RIM's fourth quarter was impressive on many fronts: Inventories were low and carriers have to restock, consumer and business demand was strong, gross margins were better than expected and earnings and the company's outlook handily topped estimates. But the real secret weapon: RIM is the most profitable device for carriers because it eats up less bandwidth.
That RIM-as-best-friend-to-carriers motif was evident on the company's earnings conference call. The company handily beat Wall Street estimates with fourth quarter net income of $518.3 million, or 90 cents a share, on revenue of $3.46 billion. The outlook for the first quarter was also well ahead of estimates.
As noted RIM and Apple will face increasing competition for their BlackBerry and iPhone juggernauts, respectively. For now, RIM doesn't look vulnerable by any stretch and shares are reflecting that in early trading Friday. But it's worth delving into the reasons why. If smartphones become a commodity market---and all tech industries turn to commodities at some point---shelf space will matter. And RIM's shelf space and carrier relationships are a huge asset.
RIM co-CEO James Balsillie noted the carrier-as-weapon situation. Carriers---like Verizon Wireless with the Storm---market BlackBerries heavily. Why? They use less of the network and yield more profits.
RIM essentially has a shadow telecom network that pushes, compresses and prioritizes data. This approach adds up to lower costs for carriers because they don't have to carry the entire load. So while RIM inventories are very low at carriers Best Buy and others are starting to restock. "[Carriers] are very well aware of how profitable BlackBerry is for the business and they’re very well aware of how strategically aligned we are with them, both current and long term," said Balsillie.
But here's the passage that highlights how RIM markets that it consumes less bandwidth behind the scenes. Anyone that has seen AT&T's network buildout to support the iPhone knows why this message would be appealing to a wireless carrier.
Cannaccord analyst Peter Misek asked about why RIM likes to say it's the most profitable device for carriers. Misek was trying to make a connection between RIM's strong consumer sales amid a downturn and bandwidth consumption. Balsillie said carriers work with RIM well because it is consistent and efficient with network resources.
Here's what Balsillie had to say (emphasis mine):
To market that you are most of the network consumption of a carrier I don’t think is a very good marketing plan. Because what you’re seeing is, in this capex environment, when there is scarcity—when you have call performance issues, most of the time it’s a capacity issue. And that’s what happens. You just get stung on capacity.
So, you’re running a 5kbps voice stop and somebody’s trying to stream a TV show for a 100 kbps or a 80 kbps, I mean, you’re taking away 10 to 20 voice calls of capacity. So with the contention comes congest and all this kind of stuff. So if you can compress and you can script and you can buffer and you can side load, and all this kind of stuff, you know, you’re rationing capacity.
And plus, if you’re rationing packets, it’s pretty much a linear relationship between battery life—battery consumption—and packets delivered. There’s also some display consumption, of course, with the color display. So all I can say is carriers do get the element that we’re profitable, it’s the wise carrier that not only correlates that on a CPGA, RPU churn kind of basis, but also interrelates that to the true step function of capex in a scarce capacity function.
And I think in this world, there is and there is going be a lot of reckoning on capex, especially if these smartphones become more and more powerful and these high-speed PC cards are out there and these high-speed networks. Just because you can go faster doesn’t change standard law that it is a fixed relationship of a bit per hertz. I mean, just because you can go ten times faster and consume ten times more packets doesn’t mean you have ten times more capacity. Or a hundred times even.
So I think the role of side loading is going to be very, very important and the role of efficiency management is going to be important for user experience and for network capacity. And this is not like pulling an optical network and just repurposing the whole spectrum on fiber for every strand of fiber. Wireless is different.
That's quite a mouthful, but the concept is notable. Balsillie didn't mention iPhone by name with the dropped calls, but he could have.
RIM's game is selling a user experience for the entire wireless system---and of course it will be happy to sell you its enterprise server on the back-end.
Balsillie's riff about network performance is worth remembering as the smartphone consumer land grab is underway. Balsillie reckoned that the marketshare landgrab is only in the second inning. He foreshadowed a series of summer product launches, but nothing specific other than "lots of packaging, lots of multimedia, lots of new air link. Some surprising things for sure."