RIM and Nokia: On Borrowed Time

RIM and Nokia: On Borrowed Time

Summary: While both of these companies have assets of potentially strategic value, neither of them are likely to survive as independent entities or even in one piece.

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Once mobile industry titans, Canada's Research in Motion and Finland's Nokia owned significant pieces of the handset market in North America, the EMEA region and Asia. But over the past several years, their commanding market lead in smartphones has eroded to single digit levels and given way to much more aggressive competitors -- Apple with their iOS products and Google with its Open Source Android operating system and their legion of Asian OEMs, the most successful of that army being Samsung, the Korean consumer electronics and contract manufacturing giant. What happened? Both RIM and Nokia sat on their laurels with aging technology (BlackBerry OS and Symbian) and allowed "Not invented here" syndrome to pervade their corporate culture which eventually caught up to them. See alsoThe mobile space is hot, so what is wrong with Nokia and RIM?RIM to forego the keyboard with BlackBerry 10RIM cutting jobs 'in batches', eyes $1bn savingsNokia starts to sink; 10,000 jobs cutNokia prepared to sell patents, maybe Apple should buy and save on lawyer fees Nokia scrambled first to compensate by throwing their baby, Symbian, out with the bathwater in favor of a partnership with Microsoft. In the wake of the iPad, RIM bought Canadian software vendor QNX to create BlackBerry OS 10. Only Nokia currently has handsets to show for their "Burning Platform" efforts, but like RIM, the company is in immediate danger of financial collapse due to disappointing sales, and both companies have had to trim significant employee headcount an enact other austerity measures just to stay alive. While both of these companies have assets of potentially strategic value, neither of them are likely to survive as independent entities or even in one piece. Both of these firms are at a very real risk of financial collapse. Nokia has approximately 5 billion in reserves, but many analysts estimate that could be burned through in approximately one year with their current expenses, so the company is going to have to enact far more severe austerity measures than it has in place now. This could include a much larger round of layoffs reducing the company's size from its 124,000 employees to a much more manageable number. RIM is in a somewhat better position as it has approximately $2B in cash and is a much smaller company than Nokia with only about 14,500 employees.

However, the run rate on paying for salaries and operations of their datacenter/network infrastructure and committing manufacturing resources and components to their new BB 10 products could eat that up relatively quickly, especially if the new smartphones do not succeed and they have to write off inventory as they did with the PlayBook. Can these companies pull out of a nose dive? It all comes down to execution, how desirable their next-generation products are, and whether or not they can even continue to compete in a highly manipulated supply chain by extremely aggressive competitors. Both of these companies have very clear disadvantages as they relate to their competitors. For Nokia and BlackBerry, I would have to point towards a significantly smaller application base, although the problem is much more severe for RIM.

There is also a basic sex appeal issue that is very hard to get around for these two companies. Of the two firms, RIM seems to have had the most difficult time with overall product appeal when compared to its rivals. Nokia traditionally has made very flashy products, so they are much more suited to adapt to the consumerization environment that has been created by Apple with their iOS products and Google's OEMs. I think at least in RIM's case, the company absolutely has been releasing inferior products to that of their competition. The PlayBook, while having excellent hardware, was marred with problems related to basic software functionality during its initial release cycle in 2011.

The PlayBook OS developer environment (which is essentially identical to the one used on the upcoming BB OS 10) is crude compared to what exists for iOS or Android and has taken a long time to manifest in its entirety. And the existing BlackBerry 7 products are technologically inferior in just about every way imaginable from the rest of competition.

Nokia has arguably released a very good phone with the Lumia 900, but the gestation period of creating a product as a result of their Microsoft partnership has been elephantine, so they have had to subsist primarily on their Symbian revenues which have been in heavy decline. I believe that Nokia made the right call with Windows Phone, but just as it is imperative to intervene with a cancer early on in its development, Nokia should have been much more proactive with their transition, which would have enabled them get their next-generation products out the door faster. Their brief flirtation with a custom Linux OS (MeeGo) instead of using a licensed product such as Windows Phone or Android was also an unnecessary distraction as well.

