Why is Research in Motion Crashing and Burning?

Remember that intriguing and innovative upstart from Canada that started taking the corporate world by storm with the BlackBerry about ten years ago?  Research In Motion (NASDAQ:RIMM) once seemed poised for explosive returns with a solid enterprise user base and high quality consumer products.  Back in 2007, Jim Cramer dubbed RIM one of his new Four Horsemen of Tech, along with Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) .

Since then, RIM has not fared nearly as well as its competitors, with its share price most recently tumbling to a 52-week low of $37.69, compared to a 52-week high of $70.54 and an all-time high topping $140 back in 2008.  The market share and mindshare of Blackberry is being attacked from all angles, most recently by Apple’s replacement for BBM, iMessage.  It can’t get any respect, even from its business partners.  Microsoft (NASDAQ:MSFT) CEO Steve Ballmer was invited to speak at last month’s BlackBerry World conference and he had the audacity to pitch his competing Windows Phone 7 on stage.  It’s become so disheartening that an analyst commentary that “things can’t get worse in the foreseeable future” is actually an improvement in sentiment.

What has been going wrong for RIM these days? And what kind of future does it face?

Lack of innovation leads to poor sales

RIM has not released a new hit consumer product in quite some time, instead introducing rehashed versions of its classic QWERTY BlackBerry phones along with lackluster attempts at new touch-screen BlackBerries.  Although RIM has held onto its strengths as an easy-to-use messaging device, it has not invested in new advantages such as a smartphone app ecosystem.  It’s almost as if they have already given up the consumer arena to Google and Apple.  As a result, the company has been steadily losing sales and market share to competitors and their iPhone and Android phones.

RIM’s new BlackBerry PlayBook tablet was a concentrated effort to turn this trend around, introducing brand new software from an acquisition, QNX, as well as sleek hardware to go up against the iPad and Android tablets.  From its release, the PlayBook received mixed praise as a high quality product that was, again, missing key advantages so that the tablet would only appeal to RIM’s current and shrinking customer base.  Retail sales of the Playbook are estimated to be another disappointment and once more, this tablet probably will not be the runaway success that RIM needs.

Erosion of the enterprise user

For years, the ease and security of the BlackBerry (NASDAQ:RIMM) network helped keep Research In Motion atop the enterprise world as companies and government agencies issued BlackBerries as work phones.  As newer smartphones with more features entered the market, these employees demanded that the IT department switch to more modern devices and, finally, changes are starting.  Even President Obama, once a die-hard BlackBerry user, now sports an iPad as well.

Government workers are complaining that they “have better access to information technology at their homes than they do at work” and want to use something they are used to.  More importantly, IT admins are slowly acquiescing and adapting because switching to new technology shows the potential for immense cost savings and productivity improvements.  As a result, iPhones, iPads and Android phones are slowly starting to replace BlackBerries around Washington.

On Wall Street, new applications and systems that can match the security and reliability of BlackBerry servers means that businesses are ready to switch, too.  Deustche Bank (NYSE:DB) has recently started a pilot that lets its employees use work email on their iPhones, with satisfactory results, and other banks may follow.   Very soon, RIM’s lack of market leadership could lead to the loss of its core customer base with no immediate recourse.

Anxious investors want answers

In late April, RIM cut its earnings guidance, sent its stock price tumbling and raised concerns about declining sales.  This, along with problems surrounding BlackBerry, has been reflected in RIM (NASDAQ:RIMM) stock and thoroughly rattled its shareholders who desperately want things to turn around.   The continued problems with product development for the foreseeable future have been framed as crucial missteps by executives.  Predictably, influential institutional investors have called for the replacement of the co-CEOs, including RIM founder Mike Lazaridis, with someone who can implement a new strategy.  Right now however, RIM’s market cap of $20.23bil makes a takeover an expensive proposition, but if the valuation keeps falling, the company and its executives could become a target.

Possible endings in sight

Where does RIM go from here?  As some analysts have pointed out, RIMM (NASDAQ:RIMM) is still a relatively healthy stock from a technical perspective.  The firm’s P/E ratio is incredibly deflated at 6.14 and its debt levels are low as well.  However, amidst its rapidly shrinking sales and market share without hope for significant growth, those metrics will soon change for the worse.

If past cases are any guide, RIM’s current situation is comparable to those of Motorola and Palm (NYSE:HPQ) mobile device manufacturers who were also disrupted by the emergence of new smartphones.  Motorola was able to rebound by using Android in its highly successful Droid then spinning off the phone division into Motorola Mobility (NYSE:MMI).  Palm was not as fortunate with its own webOS-equipped Pre, and in 2010, was acquired by HP (NYSE:HPQ) for its assets.  Based on the history of these peers, Research In Motion really only has a few more chances to come up with something, anything, that will turn the company around.

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