Pondering The Blackberry Puzzle: what IS going on here?

Just when you think you finally have figured out RIM (Research in Motion) and its Blackberry, it goes all belly up again. But at least its good to see that others, including RIM management, admit to confusion about the iconic smartphone maker.

It was ten years ago that Canadian 'beeper' maker Blackberry launched its first smartphone which had the peculiar shape, the uniquely-shaped QWERTY keyboard and was optimized for email use by busy business executives. Blackberry took the US business world by storm, soon Blackberry users were calling their device the 'crackberry' for its addictive nature. And to show how big a splash the early BB did for the world of mobile - Nokia, which was selling more than 10 times more smartphones at the time, took the Blackberry example and created its own clone, the E-Series and believed so strongly in this type of smartphone use, that it set the E-Series in its own business unit to sell Nokia branded smartphones to enterprise/business and government users.

WE ARE IMMUNE TO THE iPHONE

Then in 2007 came the iPhone and changed everything. Yes. But early on, the iPhone was not seen as a valid smartphone for business uses (early iPhones were not even technically classified as smartphones, and until the App Store came along, Apple did not let users install applications to the early iPhone, thus most business type users didn't find much use out of the iPhone if they couldn't install the necessary apps to access the corporate IT systems.) So for the first two years of the rapid growth of the iPhone, both Blackberry and Nokia's E-Series continued strong growth, almost oblivious to the iPhone.

Around that time we also started to hear increasing stories that the Blackberry was a big hit success smartphone in surprising countries, like in Indonesia, in Venezuela and in South Africa. And in those markets, it was consumers - often the youth - who took to the Blackberry. And RIM executives were quite open about it, they were baffled and quite surprised. While the QWERTY keyboard certainly played a big part in helping messaging-crazy youth to like the Blackberry, it was actually the Blackberry instant Messenger (BBM) which was fuelling that success. BBM seemed very similar to SMS text messaging but had the added virtue that any messages between any Blackberry owners (on any networks, in any country) were free. If you send two or three SMS per day, the economics will never work out. But, if you send 100 SMS every day, the savings add up very rapidly - and by late in the decade of the 2000s, youth the world over from South Korea to England to the USA, were found to have many who average more than 100 SMS per day. A ripe target audience for the 'Berry.

But the Blackberry is in a strange place. It has pretty well saturated its home market and primary target users, the corporate/business (and government) users. A survey of 20,000 US businesses by TNS in January of 2011, found that 81% of large corporations used the Blackberry and 69% of small businesses. And President Obama himself is a Blackberry user, becaue the first US president who is allowed to have a cellphone by the US secret service, the US president's bodyguards. That is how addicted he is to his Crackberry - in the tech world we like to call Obama the Blackberry President haha. You can't get much of a better endorsement of security systems and extreme utility, if your brand is the one that the US president insists on using..

But the US enterprise/business/government sector is pretty well saturated by Blackberry, it is more seeing a gradual erosion of its high market share there. The rest of the world is not as keen on selecting the Blackberry platform and in many countries recently we've seen government reaction against Blackberry (for being too secure). Meanwhile, back when Blackberry came into mobile, almost all smartphones were used by business type users. Today business-oriented smartphones count for less than one fifth of all smartphones sold and used. RIM has clearly hit its peak in this market and as the business/enterprise user base of smartphones is not growing strongly, even if RIM achieves any growth in that sector will mean a loss in market share where the bigger consumer side of smartphones is growing much faster.

So what of the success of Blackberry in India, in Brazil, in Botswana and Saudi Arabia? That is mostly consumers, and it surely reflects the right direction for Blackberry.

Yes. And I was eagerly promising that Blackberry is a sure hit last year, because I saw the early evidence of the shift from business to consumer users. From 2009, RIM has sold more Blackberries to consumers than business users and today Blackberries are sold more outside of North America than within it. That all should bode well for Blackberry.

COOL KIDS

So. We do see that the youth love the Blackberry, in many countries to absurd levels of adoption. In Canada (hardly a fair comparison being Blackberry's home market) a survey of university students found that 95% of them had a Blackberry. But lets go to the UK. A survey by Phones 4 U (UK's second biggest indepdendent handset reseller, a competitor to Carphone Warehouse) in Mach of this year found that two thirds of British youth between ages 16 and 24 - have a Blackberry in their pocket. The UK youth have taken to calling sending messages on the Blackberry as 'feeding the BeeBee' (or 'feeding the baby').