We also know that Nokia's Bill of Materials (BOM) for the Lumia 900 is somewhat higher than Apple's iPhone 4S, which is a more powerful device and is sold with a much higher profit margin. Considering that the Lumia has to be heavily carrier subsidized at $99, this is a recipe for losing a great deal of money. So the question is, what can help Nokia rebound? Many industry watchers feel that Microsoft will be the white knight that will eventually come to the company's rescue. While I would have felt this way perhaps a few weeks ago, Microsoft's Surface tablet announcement has changed my perceptions about how the company feels about keeping its partners alive. Nokia is currently Microsoft's flagship smartphone vendor, but Redmond could just as easily go the Surface route and sell their own smartphones (a la Google Nexus) instead of partnering with or buying Nokia outright.

My gut instinct is that Microsoft has their hands full with the Surface tablets, the Windows 8 launch and has already has a full plate of technology products to sell, and needs Nokia to sink or swim on its own merits. Nokia really needs Microsoft at this point much more than Microsoft needs it. And the idea of Microsoft adding even a heavily weakened Nokia with even half its current 120,000+ employee base to its payroll does sound like an unmanageable human resources burden.

I also would not discount the possibility of a company like Samsung warming up to Microsoft and producing much sexier Windows Phone 8 handsets in 2013, and taking Nokia's place as their premier smartphone vendor or even the contract manufacturer for a Surface phone. Nokia's situation is dire, but they do have some incredible photographic technology which they have developed with Pureview which could allow the company to distinguish itself from the rest of the pack as the prosumer shutterbug's phone of choice. Alternatively, it could also license this technology to other smartphone vendors. Nokia also has penetration and leadership in developing markets with inexpensive GSM feature phones, which arguably is a declining business but still has at least 3 to 5 years of life left in it. RIM's current problems stem from being distracted heavily by the PlayBook launch in 2011. While there are a number of reasons why I still like the PlayBook, it was a bad idea for RIM to knee-jerk a tablet product into development and so soon after the iPad was released. QNX certainly was a necessary purchase in order to refresh the company's OS technology, but the efforts could have been applied towards smartphones instead. RIM would still be dealing with many of the same problems as the PlayBook in regards to software development issues, but the time to market would not have been as rushed, as key functionality such as email and PIM would have been made a priority and a QNX smartphone product would not have been released without those features working out of the box. The question remains whether or not after shedding assets can RIM exist as a services and software company. I believe that a Not Invented Here mentality and a highly protective desire to keep their own smartphone business viable has prevented them from taking leadership in BYOD and competitors' devices from participating on the BES network.

I find it very unlikely that RIM can maintain independence by shedding the handset/tablet business and simply exist as a messaging infrastructure provider.

If that is all that remains of the company, it is more than likely it will be owned/maintained by a third party due to government interests, much like Iridium was kept going after the company went Chapter 11. But that's called being kept on life support, not a vibrant living company. Both companies are prime acquisition targets but Nokia is a much less messy acquisition than RIM, as it can likely be devoured whole and the value proposition may make sense for a Chinese computer manufacturer looking to assert themselves as a smartphone power in North America, the EMEA region and other developing countries.

However, Nokia's capitalization is currently twice that of RIM's, so it's a much more pricey proposition. It may take longer (a few years) for Nokia to be an attractive acquisition target as it sheds more and more staff and other excess baggage. It's just too big and needs to shed weight before it can be integrated into another company.

RIM certainly has a number of assets of value, which includes a large array of patents, their handset design and manufacturing, the BES data communications network and NOCs and the QNX operating system itself.

The problem is coming up with someone who would want to own all of these things, not just one or two of them. RIM may be worth more money in pieces than it as as whole company, which leads to the logical conclusion that the company is going to be sold of Nortel-style.

The patents can go to just about anyone. QNX may be of value to an automotive, aerospace of telecom equipment company (such as a Cisco) because it is an RTOS. The secure data communications network for BES may or may not be of value to a company like Microsoft or even Google. The value of the company's handset design and manufacturing is questionable, although it might be synergistic with someone like Lenovo looking to attract the "executive" style consumer.

While there is no question that both of these former mobile industry giants have technology and intellectual property of value, the difficult truth is that in order to survive intact for the next several years, both need to stage tremendous comebacks.

Over the next year, this is going to involve severe austerity measures (a massive headcount scale-down at both companies as well as asset divestiture) in order to reduce the run rate on cash reserves, as well as a perfect execution of yet-to-be-released products (BlackBerry 10 for RIM and Windows Phone 8 handsets for Nokia).

