RIMM Observations

After the market close, RIMM reported fiscal 1Q12 earnings. A few things stood out to me.

1) RIMM will begin a headcount reduction.  As millions of consumers switch to smart phones from feature phones, RIMM is cutting back. While it is understandable for a company to remove redundancies and waste, the writing is on the wall; RIMM had invested for a much bigger company compared to what it now sees itself as going forward. Can things change?  Sure. Will things change? Not likely.  Fixed costs can sure be a killer when your products sit on store shelves.  

2) RIMM shipped 500,000 Playbook tablets.  Keyword being shipped.  The difference between shipped and sold?  When a product leaves the factory (in a boat, plane, car, truck, mule), the product is characterized as “shipped”.  No consumer has purchased the unit.  RIMM’s 500,000 Playbook number is largely related to RIMM filling the Playbook inventory channel (the location between factory and consumer).  It’s one thing when you ship a product that people are buying (iPad), but when you are shipping a product that no one is buying, you have the classic channel stuff. 

3) Management wants to buyback RIMM stock.  While RIMM’s business is falling apart on all sides, management wants to spend part of its precious cash chest ($2.9 billion) on buying back its tanking stock. While buying back stock can carry a lot of different meanings, largely depending on which industry a company is operating in, stock buyback in the technology industry does not carry a positive connotation.  Instead of using money to better your position to innovate, buying back a stock that finds itself on a slippery slope screams desperation and a ploy to show Wall Street that management holds confidence in the future (Wall Street rarely cares - quickly seeing through the action like swiss cheese). 

4) Guidance gives perspective. In the matter of a few weeks, RIMM cut its annual guidance by 30%.  Given RIMM’s size, cutting guidance by 30% in such short order is not caused by one bad product launch, or by economic concerns impacting your consumer base.  A 30% guidance cut is evidence of stuffing the inventory channel with a ton of product and finding out that no one was actually buying your product.  A 30% guidance cut is evidence that your fixed cost base is quickly eroding profits as your new product lineup is delayed and your old product line up is stagnant. A 30% guidance cut for a mobile phone company during the age of the mobile revolution should speak volumes for the amount of trouble RIMM is facing. 

Going forward, look for liquidity to be a front and center issue for RIMM. For management to have any chance of a comeback, it needs ample cash, and a $2.9 billion war chest contains only limited opportunities. 

Snapshots

While surfing the web this morning, I could only laugh at the amount of optimism given to Windows 8. Posts on how Windows 8 will truly revolutionize Microsoft (they said the same thing about Windows 7) were the cherry on top. Commenters rushed in with Microsoft support throwing around such figures as 350 million Windows 7 licenses sold to date or some other funny math that supports their claims. If I wanted to live like it was still 2004, I could go along with these individuals and drink the Microsoft kool-aid, but its time to wake up. 

People are making a fundamental error. Rather than looking at tech trends, many are looking at snapshots of the current technology landscape and then extrapolating what they see into the future. Snapshots do nothing but reinforce the dying status quo. 

June 2011 technology snapshots would show:

1) Nokia is still selling plenty of phones.

2) Microsoft is crushing it with Windows 7 licenses. 

3) Research in Motion is still selling a boatload of blackberries. 

All snapshots; singular moments in time that won’t show:

1) Mac sales are gaining market share every quarter and will soon surpass 15% of the consumer computer market.  

2) iOS is becoming ever-more vibrant as a growing number of developers are now earning a honest living from iOS app revenue.

3) iPad power.

4) Android is largely becoming the non-Apple destination for anything mobile. 

While Windows 8 may have its attractive points, interesting features don’t change consumer technology trends. Instead, years of successful product launches and value-added services help turn a loyal consumer base into an army of brand enthusiasts. The tech industry is still in the early stages of working through the death of a monopoly.  Industries take years, if not decades, to work though such an industry-changing event. Certain brands are dying a slow death, while at the same time, being replaced by up and coming brands. Taking snapshots will never give the true picture. 

Want to Beat iPad? Hire a Psychologist

When unveiled in 2010, Apple didn’t know why iPad would be a major hit.* After spending most of the keynote explaining some of iPad’s basic features, such as email, reading books, and surfing the web, Apple left the fundamental question of why iPad would become popular to the marketplace to answer.  

