A Turning Point For RIM

Earlier this week we noted that RIM's recent licensing deals and lay offs hinted at bigger changes at the company. Nokia is the firt major handset maker to license RIM's software and announced that it will release a RIM compatible device by the end of 2003. Below we take a longer look at what all this could mean for RIM's future. Click the "read more" link to see the full story.A Turning Point For RIM Techdirt's Prashant Agarwal examines why the BlackBerry maker is abandoning hardware to focus on enterprise software. Over the last two weeks wireless email pioneer Research In Motion (RIM) has made a number of announcements that suggest its business model is changing. Last week the company announced licensing deals with Handspring, Palm, and Nokia. This week it announced that it is streamlining operations by cutting 10 percent of its worldwide workforce. Currently RIM is in both the hardware and software business. This has always appeared to be an unsustainable long-term position. Sooner or later, they needed to concentrate on just one aspect of their business -- and the latest moves suggest that RIM is getting ready to abandon its hardware business in favor of its software business. Why should RIM abandon hardware? Hardware is a low-margin, high-volume business -- just ask Nokia. RIM�s main contribution to wireless hardware was showing that users would adopt a thumb keyboard for messaging. The licensing agreements with Handspring and Palm, though, show just how easily that can be replicated. These days, getting to the right form factor and UI for voice and data is a huge challenge, especially with devices converging towards all-in-one communicators. RIM has already entered this space with GSM/GPRS, CDMA, and iDEN devices, but by entering the voice market their competition suddenly becomes Nokia, Motorola, Samsung, and the other top handset makers. What is to stop these companies from developing keyboard based devices? Nothing. Nokia and Motorola already have. RIM could license a basic reference design to let others develop new devices. The challenge on that front is the software developer base. Right now RIM offers basic PIM, messaging and web access. But as they move into the communicator space, end users will want more software choices to customize their devices. Developers can develop Java applications for RIM devices, but most likely these will be limited to vertical applications. Palm has been able to combat Microsoft�s onslaught in the PDA market partly due to its strong developer base. It is no surprise that RIM, by licensing its keyboard patents, has now hedged its hardware bets with two Palm OS licensees. They realize that once the form factor problem has been solved, devices will compete on software and the Palm OS has a strong position on that front. Both Palm and Handspring are making plays for RIM�s core enterprise market, but do not be surprised to see both companies eventually license RIM�s enterprise software -- or at least support it in some way. RIM�s real asset is their ability to integrate with Microsoft Exchange and securely push corporate email to wireless devices. That leads us to Nokia�s deal with RIM. Given Microsoft�s dominance in the corporate email sector, Nokia needs a way to support Exchange. But as the two companies become more competitive, Nokia can�t work directly with Microsoft to create such a solution. RIM gives Nokia the ability to offer credible Exchange integration without having to deal with Microsoft. For RIM, the Nokia partnership allows it to sidestep an eventual device battle by partnering with the world�s largest handset manufacturer. RIM can specialize in high-end solutions and work with Nokia on more affordable solutions for the broader corporate market. In fact, Nokia might consider eventually acquiring RIM to bolster its position against Microsoft. All three of RIM�s licensing deals are with hardware companies that compete with its own hardware products. By working with Nokia, Palm, and Handspring, RIM all but admits that it will not be able to deal with the device challenge on its own. Nor should they. The hardware business is a low margin commodity business and the shift to communicators only increases the competition. If they truly believed they could hold their own on the hardware front, RIM would not have settled with Handspring, licensed the keyboard to Palm or partnered with Nokia. But they did. With less emphasis required on hardware, they can easily afford to get leaner. While they did not mention any specific departments in the layoff announcement, a 10 percent cut isn�t much. Between downsizing and cutting discretionary spending they expect to cut $20-25 million from their bottom line. Either their discretionary spending is very high or they are letting go of some very technical employees and cutting back on new product development. Don�t expect RIM to pull out of the hardware business overnight. The announcements and their timing indicate that RIM is taking long-term steps to deemphasize their reliance on developing hardware. The wireless space is still developing, and RIM is an important player in the market. Their products inspire competition and innovation. RIM�s future, though, is clearly not in hardware, but in software. The announcements from the past two weeks show they know this, too. Prashant Agarwal is the senior wireless analyst for Techdirt Corporate Intelligence. Send him your comments at prashant@techdirt.com. First published by FierceWireless on November 13, 2002.