Assuming the execution is perfect, we are also making a big assumption that the new products will allow them to distinguish themselves and draw attention to consumers that would otherwise be looking at the products from their competitors, such as Apple and Samsung, who are also continuing to innovate and command a very strong lead in the smartphone and tablet market.

In the case of Nokia, we cannot even be assured that their patron, Microsoft, is fully committed to keeping them afloat, given the company's recent move toward branding their own devices with Surface. And now that the public knows that the Lumia 900 will not get a Windows Phone 8 upgrade, that may make moving existing inventory difficult.

And if RIM's previous performance with attracting developers to their QNX-based PlayBook is any indication of future success with BlackBerry 10 handsets, we could very well be looking at the company's last stand come this fall.

Any way you look at this, the challenges seem nearly insurmountable.

Will Research in Motion and Nokia survive 2013 intact? Talk Back and Let Me Know.

Topics: Nokia, Mobility, BlackBerry, Security, Smartphones, Tablets

About

Jason Perlow, Sr. Technology Editor at ZDNet, is a technologist with over two decades of experience integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer.

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44 comments
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  • Nokia and RIM both will survive

    that's the great thing about borrowing - you get what you need now, and live to pay it back in the future.

    But hasn't everyone gone over all this already for the past three weeks?
    William Farrel
    • Their borrowing rates are high

      They've been rated as "Junk bonds" so their interest rates will be high.

      Neither one has enough cash to make a credible run at market share, even if they invented the Jesus Phone tomorrow. That takes an incredibly deep pocket, as you must build many tens of millions of devices with many billions invested in inventory and supply channels and manufacturing capability.

      At this point anybody who lends money to one of these two deserves to lose their principal.
      symbolset
    • You got that half right

      RIM will indeed survive, while Nokia gets sold off as parts, or absorbed by Microsoft. Then you'll see the "Microsoft Lumia Window Phone 8 series phones, by Microsoft" (we know how Microsoft really likes long, complicated names). I also expect Microsoft will not respect the current Navteq licenses, and will require all the GPS units to run some variant of Window 8 (Maybe even that $95 Window RT license). Imagine having Office on your GPS... I wonder how many accidents that would cause?
      Jumpin Jack Flash
  • Apple

    This same article could have been written about Apple in the late 90s and look at them now.
    clcrockett
    • Yes, but

      Apple had Steve Jobs to come to their rescue, and they were rescued in the middle of a relatively strong economy in very different set of circumstances in the industry.
      jperlow
      • This isn't a strong economy?

        It sure doesn't look like a weak economy to Apple at the moment
        William Farrel
      • Microsoft

        I thought it was Microsoft and their $150 million investment and who knows how much in settlement money that saved the day.
        clcrockett
      • You say that

        You say that now, only after the turn around Apple has done. Steve Jobs in case you did not realize was only human. There very well could be others in Nokia or Rim as brilliant or even more brilliant than Steve Jobs and just need an opportunity to shine.
        schultzycom
      • The $150 million

        Was the settlement, along with an agreement to produce Office for Mac (for 5 years). Microsoft has since sold off those non-voting stocks.
        Jumpin Jack Flash
    • Microsoft needed to invest in Apple

      Because Microsoft doesn't have a clue, they always need someone to follow.
      GoPower
  • Then stop comparing RIM to PALM:)

    Anyhow, RIM will likely survive simply because they are focused on doing BBerry 10 correctly, they have 75+ million subscribers, they seem to be doing well wooing app developers with "Cascade" and still have contracts with large organizations w/ BES and the new multi-device management system.

    To me, Nokia is now suddenly afflicted with an identity crisis - are they a Windows product or not? If they do not get Windows 8, what the heck are they supposed to get? The whole Microsoft venture thing seems a tad underhanded. They must have known they were going to start doing their own Microsoft hardware line well before Lumia hit the market.
    I smell a big collapse of NOKIA, quite frankly, with all their bond-related commitments. The collapse of NOKIA btw will actually cost Microsoft very little respectively-speaking. Microsoft got to enter the phone market quickly via NOKIA's Lumia line and now gets to get over the teething problems. They also lose nothing in terms of brand - NOKIA's poor sales of the Lumia reflect on NOKIA, not Microsoft. Microsoft has now hollowed out Nokia and can get what they want out of it to more than recoup any losses their strategic partnership may cost them - if I was NOKIA I'd be royally pissed at this whole affair.