And we can easily understand why there is a sudden Blackberry surge in the youth markets around the world. Its the cool kids in class. If the cool kids get Blackberries, they will of course shift their messaging traffic away from costly SMS to free BBM. And now the 'other' kids in class, are either 'excluded' from participating in the chat with the cool kids - who of course will not pay SMS to send the other kids messages - or else the uncool kids have to get Blackberries also - just so the cool kids will agree to communicate with them. A very cruel form of class discrimination in a way, sociology and youth culture at play, but that is how kids behave. And if the cool kids suddenly adopt the Blackberry, all others have to follow suit, very rapidly. Meanwhile just today we heard from Ofcom the UK telecoms regulator, out of data from their latest findings of their annual survey, that twice as many teenagers have smartphones than adults (in the UK half of all new phones sold are smartphones). So you have the addiction of the most desirable age segment that is also most addicted to your device.

That to me was very strong proof that Blackbery has the future well in their hand. The youth of the world seem to love the Blackberry and if you have 67% market share in the most desirable age bracket, 16-24 age, then isn't the future pretty much belonging to you?

That seems reasonable yes. But why then is Blackberry in decline? Its not just that it was growing less fast than the industry (something from the enteprise/business side of the Blackberry business) as RIM has actually had declining market share from its peak of 21% in Q3 of 2009 - for the first time RIM saw an actual decline in unit sales now from Q1 to Q2, when RIM went from 14.5 million down to 13.3 million smartphones sold. So RIM declined 8% in one quarter at the same time when the market itself grew 8%. So the effective loss to RIM of its market position was 16% decline in one quarter. Thats pretty catastrophic.

It doesn't make sense to me. There is no utter failure phone. The corporate/enterprise customers buy on a steady pace, they make long term plans, they use one platform as the TBI survey from 2009 told us - 80% of US businesses insist on only one smartphone platform, obviously most of those will be on Blackberry. So if they bought Blackberries last year, they will be buying them again this year. And don't say iPhone here. Yes, the Marketing Department probably got permission to switch from Blackberries to iPhones but most other departments will continue on the Blackberry.

And if we see enormous growth in so many Emerging World countries, and the youth love the Blackberry at rates of 67% adoption rate in the 16-24 year age segment, why isn't Blackberry growing sales now?

Ah. I have pondered that a lot. And I do think I have an answer to the conundrum. I think its not the Blackberry which is the answer, it is the Blackberry Messenger, BBM. And lets first go back to the market share in the UK. We just learned in June from Kantar Worldpanel that Blackberry's market share in the UK market had grown from 19% to 22% in the past year. Now if we take the youth age 16-24 (12% of the population) away from that number, ie 8 million smartphones, we are left with 5 million to distribute to the rest of UK population. And of that, a vast majority will be corporate users. So while the youth are very loyal to the BeeBee, the rest of the population don't care for the device.

Meanwhile, why isn't 67% penetration in highly mobile-addicted youth segment generating massive repeat sales? Ah, here I think I have had an epiphany. As the solution is BBM, the addiction is not to the handset, it is to the service. And here the kicker: a five-year old monochrome screen Blackberry works just as well as the latest Bold. So while yes, the youth are heavily addicted to smartphones, they don't have a compelling reason to upgrade their Blackberry. One Blackberry is enough, it can easily be a year or two old, no problem, what the youth do - is to replace their OTHER smartphone! So they go buy the newest Samsung or iPhone or HTC or SonyEricsson and replace that regularly, but they keep the old Blackberry!

So RIM is in a very peculiar pattern, where they have strong loyalty in their two main segments - business users and youth - but neither is growing anywhere near the speed of the industry. And the evidence is pretty clear that once we pass the youth segment, the rest of the population is not in love with the Blackberry, they seem to want almost any other smartphone currently. Hence the overall decline in smartphone sales for RIM.

