Diverging Prospects for RIM and Palm

Research In Motion (RIM) and Palm both reported their latest quarterly results yesterday. RIM produced third-quarter results and guidance that were better than what the market expected; Palm disappointed.

As the smartphone market becomes more fiercely contested, these sets of results were analyzed for more than their immediate trading utility. Analysts and pundits carefully scrutinized them for clues as to how each vendor is faring in its bid for long-term prosperity in the smartphone market.

On that score, too, RIM emerged the better of the two. Not all the questions about RIM have been answered, but the company has a coherent strategy, ample resources, a credible brand, strong carrier relationships, and a track record of proving its detractors wrong. Palm doesn’t rate nearly as well on those counts.

As for RIM’s latest quarterly results, as reported by Dow Jones, revenue rose 11% to $3.92 billion, surpassing the company’s guidance of $3.60 billion to $3.85 billion as well as the Thomson Reuters estimate of $3.78 billion.

The company said it added about 4.4 million net new BlackBerry subscriber accounts in the third quarter, bringing the total BlackBerry subscriber account base to about 36 million at quarter-end.

Looking immediately ahead, RIM is forecasting fourth-quarter revenue of $4.2 billion to $4.4 billion and gross margin of roughly 43.5%, resulting in net earnings of $1.23 to $1.31 a share, all outpacing expectations of market watchers.

Unfortunately, where RIM is surging, Palm is treading water. Sales of its new smartphones, the Pre and the Pixi, are already starting to decline. Palm said it shipped a total of 783,000 smartphones during its fiscal second quarter, a drop of 5% from 823,000 smartphone units during the first fiscal quarter. (Palm’s year-to-year comparisons are irrelevant, with its smartphone overhaul occurring this year.)

Another area where RIM is doing well and Palm is not involves market coverage. RIM is pushing forward in China and everywhere else besides, whereas Palm is not. Breaking its dependence on North America, RIM reported that 37 percent of revenue is derived from overseas and approximately 35 percent of the BlackBerry subscriber base is now located outside North America.

Areas RIM is targeting for future growth include small- and mid-size businesses and China, where RIM has been building key partnerships lately. For example, a week after reaching a deal with China Mobile, RIM announced a similar partnership with China Telecom. Before that, RIM had inked a distribution partnership with China’s largest IT services provider, Digital China Holdings Ltd.

RIM is looking at doing more than selling its products in China. Said RIM co-CEO Jim Balsillie:

“To further support our efforts in China, RIM is also exploring opportunities to manufacture and conduct R & D activities in the region.”

Such a move would make sense. China is a burgeoning market, and RIM will have to commit to it, not only in terms of providing product localization, but also with regard to doing valuable R & D there. Perhaps, like McAfee in the security-software space, RIM will establish a wholly owned subsidiary in China.

While international expansion was a key contributor to the company’s success in the third quarter, RIM also is helping its cause with a more diversified product portfolio and gains in consumer patronage. Even though its installed base remains strongly represented by business customers, RIM said 80 percent of its new subscribers in the third quarter were non-corporate customers.

That’s all good news for RIM, but I still think the company will need to overhaul the look and feel of its BlackBerry software if it has aspirations of continued consumer gains amid intensifying smartphone competition.

The smartphone market is growing briskly, but it will consolidate. At that point, the leaders will reap the largest rewards, with the laggards failing or getting acquired, sometimes cheaply. That’s why maintaining and gaining share are so important, and why RIM’s latest solid results and bullish guidance are encouraging signs for the company.

Meanwhile, again, Palm isn’t looking so good. One can downplay Palm’s disappointing quarter by arguing that the company remains a work in progress and that it will have occasional stumbles as it goes all in as a smartphone player. Some apologists, with arguable justification, also will point to Palm’s early dependence on Sprint for sales of its webOS-based Pre and Pixi models. Nonetheless, Palm is losing momentum, doesn’t have the resources of its larger rivals, and the competition it faces in the space will only intensify.

Palm had an early chance to carve out a growing niche for itself, but its window of opportunity is closing rapidly. While RIM has gained ground and positioned itself well for the future by expanding in markets outside North America with a diversified product portfolio, Palm is something of a one-trick pony, still focused primarily on North America with a narrow product line and an overwhelming dependence on getting and keeping the favor of fickle consumer who are bombarded by the heavier and slicker brand advertising of Palm rivals such as Apple, the Google Android mafia (Motorola and Verizon with Droid, for example), RIM, HTC, Nokia, and others.

It’s too early to perform last rites – how many times has RIM proved doomsayers wrong? – but Palm’s prospects are dimming.

New figures from AdMob, measuring worldwide smartphone Internet traffic, demonstrate how quickly the market might be consolidating. With traffic attributable to the iPhone and Google Android-based handsets dominating and on the rise, respectively, everybody else is struggling to hold market share.

RIM is positioning itself for future growth in China and other foreign markets, while maintaining its hold on its sizable installed base of enterprise-messaging customers, means it is likely to stay the course, though it’s anybody’s guess how the situation might look three years from now.

RIM has the resources to play a game of attribution, however. Palm doesn’t. Unlike RIM, Palm doesn’t have the luxury of a lucrative, money-spinning installed base of corporate mobile-email customers. It doesn’t have option to reinvent itself one more time.

If Palm’s smartphone unit shipments continue to slip sequentially from quarter to quarter, it won’t remain in the race much longer. Time isn’t on Palm’s side.

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