Research in Motion is toast

I do very little fundamental company-level trading but I couldn’t help taking a negative view — arguably like almost everyone else — on Research in Motion (NASDAQ: RIMM).

The Canadian company’s claim to fame is the BlackBerry, a family of smartphones everyone in the finance industry, and business more widely, including the more shadowy types, was using before the iPhone, and then other touch phones, came to the market.

The BlackBerry innovations were (1) phones with a miniature keyboard, (2) a closed-garden messaging system well integrated with “enterprise” email systems (aka MS Exchange). Touch phones have killed the interest in keyboards, and for those users who still prefer them, all smartphone manufacturers bar Apple now have some decent offering in that space. The closed-garden messaging system is also actively of very little interest to anybody, except legacy users, like end users networking within the system, and slow-moving IT departments.

They haven’t reacted much so their platform is now well out of date. The competition is so ahead that even catching up will probably not help, even if they pull it, which will be hard, it might not help. Among the headwinds, all the techies working for them will know they’re doomed so either have already left, will leave, or will be unenthusiastic about being left in a sinking boat. Mediocre techies will stay the longest, of course.

They also have a very good track record at producing ugly phones, and it’s difficult to see how they could catch up when most of the competition is doing not too badly chasing Apple on that front.

So what could they do?

  • Orderly shutdown: turn the legacy proprietary services into apps for the iPhone, Android, and perhaps Windows Mobile. Support legacy users with the app and the existing server side infrastructure, close down or sell everything else, and stop manufacturing devices. The question then is can the cost of the shutdown leave a profitable if much smaller business?
  • Do a Nokia: adopt either Android or Windows Phone, turn the legacy services into an app for the chosen platform and sell devices with the third party OS and make that app exclusively available on their own hardware, so that people who want the legacy services (or ugly retro phones) still have to buy their phones, but without being stuck with a dead platform. So they save platform development and maintenance costs, escape being in a dead end ghetto, but then they become an also-ran among makers of phones for someone else’s operating system. It’s not obvious that this can be done profitably. The jury is still out on Nokia, who actually have some strength left in some areas and is probably in a better position than RIM. The simplest way to do that would possibly be to merge with Nokia, though it may be hard to find conditions where it would be advantageous for Nokia to take the burden.
  • Try to catch up on their own: it seems to be what they’re currently doing and the most likely outcome. Good luck with that. This is very likely to end up in bankruptcy proceedings.

What are the macro lessons? The market system lacks an efficient system that would allow such failing or outdated companies to go through corporate euthanasia as smoothly as possible. As it is they keep trying and burning resources in the process. People working there are wasting their time and everybody would be better off if they were redeployed to more productive endeavours.

In passing, I was amused reading recently, in the comment thread of a blog post about Apple’s dividend announcements, contributors who stated proudly that they have invested all of their liquid wealth in Apple stock and are rejoicing about how they will retire on the proceeds, some decades ahead from now. Apple’s business has a visibility of about 2-3 years, and at its peak RIM appeared, at least to non-technical people, similarly unassailable. I wonder if anybody had invested their life savings in RIM then… Apple could still do better, but it’s one hell of a single horse bet.

From a trading angle, the stock has been going down significantly already, and could have temporary rebounds, but this type of failing company seems in general to slowly trend towards zero, possibly partly because it takes time for longs to admit defeat, hence my assumption that not all the failure potential is priced in. I’m using put options to avoid exposure to either a temporary backlash or a permanent resurrection.

Disclosure: long December 2012 RIMM put options at $15.


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