Again, the Blackberry conundrum is so difficult to get, that this is likely still not the full picture, but yes, expect there to be sudden surges in given countries, when the specific 'cool kids' in the youth discover the Blackberry Messenger, but also, don't think that sudden growth pattern will then repeat across the full population. The Blackberry seems very much destined to be only a niche smartphone maker and seems to have hit its peak and no sign suggests they could recover any kind of growth out of this, no matter what better operating systems or touch screens (or tablets) they were to launch.

(and just watch me be proven wrong once again right after I post this haha..)

Comments

[kevin]

Tomi,

I called this decline last July based on just the numbers. But thanks for providing a plausible explanation. Also, adding to your theory, it seems to me that each new generation of BB hasn't had a big desirability factor to prompt an upgrade.

You stated that these teens have another smartphone. Is this true of a large percentage of these teens? (If true, these are some pretty rich teens.)

Also, if the keyboard becomes not such a big factor relative to other phone features (like media content and apps), then if the cool kids switch over and start using iPhone iMessage (now free as its included with any data plan), could we not see a surge in teens switching to iPhone (especially if there is a cheaper model)? I bet Apple's market research has seen this possibility. And no doubt we'll see free messaging emphasized more by Google for Android phones as well.

[Guy Rosen]

My teenage nieces in the UK always baffled me with their clumsy BBs, and indeed it was BBM that was keeping them there. However their crowd now considers WhatsApp to be the viable alternative (I even overheard it being called "BBM for iPhone"). Assuming WhatsApp data usage is efficient enough to be negligible within any reasonable data plan, it's become a big enough brand to pull those teens away from BBM. I also believe it (or one of the equivalents) will succeed more than iMessage which will inevitably remain a closed, Apple-only service. (Just look at FaceTime.)

The opportunity is actually Google's here - as a service-centric not device-centric company, if they provide a GOOD cross-platform mobile texting service (GTalk++?) there are billions of eyeballs to be won.

[virgil]

Tommy, but if you are indeed right, it means that its' not too late for BB, and if they get out next year highly-desirable QNX-based phones, they may stand a chance after all.

[Geri]

I love the point on BBM is the hook for kids, not the device itself. I also agree with Guy Rosen on Google opportunity - and it was partly there with GTalk and now with Google+ and Huddle Google is seriously stepping into this territory with a far better potential coverage than WhatsApp or iMessage.
On top, Google push Google+ project heavily, as E.Schmidt stated it was a 500-person project! 500 Google brains only on G+. Massive!

[Eurofan]

Cool post, Tomi. That's why we come here, to see you do the heavy lifting, and to learn something from each other. I agree with 80% of what Lee said. Good insights, Tomi. I don't think you will be proved wrong on this one.

[khim]

Good theory. Much better then Nokia-related crazy tales.

But if true then Blackberry is in VERY peculiar situation: they are not in any immediate danger, but they are one step from Nokia-style boycott by operators.

The whole house of cards is built around service which can be disabled by operators any time they decide it's not all that profitable to continue to support it. They obviously signed multiyear contracts thus it can not happen overnight, but if they decide that it'll be more profitable to offer some cheap SMS plans and cancel the BIS support... BlackBerry can implode pretty soon.

So it means RIM does have time to do something but BBM by itself is not a viable long-term plan. It all depends on 3G/4G expansion, really: it's pointless to offer 3G/4G without a data plan and with data plan BBM exclusivity evaporates...

[Eurofan]

@khim, I thought nokia boycot by operators was Tomi's biggest crazy tale. Since Tomi made that point about the boycott we've mostly come to see the evidence supports that call by Tomi. If that's true everything else Tomi has written lately is true too, Eflop has to go for cause or be driven out by the forces of good, if they still exist. If wall street wants a competent american, put rick simonson in the ceo job and vanjoki can be his coo. we just need cool heads now in this storm not pudgy handed dumbfuchs.

[essay help]

Interesting info! Thanks.

[kevin]

@Eurofan: I don't think of it really as a carrier "boycott". I think carriers are doing a very rational thing - why should they sell a smartphone whose accompanying ecosystem has been end-of-lifed? The carriers have direct relationships with consumers; if these consumers get dissatisfied with what the carrier sold them, they'll switch to some other carrier the next time.

