Software the key for RIM to stay in the race

Share

Forecasts of impending doom for Research In Motion Ltd. are greatly exaggerated.

While the company's earnings warning this past Thursday provided the bear camp with extra ammunition, many of the dire predictions are far darker than reality warrants.

The mobile phone business is in dramatic flux. To stay in the fight, RIM needs to evolve into a respected software platform. This means providing developers with tools they love, enabling them to create powerful apps and games that attract customers. RIM's chances of doing this are better than most people think.

I have been a BlackBerry user and a shareholder for over 10 years. I've also been a sell-side analyst covering the stock over that same period. This week I will attend RIM's Capital Markets Day and the BlackBerry World conference in Orlando, along with hundreds of other analysts and software developers.

Everyone is there to gather information. In many ways, an institutional investor and a software developer are in the same boat. Both need to decide where to invest their money. Institutional investors are gambling on stocks while software firms are gambling on the underlying platforms.

Right now, it's a battle of BlackBerry vs. Apple and Google. But RIM has faced fierce competition before and managed to thrive. The company topped one million subscribers in February, 2004. It hit the 10 million mark in October, 2007. Today, RIM has about 60 million BlackBerry subscribers.

Its most intimidating rival is Apple, which introduced the iPhone in the summer of 2007. The new device immediately became a consumer icon and put RIM under immense pressure. Yet growth continued. RIM's sales expanded from $6-billion in fiscal 2008 to just shy of $20-billion in fiscal 2011.

Despite its tremendous revenue gains, RIM's stock declined in value by about one-third because of concerns about growing competition. RIM now trades at under eight times forecast earnings for the current fiscal year. That ratio reflects extreme skepticism. It says that the market does not believe RIM can sustain its current level of earnings.

Investors fear that RIM's software isn't up to snuff. There is also a perception that RIM management didn't truly understand the risks they were facing until they were left in the dust. If the bears are right, RIM is simply not moving fast enough to deliver a compelling experience for users.

But the race is far from over. RIM has come a long way since last year's big Orlando conference.

It was last year, around this time, that RIM acquired QNX Systems for $200-million. QNX's major asset was its Neutrino operating system. Famed for its reliability, Neutrino provides the smarts for nuclear reactors and other vital equipment.

QNX's software now brings its muscle to the BlackBerry PlayBook and will appear on BlackBerry phones in 2012. It provides RIM with an important competitive advantage - an operating system that is more stable and secure than anything else in the mobile market.

Perhaps as a result of the QNX acquisition, RIM's pace of development seems to have picked up. In under 12 months it developed the PlayBook tablet and built and launched Tablet OS, which is RIM's name for the Neutrino operating system as implemented on the PlayBook. The PlayBook obviously isn't perfect yet, but let's remember that it took Apple two years to bring a cut-and-paste function to the iPhone.

RIM has also taken big steps to give developers better tools to build apps. This is vital. Developers don't like wasting money any more than investors do. They want to be able to create apps for one platform - the iPhone, say - and adapt it easily for others.

A year ago, developers working on BlackBerry apps were forced to use the Java computing language as their only option. Now RIM has added industry standard tools such as HTML5 and Flash. The Tablet OS is set to become the basis of next year's BlackBerry "Superphones," which will open up tremendous new computing capabilities for users, including the ability to run multiple apps at the same time.

If a solid operating system and a wide variety of applications are what matter to high-end consumers then these developments give RIM a great chance to stay in the race.

It all comes down to execution now. If the last 12 months of progress tell us anything, it's that RIM is training hard to be competitive in this fight. This week I'll get a further glimpse of how well this work is paying off.

I intend to pay close attention to three things.

Management focus: Does management truly understand the need to become a much stronger software company? I'll be looking at how management communicates and whether developers buy into it.

Developers' enthusiasm: Are software developers seeing enough progress with RIM's various development kits? Only conversations with developers can help me answer this question.

Product announcements: Will new devices running BlackBerry 7, a stop-gap Java-based operating system, be enough to bridge the gap until QNX arrives on RIM's phones in 2012? Again, conversations with developers will help me gain a better handle on this topic.

Stay tuned. It should be a fascinating week and I'll be reporting on what I find.

Special to The Globe and Mail. Chris Umiastowski spent over a decade working as a technology analyst on Bay Street. He now works as an independent analyst and strategy consultant.

The author owns shares in RIM, Apple and Google.