the App Stores features. Maybe RIM can make a great App World. But that’s just the storefront.

    Many seem seduced by the application storefront because it becomes a convenient metric. It’s a necessary and important platform outlet to the consumer now, no doubt, but it’s not necessarily the key to platform success.

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    1. I would underscore Tim’s point. Most people seem to equate the App Store as primarily a virtual storefront with one-click purchase, download and install as its main source of goodness.

      Analogous to the auto showroom, if what rolls off the assembly line looks more like a Chrysler than a BMW, they aint gonna sell a lot of cars. That the vehicle of an iPhone App is so compelling to many is a function of the Dev Tools AND the App Store model AND the Device.

      Pull out any one piece, and experientially, it is a lower life form.

      Check out:

      iPhones, App Stores and Ecosystems
      http://bit.ly/xcP8T

      For more fodder on this one.

      Mark

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  8. There’s ultimately only room for 2 or 3 operating systems in the mobile arena, much like in the PC space. I don’t expect that RIM has a long term future (as an operating system), as it is too expensive to keep it up to date. Maybe there are enough Blackberries around to sustain it for some time, but it’s hard to see them keeping pace with the Android camp or even Apple.
    RIM need to decide what their core competence is; device design or building unique services within their ecosystem. If they choose the former, then they should be looking at a migration to one of the other operating systems (and ecosystems), if the latter, then they should partner with hardware manufacturers and concentrate on the software and service.

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  9. With all of the open source ware being developed, I think it’s only a matter of time before we really don’t need to worry as much. It seems there is more demand for what people want VS what people are offered as the end all. There are already many hand held devices that have been modified to use linux systems and apparently work quite well. I think developers should focus on other areas, as Paul mentioned.

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  10. Actually, AppWorld has proven to be a great growth driver for us, but not because people pay for our app, but because we can use our free app to drive sales of various services we offer.

    In contrast, GetJar and others have proven to be absolutely useless, both for driving downloads and for acquiring interesting customers. Iphone’s AppStore is too unpredictable – with a 4 month approval time for our app last time. And Android customers seem in general to be uninterested in paying for anything ever and not only that, they complain about ads.

    That said, RIMM really needs to do some work on AppWorld – more quickly approve apps, provide ways to respond to comments, etc… But it shows good promise.

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