One year, and 19.5 million iPads, later, the marketplace has spoken. While users have a variety of reasons for liking iPad, I attribute its success primarily to its ability to transfer innovation to the user. Apple’s curated iOS ecosystem allows iPad to bring app innovation, and functionality, into users’ lives, all the while sustaining a satisfaction level that is unmatched in Silicon Valley. When selling technology to consumers, initial satisfaction is good, but being able to deliver continued satisfaction and enjoyment is even better.  

When putting iPad in this context, it’s easier to see the uphill battle facing competitors. The competition is having a hard time beating iPad because they don’t understand why people are actually buying iPad. To beat iPad, you can’t look at it as some piece of hardware that runs apps; you can’t look at it as “an iPad”, but instead as “iPad”. You have to understand the emotional connection between iPad and its user, which a psychologist could analyze at a steep price.  A cheaper option to see the connection between iPad and its user is to walk into an Apple store and hover around the iPad table. After a minute or two, you will see the connection when looking at people’s faces.

Competitors need to aim for users’ hearts and minds and not assume that consumers are buying iPads just because they have $499 lying around the house.  I have little confidence that competitors can successfully appeal to consumers in the same way that Apple does. Instead, competitors have two options for fighting iPad: low price commoditization with little emotional appeal, or reliance on innovation to beat Apple at its own game.

1) From a financial perspective, removing the emotion out of a product does not bode well as competition will lead to hardware commoditization and the ensuing margin collapse. Profits and brand power will quickly evaporate. Nevertheless, competitors need to convince users that some level of satisfaction can be received from a tablet form factor at a much lower cost than iPad. Apple understands this alternative strategy (some say due to its PC war history) and is relying on its massive $66 billion cash position to secure device components at prices that help lower iPad’s cost to a price point that is very difficult for the competition to slide under, while at the same time maintaining attractive margins. If you are curious what the tablet market would look like if iPad competitors choose the route of hardware commoditization and low cost, instead of appealing to consumer’s emotion, look no further than the MP3 player market, where Apple’s iPod and iTunes ecosystem maintains 70% market and emotion share.

2) You can only rely on apps and services to such a extent before poor financials, low product margins, and a lack of cash become too much to bear and competitors exit the market. If low-priced commoditization sounds unappealing, a better strategy for competing against iPad is to innovate and come up with something completely different. Once this new product is developed, control the emotional connection to your consumer and strive for increasing functionality and user satisfaction. Let iPad have its user base, while your product entice others with unique features and attributes. Try to beat Apple at its own game.

One year, and 19.5 million iPads, later, the marketplace has spoken, but competitors have spent more time talking instead of listening and watching. 

*I didn’t write “if iPad would be a major hit”, but instead, “why iPad would be a major hit”. Apple has a history of releasing major products only after it knows it is worthy of becoming a hit.

iOS App Innovation and iPad 2 Design Lead to Magic

After my attempt to pick up iPad 2 on opening day failed miserably, I had to settle for ordering one online and waiting four weeks. On Wednesday, my wait ended. My initial iPad 2 thoughts focus on two themes; app innovation and iPad design. 

After connecting iPad to iTunes (using the iOS umbilical chord) and running through the obligatory setup process, I was ready to take my iPad 2 for a spin. My first stop; the app store.  Instead of searching for a specific app, I found myself scrolling through the Featured and Top Charts lists. After one hour, I had installed 15 apps, 14 of which were free*. 

Apps. Apps. Apps. Without apps, iPad 2 would feel empty. I’m intrigued by the ongoing debate as to how to judge an application ecosystem’s health and popularity. Does it mean anything if Android reports more apps than iOS? Should I look at the number of app developers, or the growth rate of application submissions? Can I go by how quick a developers conference sells out as some indication of ecosystem success?

The most critical aspect of an app ecosystem (iOS, Android, HP webOS, Windows Phone 7) is app innovation.  Every time I check the Featured app list, I want to see new apps. When I check the Top Charts list, I want to see new apps.  I want to see strong app circulation.  This type of app innovation stands at odds against those who argue as long as an app platform has the 10-15 apps that I use most often, then the platform is healthy and I should be happy. I strongly believe this type of settling for the bare minimal will lead to stagnant app buyers that become disenfranchised with routinely searching and paying for apps. 

With 15 apps downloaded and my iPad 2 in hand, I sat on my couch and it wasn’t long before I lost track of time. 

After a few minutes of using iPad 2, I found myself forgetting that I was using iPad 2. My entire thought process was given to the app that I was using.  While iPad looks and feels amazing, the iPad dissolves away when in use, exactly how Apple planned it. Remove the intermediary and let users interact directly with innovation.  I don’t care what’s inside or isn’t inside iPad 2, as long as iPad 2 has the ability to run the highest quality apps possible.  iPad 2 meets this goal. When I see iPad competitors spend precious commercial space discussing product specifications, similar to the laptop wars of the early 2000s, I can only laugh.  

