You’ll recall that I didn’t think that much of Research In Motion’s (Rim) PlayBook – its 7in, Flash-enabled tablet – when I reviewed it in June. Very limited app store, not a great experience to use. The market seems to have agreed, given that the numbers shipped in its second quarter were miles down on the first – from 500,000 to 200,000.
But here’s the problem that the PlayBook poses for Rim: it can’t kill it, because that would mean killing the only outpost it presently has for which developers can code for QNX, the OS that is going to be the basis for its new phones from next year.
Mike Abramsky of RBC Capital Markets on Tuesday issued a biting research note on the company, saying that its shares carry “above average risk” although it does think it will perform as well as the rest of the technology sector.
He outlines three scenarios for the company over the next year or so, including a “bearish” one in which it simply doesn’t manage to make the transition cleanly, kills the PlayBook, sees shipments of handsets fall, and generally gets crunched. His “base case” (expected) scenario still sees Apple (NSDQ: AAPL) winning the high end in the valuable US market, and Android chewing up the commodity market in the middle. A “bullish” scenario sees everything turning up roses, with wonderful tablets and smartphones in 2012 – yet even there, Abramsky is only forecasting 1.9m PlayBooks to be shipped in the next financial year. (Then again, the base case is for 1m to be shipped in that period.)
More generally, he warns that the company could face a cash crunch as it tries to execute its transition to QNX: in the second quarter, its available cash halved to $1.4bn, the lowest level in more than four years, despite revenues being more than four times larger than in 2007. Part of that was down to the purchase of patents with Apple and Microsoft (NSDQ: MSFT). But that cash pile is going to hear a big sucking sound in the near future – and it comes from the PlayBook.
Looking generally at the company, “We don’t see valuation [of the shares] improving until Rim addresses four key issues,” Abramsky wrote. Those included “backwards-looking, uncompetitive products and software”, “[poor] marketing and launch execution”, “investor credibility’ (because of its repeated missed targets on revenues and profits) and “governance” – the complaints from stockholders that the Rim board needs to oversee what the co-CEOs, Jim Balsillie and Mike Lazaridis, are doing more closely.
The only problem with the last, as someone else pointed out to me, is that Balsillie and Lazaridis are the co-founders and own 10% of the shares. It’s not too likely that they’re going to get slung out.
Abramsky says they don’t have much time to get things right: “competitors are bringing their ‘A’ game, and Rim can’t afford to launch products perceived as half-finished or uncompetitive by the market,” he comments. Getting the Android emulation software for the PlayBook to work properly (so it can run apps from that much larger market) becomes important.
The interesting point there is that the BB7 phones launched recently were delayed so that Rim could get them right, whereas the PlayBook was hurried out to meet no particular deadline that anyone could perceive. It was launched without inbuilt email or calendaring (but with Flash! – so now you know precisely how much of a must-have feature that is) in a form factor (7in screen) that hadn’t been proven in the market at the time. The PlayBook looks like Rim’s attempt to catch Apple in tablets, just as the 2008 BlackBerry Storm was to catch the iPhone (though in the latter case, it was Vodafone (NYSE: VOD) which told Rim, and particularly Lazaridis, that the company needed to develop a touchscreen phone; Rim wasn’t going to do it off its own bat. And, arguably, shouldn’t have.)
But Rim is stuck with the PlayBook. Really stuck. It needs a QNX product for developers to aim at. But the cost of shifting whatever proportion of those 700,000-odd PlayBooks remain unsold out of the “channel” – wholesalers and retailers – is going to cost it dear over the next two quarters at least, as it revealed in its earnings call with analysts last week. (The transcript of the Q2 earnings call with Rim over at SeekingAlpha makes for fascinating reading.)
Rim wouldn’t give an average selling price (ASP) for the PlayBook. But Brian Bidulka, Rim’s chief financial officer, admitted: “current PlayBook sell-through is lower than we have forecasted. Additionally, Rim made a strategic investment in certain high-value components related to PlayBook that were in tight supply at the time of the commitment. This has resulted in normal – higher than normal levels of inventory on the balance sheet. In addition to the inventory on Rim’s balance sheet, there is inventory in the channel that we’ll work through with our partners to sell-through over the coming months.”
