RIMM is Done – Who’s Next?

miked | Jun 18, 2011 | Comments 17

Friday was a terrible day for Research in Motion’s (RIMM) shareholders and employees. The stock’s 21% pummeling was the culmination of a series of bad management decisions that date back to first time the word iPhone was uttered in January of 2007. RIMM’s management snickered at the announcement. After all, RIMM was king of the mobile hill. It had a legion of fanatical customers. Its market share was growing like weeds. All was good.

Four years later, management still believes it’s 6 months away from a viable response. In the mean time, I carved out a few bucks on the short side. Not nearly as much as I should have, but I am ready to move on to the next casualty in the smartphone wars.

Here are a series of tweets that I tweeted after the RIMM conference call:

I received several responses back, but none were ready to accept my thesis. Matter of fact, my thesis sounds bizarre. Android is an state of the art OS. Its users are fanatical about it and it’s growing like weeds. Sounds familiar. All is true, but Google’s secret sauce is under attack. Android manufacturers love it, because it’s a much better OS than they could design and the price is right – $0. Google gives Android away hoping to make money from ads.

Well – free is not free anymore. HTC pays Microsoft a $5 fee for every Adroid device it sells as part of a patent settlement between the two companies. Microsoft has also filed a lawsuit against Motorola claiming their devices infringe on nine patents. Microsoft is also pursuing patent deals with other Android manufacturers including Acer and ASUS.

Oracle is also getting into the mix. A filing from Google hinted that Oracle wants more in damages than Android has earned in its entire existence. Hot off the press today – an Oracle expert claims that Google may owe up to $6 billion. If Microsoft delivers on its upcoming Windows Phone 8 OS – these lawsuits may push many Android OEMs into Steve Ballmer’s arms.

If Larry Ellison and Steve Ballmer don’t inflict enough pain – Google is doing a pretty good job itself. Solar initiatives and driverless cars will all prove to be superfluous expenses. Worse yet it’s entire mobile revenue/expense structure is upside down. Although Android is growing like wildfire, Google’s share of profits is not growing proportionally. It has effectively become the software R&D department for Android manufacturers in exchange for a hope that an end user will click on an ad.

Google’s Wallet mobile payment service continues its “hope for a click model.” IMO, the amount of money that it has/will spend is not commensurate with its return. Its desktop search advertising cash cow has allowed Google to maintain its current business model. However, desktop search is under attack as different discovery models emerge.

Every analyst and their grandmother downgraded RIMM on Friday. That horse is out of the barn. Where were they 6 months ago? Check my archives. I felt like a lone wolf 1.5 years ago. Google is still in the barn grazing. I don’t expect it to shed $500 in the next few days. This is a long term play for me.

Disclosure: Short Google. Position subject to change at any time.

Filed Under: Mobile

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Anonymous

Nice write up Michael. I have been wondering aloud how long the advertising business model can last and whether the recent IPOs from LNKD and P are signs of a topping. I would be interested in your thoughts there as well.
http://twitter.com/TheMoneyGeek Sam Fawaz, CPA, CFP®

Good analysis, and you hit on the right point: online advertising may not be working as well as it used to. People just don’t click on as many ads or ad-words like they used to (my own business is a case in point). Search is going social and the results pages are gamed by companies so that most “hits” are increasingly irrelevant. Add in a scientist as a CEO and you have a recipe for a continued decline in the stock price (no position in GOOG currently but looking for some strength to buy put spreads).
http://michaelkdawson.com/ TrendRida

Thanks, Greg. I believe that an advertising model can work as long as your revenue and expenses stay in line. Google has taking it to another level with Android. The expenses are far greater than their revenue. More importantly the revenue is highly variable. HTC, Samsung, etc. should all be sharing in the Android’s development costs.

That all being said, I would prefer to pay a fair cost for a service than be bombarded with advertising. I wouldn’t be surprised if the recent IPOs are a mini-topping. However, I think the cloud will be real businesses with real value propositions to offer.
PurpleSpy

Looks like the winner in all this is sleeping giant msft Collecting royalties from android and Nokia. Thats a very large base of consumers. Someday rimm may throw in the towel on trying to build OSs and move to winmobile, if msft can make it good enough.
http://michaelkdawson.com/ TrendRida

Last year I speculated that RIMM would be partnering with MSFT by this year (2011). They are moving much more slower than I thought. Now they will need to give QNX a year to work or not. By the time the are ready to come to the table MSFT may not be interested…
http://michaelkdawson.com/ TrendRida

A ton of comments on this article over on Seeking Alpha. http://stk.ly/igec35
http://twitter.com/spmsnk spmsnk