Random bytes:  Although iPad 2’s Safari is adequate for web surfing, I’m having a much better experience using apps to access website content.  I always think back to a Wired article published a few months back, titled “The Web is Dead. Long Live the Internet”. While the author was somewhat off with the concept of “The Web” , I agree with some of his general ideas; primarily that Apps are changing the way we use the Web. I find myself turning to apps instead of surfing the Web through a search engine. 

Drawbacks: Overall, I did find it somewhat hard to type on iPad 2.  The onscreen keyboard is not wide enough for normal typing, even with iPad 2 turned horizontally on its side.  I also found having the onscreen keyboard displayed horizontally was subpar because of the amount of screen real estate that it took up. I’ve been finding myself using one finger to type (similar to the iPhone) and this can make certain tasks difficult.

I also have a number of questions on transporting iPad 2 safely. Should I put iPad 2 in a backpack, briefcase, or carry it in hand?  I don’t have a smart cover (yet), but what about the back of the iPad and possible scratches or scuffs?  I am leaning towards buying some type of pouch to put it in (which then can go in another bag), but it’s the first time that I actually felt the need to buy some type of protection for an iOS device, which I’m not thrilled about. I would hate to cover something up that was meant to be seen.

Overall, my iPad 2 has exceeded my lofty expectations.  Interestingly, I am finding specific and distinct uses for my three primary Apple products (Macbook - typing, iPhone 3GS - continuous communication,  iPad 2 - apps and entertainment).  I believe the iOS ecosystem has reached an inflection point where app innovation now has enough momentum to self-sustain itself (given continuous product innovation from Cupertino). In the coming weeks, I will lay out my argument for why I think the iOS ecosystem is in a solid position compared to other mobile platforms and how app innovation will ultimately decide the winners and losers in this ongoing technology revolution.  Stay tuned. 

*I am still hesitant to pay for applications without knowing how often I will utilize the app. As I have said for months, a better app store with the ability to preview and test drive paid apps would be beneficial. 

Amazon Cloud

Amazon Cloud

1) While I applaud Amazon’s willingness to adapt its business model to the changing technology environment, I am left wondering if cloud music storage is the answer to Amazon’s quest for mobile content relevancy. While digital music was a hot topic a few years ago, services such as Pandora, last.fm, and Rhapsody have been gaining in popularity and serve as a viable alternative to digital music downloads. I also question Amazon’s seemingly eagerness to compete directly with Apple and its accompanying competitive advantages on more than one front.   

2) I worry that Amazon’s relationship with Android and the relative ho-hum introductions of these new features (appstore and now Cloud storage) could backfire and turn into Amazon’s achilles heel.  One of Google’s perceived weaknesses (but actually looked at as a strength within Google) is unveiling countless features and services with the goal of seeing what sticks, if anything. Is Amazon playing the leader or the follower with Amazon Cloud Drive? Will Amazon need to kick up its advertising campaign to put these new initiatives in front of potential users? As it stands now, mainstream media, and most of America, are unaware of Amazon Cloud Drive and probably will never use it due to this unawareness. Amazon has a had a healthy success rate in new features, but if new services are deemed unready or incomplete for prime time, Amazon’s reputation could take a hit. 

3) How is Amazon’s new music storage initiative intertwined with the music labels? According to several news sources, Apple has been stuck in music label negotiations as to how to adapt iTunes to the changing times. Amazon apparently didn’t seek any licenses or music label agreements and went ahead with its plans for storing purchased music in the Cloud. Does the music label’s support actually mean anything anymore?

4) Similar to Amazon’s recently unveiled appstore, the financial impact from Amazon Cloud Drive is murky and I suspect the long-term goal is once again to reiterate the “Amazon is Web Commerce” mental connection.

5) My gut tells me Apple is looking at these digital music initiatives, but from an industry changing perspective. As the music labels remain extra conservative in negotiations for fear of losing even more power at the hand of Apple, I am a believer that music labels will eventually cave and iTunes will adapt to changing consumer habits. It remains to be seen if Amazon will be at a position capable of competing with the new and improved iTunes.  As it stands now, I still see Amazon’s digital music initiatives at a huge disadvantage against the iTunes/iOS ecosystem.