Now, what does this mean?
?¢ A reasonable guess is that the “high-value components” are the touch screens needed for the PlayBook
?¢ they were in constrained supply because of the Japanese earthquake.
?¢ “sell-through is lower than we have forecasted” means “PlayBooks haven’t sold, and they’re sitting in wholesalers’ and retailers’ stockrooms”.
That’s what the “inventory in the channel” is too. It all adds up to price cuts on PlayBooks in the coming months to try to get them to shift, and get the touchscreens off Rim’s balance sheet (as inventory is just money sitting there doing nothing useful; Tim Cook of Apple thinks of it as being like milk – prone to go off if you don’t get it consumed).
The problem for Rim is that wholesalers are refusing to take the drop, and are obliging Rim to stump up the cash to pay for discounts to shift the PlayBooks.
Co-CEO Mike Lazaridis realises things are bad in the PlayBook App Store: “We recognize that the current availability of content and applications for PlayBook has limited the near-term uptake of the device in the market, and we are actively working with key partners to deliver the most desired applications and content to our targeted market segments.”
Translation: we’re pleading with people to port their apps to QNX. What you can conclude: the PlayBook can’t be killed until there are QNX BlackBerrys.
“Rather than easing these enhancements out little by little into the market, we are planning to bundle a number of significant features and enhancements into a new major software release for PlayBook that will be demonstrated at DevCon in October and released thereafter. The ability to push out upgrades over the year to PlayBook is a significant advantage, and both existing and new PlayBook users will be able to benefit from this new software release when it is available.”
Surely everyone pushes out upgrades over the year. And what’s coming in “PlayBook 2.0”? Well, says Lazaridis, “built-in native email, calendar and contacts; robust enterprise features, including BlackBerry Balance to allow management of personal liable devices; the previously announced Android app player; enhanced web browsing; the availability of new consumer apps and social – [corrects himself] the availability of new consumer apps and multimedia and video content, including BlackBerry video store, which will have 10,000 movies and TV shows available on demand to buy or rent as well as new movie releases on the same day as DVD availability; and of course, with the built-in HDMI output, the ability to enjoy videos on your TV without the need to purchase additional system components”.
Yes, everyone is watching video on their TV using an HDMI cable attached to their PlayBook, because nobody owns Blu-ray or indeed upscaling DVD players any more, and much prefer to rip the DVDs and store them on their 16GB tablets. Something like that. (The real use case is obvious: playing hi-definition video in company boardrooms. Quite why Lazaridis can’t say this, I don’t know.)
However, the promotion to push those pesky PlayBooks out of the channel is going to keep hurting Rim’s numbers for the rest of this year and beyond, admits Edel Ebbs in the question-and-answer session: “In terms of the impact on gross margin from the PlayBook activity that we’re going to be undertaking over the next few months, it’s going to be more than one quarter impact.”
In other words, at least two quarters. Six more months of financial hurt.
Meanwhile, Nokia is prepping itself to launch the first of its Windows Phone devices. (Did I say back in February that they wouldn’t be ready before October? Yes, I did.) However, it’s only going to be able to ramp up output over the next two or three quarters, which are going to be crucial to its future. Windows Phone really matters for Nokia (NYSE: NOK). If it can’t make it work, it’s toast. Rather like Rim and QNX.
That means that for the next two months Rim and Nokia are going to be wrestling each other for business, offering new software platforms that they’re trying to get off the ground, while relying on their huge base of subscribers around the world to stick with them. And both are strong in many of the same countries and regions. (Rim’s principal advantage over Nokia is its strength in the US.)
And they’re converging in terms of their position in the smartphone market. A year ago, Nokia was selling around 24m smartphones per quarter; Rim, 12m. In the most recent reported quarters, Rim sold 13.7m phones (though it shipped 10.3m; the remaining 3.4m were lurking in the channel from earlier). Nokia sold 16.7m phones. The two of them are closer together than they might seem at first glance.
Rim against Nokia in the battle of the platform shifts? Amateur hour is over, indeed. It’s going to be a titanic 2012.
This article originally appeared in MediaGuardian.