I still think the others (like Skype story) are crazy tales.

[Eurofan]

Kevin, I agree but carrier boycott is for me a shorthand way of saying all this. I don't blame the carriers for being rational actors. But thanks for the clarification.

[Troed Sångberg]

"It doesn't make sense to me."

It does to me - and my old post on the three categories of featurephones, smartphones and MIDs (Mobile Internet Devices).

Android and iOS are MID platforms - and the dividing factor is the active third party support (different from "number of SDK downloads" etc).

Symbian/RIM etc är smartphone platforms. MIDs are growing, smartphones are not.

(September 2009) http://blogs.sonyericsson.com/troedsangberg/its-not-about-smartphones/

:)

[dirk]

skype is now on android, fyi

[kevin]

@Troed: Yup, many here have told Tomi that iOS/Android are different from Symbian/BB many times over the last few years, but his standard response is he's just following the categories made by those who count sales. I think ignoring this distinction will lead to errors in projecting the future, and to misreading how to solve Nokia's OS/ecosystem problem.

@dirk: Yup, Verizon partnered with Skype to have an exclusive launch on Verizon Droid phones back in 2010. So really don't know what Tomi is basing his story on.

[Eurofan]

Kevin, Now that I am home on my own keyboard I will expand: I don't think we mere mortals are in a position to judge whether the carrier boycott on Nokia is motivated by factors beyond the publicly announced death of Symbian OS by Eflop, possible high return rates of Nokia phones [although nobody has shown this, have they], possible customer disgruntlement or risk of disgruntlement at carrier sales staff at selling them an "obsolete" phone, etc. Did MS's purchase of Skype anger carriers enough to be another reason for not promoting Nokia's Symbian products in addition to the above reasons, because the carriers want to hurt Nokia now ahead of the WP7.5 push? Maybe, I don't have a position on that, that's higher politics I don't have a feel for. To me the publicly announced death of Symbian OS is grounds sufficient for operator boycott for the reasons you have given, they have other hot phones and don't want to push dead end phones on customers for reasons of keeping good customer relations. However, I think the fact that Apple OS can support Skype apps as well as Facetime and Android supports Skype doesn't mean Tomi is necessarily wrong about carriers being angry at Nokia for aligning with MS after MS purchases Skype. For the reasons I gave in my long rant above on the price of wireless coverage in the US, somebody smart in the hand set making space is going to come out with an affordable smartphone which is like a iPod Touch with cell signal. The idea is it could be used on prepaid plans or affordable postpaid voice plans with no messaging and no data: all the messaging, all the data, and most or all the voice is carried via local wifi, whether in school, at home, in the car, at work, or in the city, etc. This product, if it is affordable, will not need subsidy to sell. It will sell itself on savings from data and messaging fees. It is an existential threat to the carrier model in the US and maybe elsewhere, I don't know about overseas.

I can see the operators not wanting one of the major players like Nokia or Apple to develop such a device. Carriers are a very big business in the U.S. in terms of political influence and profitability. Skype [and its analogs] would be a major component of such a new disruption device. Right now iOS and Android based phones are too expensive to sell without subsidy for the most part so they are not threats to the existing [US] telcom model, because as I mentioned above [at least in the US], subsized phones are always bundled with two year commitments to both voice and data plans, and everybody gets messaging too although not required to and messaging anyway is cheap compared to data so not taking messaging is not as much a threat to telcom profitability as not taking data. Data is 20-40$ in the US. Messaging is 5-10$. Assuming in both cases you already have voice. I'm not sure how easy it is in the US to just get a data plan in the US with no voice, maybe only if you are buying a mobile hot spot device or a plug in for your laptop. How easy it would be to switch such a data plan over to a phone and have a phone run on a data plan only, I don't know. That eventuality of course the telcoms have a strong incentive never to let happen.

I think the telcoms are looking at the voice/messaging/data situation closely and might very much want to weaken Nokia before it goes forward with the idea of cheap WP based phones for the masses, for example prepaid WP phones. Anyway, I don't rule it out. It's up to the regulators to prevent economic entities from colluding, since the economic incentives of big industries always push the big players toward collusion. The threat of wifi-based developed world communication or data only (web) based world wide communication is a big one to the telcoms who have tremendous sunk costs in voice/messaging.