    RIM has big issues too, but they still have 75 million subscribers who seem willing to wait and give them one more shot - if BB10 works well, as Thorston seems to be aiming for, then they could pull it out. Further, I disagree with your view on the BB10 developer environment - the app developers seems a LOT more enthusiastic about it than for the Playbook, so not quite sure where you come to such a conclusion. Lastly, the balance sheet simply cannot be ignored - and they still have a healthy one, albeit at risk of being devoured sharply over the next two quarters.
    respighifan
    • Developers are loving the new environment with APIS and packaged QML/C+ etc

      I was at the NYC Blackberry JAM as a developer, and we are loving the new environment--the author's statements:

      "The PlayBook, while having excellent hardware, was marred with problems related to basic software functionality during its initial release cycle in 2011...."

      "The PlayBook OS developer environment (which is essentially identical to the one used on the upcoming BB OS 10) is crude compared to what exists for iOS or Android and has taken a long time to manifest in its entirety. And the existing BlackBerry 7 products are technologically inferior in just about every way imaginable from the rest of competition.
      "

      are full of misinformation...and definitely DATED...has the author checked out the Playbook with the latest software or even the BB OS 7.X phones??!! The PB was the development platform for the next generation BB10 and was a key product launched to target the tablet market; it will only gain market share with improvements in BB10, as the phones and tablet and telematics in car in other devices/hardware will use a unified OS, Blackberry 10 OS. The one thing about all this RIM hating is that at least RIM stays in the news to one day rise again and make all the haters eat their words!
      pfcsystems
    • Careful with that "75 million subscribers" number.

      While that number may be accurate, bear in mind that at least a portion of that number could disappear overnight if BYOD breaks through. We use a Blackberry because we are forced to. We are not "willing to wait" and at least some of us would bolt in a moment if our iPhones, Galaxy, et al could be used on the company network. GOOD is in test now; could be released to all during the summer.
      Peter Sabin
  • The ticking speeds up

    Neither company really gets to burn through their entire cash reserves, because there are always corporate bottom-feeders like Carl Icahn around who will buy a big bloc of shares and use it as a platform from which to mount a "shareholder's revolt" against management. The pitch is something like, "elect my slate of directors and we'll sell the company now, -before- all the cash is gone and the company is worthless!"

    My hunch is that the laws in Finland make that tougher to do than the laws in Canada, so RIM might get attacked first.

    UPDATE: Ya gotta wonder about the idiots who downgraded this note. It's not like Icahn didn't do this exact thing to Mototola Mobility.
    Robert Hahn
  • RIM and Nokia: On Borrowed Time

    Since this post was entirely too wordy I decided not to read it. Nokia is going to do just fine. They have the name branding, are backed by Microsoft, and their phones were the #1 seller on Amazon.com and AT&T. RIM on the other hand, its up in the air as to their fate.
    Loverock Davidson-
  • Really

    And once again I ask, what big corporation have you run in your life?
    I smell BS.
    RIM has great assets, good cash reserves, and I am pretty sure if I go looking you wrote off Apple more then once.
    BB 10 will be out, the playbook is quite good, and its too bad they had to discount it to get people to see that. The OS2 enhancements make it a very good tablet. Mine is in use everyday till the battery dies.
    I have friends with Ipads sitting in drawers collecting dust. But they got sucked in by so called Tech writers like you and drank the koolaid.
    When any of you start running a billion dollar company successfully I'll be happy to listen to what you have to say. But till that day I blame you for most of the problems these companies have. Bunch of jump on the band wagon goons.
    Home Grown IT
  • Jason Perlow, please stop blogging...

    Jason Perlow,

    With all due respect, your articles in the past 12 months are nothing but total and utter BS, please do something about it.
    owllnet
    • I just want him to change his technique to get views and comments

      I wouldn't say _ALL_ of them were clickbaiting crap, but..
      zhangkhaien@...
    • Owlinet, please stop...

      Reading my blog. Thanks.
      jperlow
      • Be careful of what you wish for.

        It comes to something when authors of articles tell them not to read them in the future.

        It's quite tough out there in the job market, where do you envisage a job opening for an out of luck blogger that got the elbow because he told his readers to go elsewhere?
        Bozzer