How About a Microsoft and Research in Motion Partnership?

I believe that in June 2009 the smart money started putting the pieces together.  It was the first of a string of disappointing earnings calls for Research in Motion (RIMM). Since then, its stock price has been sliced in half.  RIMM’s shareholders believe that the sell-off has been overdone.  The company itself believes that as well and announced a share buyback plan at it earnings call in June. I love Fred Wilson’s take on buybacks (Why I don’t like Buybacks).

Personally, I believe the street has it right.  Due to Apple and now Android based phone dominance at the high end, RIMM’s growth has been regulated to the emerging markets.  This is a thriving and growing market, but it is also very cost sensitive.  The combination of selling fewer high end devices and more devices in cost competitive countries has led to a rapidly declining average revenue per device.  Last time I checked, Wall Street doesn’t reward high multiples to companies that can only grow by cutting prices.

It is grim in Research in Motion land, but it could be worse.  Many investors remember another Canadian tech giant Nortel.

Nortel was a dominant Canadian Telecom company.  In its glory it employed well over 90,00 people and its market capitalization accounted for more than a third of the total valuation of the Toronto Stock Exchange.  Nortel was one of the most spectacular casualties of the internet bubble. From September 2000 to August 2002, Nortel’s stock price plunged from C$124 to C$0.47.

RIMM’s stock price slide will not reach “spectacular” levels, but its descent will continue until there is a significant strategic shift at the company.  Here is my prescription for preventing the Nortel’ing of another Canadian giant.

1. Concede the consumer market to Apple and Android.  As RIMM attempts to compete in the consumer market it is slowly losing its bread & butter enterprise customers.  Enterprise is not sexy, but it is profitable.
2. The enterprise is under tremendous pressure to start supporting Apple and Android devices.  Stopping the bleeding will not be as simple as redirecting resources from consumer to enterprise, but it will help.  Cisco just announced a tablet device targeted towards business users.  RIMM’s mission should be to dominate all mobile devices in the enterprise space.
3. The following solves a multiplicity of problems because Microsoft needs this as desperately as RIMM.  Partner with Microsoft to deliver its next generation OS.   Microsoft’s Windows Phone 7 is the “Field of Dreams” of software – if we build it they will come. As Win Phone 7 is being positioned – there is no need for it.

• Android solves the problem for mobile device hardware manufactures without OS expertise.  Why would HTC or Motorola need a phone running Android and Win Phone 7?  Add in the fact that Android is free and there will be a cost associated with Win Phone 7; Win Phone 7 is a dead man walking.
• A better approach would be for Microsoft to do a exclusive deal with RIMM to provide their OS.  This addresses two problems: Win Phone 7 has a problem to solve and RIMM has a next generation OS.  Also, both companies are strong in enterprise and could possibly find other areas of synergy to exploit.
• There have been many calls for a Microsoft buyout of RIMM.  I won’t happen.  First, the failed Yahoo buyout attempt is too fresh on Microsoft’s mind. Secondly, RIMM would be just as bull headed as Yahoo if not more so.  Mike Lazaridis, RIMM President and Co-CEO, founded the company.  This is his baby. He ain’t selling.

If this were to ever happen, which I doubt,  it is at least a year away.  First, RIMM’s next super phone, to be released this summer, must fail.  Apple could easily seal that fate by announcing an iPhone on Verizon.  Secondly, Win Phone 7 must fail.  Since it is not scheduled for release until Christmas and if they kill it as fast as the Kin – we are looking at March 2011 wake.

That sets us up for a blockbuster partnership announcement next summer. Now if only Apple and Google will stop innovating while this materializes – all will be well….