Agree Microsoft Win8 and/or HP’s WebOS might be the
beneficiaries of any market share losses by any of current dominant mobile
OS’s. Eventually MS and HP will have to combine forces towards a unified
ecosystem if they have any hope of taking on Apple

but android is formidable and beloved by the right demographic & there is no rule that says google can’t start levying fees on manufacturers it ostensibly saved
http://michaelkdawson.com/ TrendRida

You are right about “beloved by the right demographic.” Not quite crackberry-esque, but loyal. As noted, MSFT is already levying fees on the behalf of GOOG. There is also the ORCL lawsuit in the background. Depending on how that plays out – GOOG will have no choice to levy a fee. However, they will vectoring that money to ORCL….
Nate

It’s not just Microsoft collecting from HTC. Nokia is also now collecting from Apple. See this link:

http://gigaom.com/2011/06/14/why-nokia-deal-with-apple-may-spark-mobile-patent-war/

Usually it’s cheaper for these companies just to settle than to fight it in court. If Windows ever releases a viable mobile platform, I wouldn’t be surprised to see them get sued as well. The whole software patent system is an embarrassment. So I would hardly see this problem as restricted to Android.

I’d be interested to see the evidence for this assertion: “However, desktop search is under attack as different discovery models emerge.” What are the prime threats to Google’s search position? Social search? Facebook?
http://michaelkdawson.com/ TrendRida

I was getting ding over on Seeking Alpha about that statement “”However, desktop search is under attack as different discovery models emerge.” Here are my responses:
1) Google is still King of search advertising and most likely will remain #1 for awhile. However, businesses now have viable alternative internet advertising platform in Facebook. Some companies are having more success with Google while others Facebook. The problem for Google is that until one is proven more effective than the other – customers will split their ad spend by reducing the spend to Google. Basically the ad pot is the same, but money going to Google & Facebook instead of just Google.

Bottom line is that Google’s other initiatives must start paying for itself instead of relying on profits from search.2) Facebook Surpasses Yahoo as Top U.S. Display-Ad Seller in Study” Facebook will reap $2.19 billion in display ads sales this year, for a 17.7 percent share of the U.S. market, topping Yahoo’s 13.1 percent, according to a report today from Internet research firm EMarketer Inc”stk.ly/lDKA32
Teddi Knight

Great post. I have been following you for some time on seeking alpha. Nice call on RIM. I have been in RIM for a few years, through selling options. I have enjoyed double digit returns. Like you, I have written so many articles about RIM not being for “investors”, but for traders or those of us who do options. My RIM trades are here http://www.fullyinformed.com/stocks-canada/2011-RIM.htm

Sadly it is now time for me to leave RIM behind. It provided wonderful returns but I was swamped this past week by emails from readers wondering what to do about RIM if you held stock. I couldn’t reply to them all so I posted a personal comment on my site discussing a few ideas on what investors who are holding stock could do. http://www.fullyinformed.com/articles/2011/rim-a-personal-comment.htm

RIM has made for lots of articles. I will miss it.
Thanks again for such a great website and you have some excellent ideas.
Teddi Knight http://www.fullyinformed.com
http://www.hedgefundfx.com Ross Jaklik

What do you say to Google’s potential in Cloud Computing? I didn’t notice this mentioned once in this article, but there ability to be a juggernaut in this arena should be priced into your shorts. Oracle also has the potential to be a leader in this area, so does Apple, however I give the cake to google.

This is more a hunch than anything, you’re correct – the cars and so forth are a joke, but I can’t comment on the exact amount of money they have actually spent on that.

Also, am I living IN THE barn? Where are these ads on my android devices? I thought the ads stored within applications were born from the actual applications, not the android device?
http://michaelkdawson.com/ TrendRida

Thanks for the comments & congrats on almost making your year already. I will definitely keep an eye on your site going forward….
http://michaelkdawson.com/ TrendRida

Google has a ton of potential in Cloud, but how are they going to monetize it? More ads. The ad model worked great for search, but IMO it is not as effective in other products. I’m still a big fan of charging a fair price for a product or service – but their DNA is free or almost free…..
http://marketshotnyc.com MarketShot

Google just hasn’t had the margins since they dropped me from Adsense, nuff said. =)
http://www.hedgefundfx.com Ross Jaklik

Create google products to harness google cloud. Google brand tablets etc. Turn that machine into Apple, people are saying they don’t have the cash for this gamble? I don’t know.
http://www.usedmobilepk.com/ used mobiles for sale

Google, Microsoft, iPhone and many powerful companies faces growth struggle in past three recession years of 2007.2008.2009. But I am sure now the business in these large enterprises is grown because recovery period is begun in economy.

RIMM is Done – Who’s Next?

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