On the knocking of Symbian that constantly goes on here, I really don't get it. Symbian Anna and whatever is next after Anna are good enough to get through 8 quarters to Maemo/Meego. The E7 running on Anna and the N8 running on Anna are good devices for many people's needs and sold without too much exaggerated hype as useful things with long battery life and good keyboards they could continue to sell into the upper end of the subsidized cell phone space. I've come to believe Nokia's original pre-Elop plan was workable and that there was no burning platform, that the four reasons Peter identified as 4 top reasons for Android returns could have been distinguishing basis for semi-successful marketing campaign by Nokia in years 2011 and 2012 as transition to Maemo/Meego began. But what would carriers think of such a promotion. How does the MS link up and subsequent Skype purchase influence carrier opinion toward Nokia. Unknowables.

Anyway, I really don't buy that iOS/Android are fundamentally different or an altogether different category of o.s. from Symbian/BB. I just think the former pair are further developed than the latter pair, because the parents of the latter pair each decided to replace their progeny with new, improved o.s.'s and so have neglected them. Anyway, I'm saying that a current Blackberry or a current [Anna loaded] E7 are reasonable choices for some consumers looking for a $200 subsidized phone, just as valid a choice as a $200 new iPhone 5 or newest Android are as choices for consumers looking for "more" in the subsidized cell phone space. Some people just want their phones to go from point A to point B as it were and are Toyota-buyer minded: reliability, consistency, battery life, call quality. The fancier things are of course supplied by iOS and Android, but so what, they also cost more. No reason for RIM and Nokia to go out of business. Betting the farm on instant adoption by old Nokia customers of WP7.5 is just trying to go out of business, especially after one year of carrier boycott of Symbian devices. Such a stupid plan by Elop, the pudgy hand waving charlatan.

As I've said before, I don't see why Apple's, Google's and Android partner's successes in the hand held smart devices space can't coexist with a health Nokia and a healthy RIM. Since my heart lies with Nokia, that's the only story I focus on. But the Space is large and many players can coexist. There are many definitions of ecosystem, but bankruptcy has only one definition. Elop blew up an ecosystem when he pulled the plug on Symbian, QT and Ovi. Elop claims to be ushering in a new econsystem in WP [no evidence other than "potential" at this point]. And Elop may well drive Nokia into the arms of the bankruptcy court by doing both of those things in the way and at the time that he did them.

What role Skype plays in all this we will probably understand much later when the history of this period is written. In the mean time it is fair to say there is a carrier boycott of Nokia products going on now for 6 months and Elop had about %100 to do with it.

[Tim F.]

Ending every tenth sentence with "ha ha" make your bad jokes funny, they just give the impression you have the intellect of an 8 year old.

[Tim F.]

CORRECTION: Ending every tenth sentence with "ha ha" DOES NOTE make your bad jokes funny...

[Tim F.]

Grrrrr DOES NOT

[Bill]

Blackberry is the new Nokia - and not in a good way. Multiple models. Marketing driven drivel leading them to launch multiple confusing models. Two operating systems. And now they've Osborned themselves.

[Anon]

Surely the key is enrich BBM with hughly desirable features only supported by BBOS7, then ditto for QNX.

[Eurofan]

Baron95, I agree completely with your comment above, "Business users were never...". As far as your "But, what I really wanted to hear, Tomi, is...": When I read Tomi's assertion on this point, about the profitability of SMS to operators, like you I thought of the North American market and RIM and now WhatsApp etc and thought that doesn't seem right here. I think, though, Tomi is talking about profitability in the rest of the world. Here in North America its data that is so profitable to operators, not messaging, thanks to the iPhone effect, when the operators learned to bundle data with voice the way they used to bundle messaging with voice. Messaging is gravy in North America. Data is the meat. Voice is the pizza pie, or something. I bet for carriers in less developed parts of the world, messaging is hugely profitable, as data is in North America. But I agree with your "Business users were never hooked on Blackberry..." analysis. Tomi's "cool kids" probably acquired their crackberry addictions from their parents and began by using their parents hand me down devices.