RIMageddon: Three end-game scenarios

RIMageddon looms, after the BlackBerry maker fares far below Wall St. expectations in its Q1 earnings. Here are three possible end-game scenarios for the ailing firm.
Written by Zack Whittaker, Contributor

Did you bring popcorn? Research in Motion's first-quarter earnings report was a blast --- in the literal explosive sense.

A little less than a year ago, ZDNet's Jason Perlow predicted three outcomes for the BlackBerry maker: independence, assimilation, or oblivion.

The company was given three valid options --- and it still had time on its side --- to pull itself out of the then-quagmire it had found itself in.

But RIM failed to adapt and compete, and announced its first ever quarterly operating loss.

RIM said today it would layoff 5,000 employees, dropping the total employee count figure down around the 11,500 mark following earlier layoffs in May. It shipped only 7.8 million BlackBerry smartphones down from the 8.7 million units Wall Street expected.

It isn't even shipping BlackBerry 10, the company's possible saviour, until the first-quarter of 2013. The only thing keeping investors on their seats was a possibility --- even if it was a slim chance --- of a market comeback with its next-generation operating system and forthcoming smartphones.

RIM can stay and flounder, share and generate long-term revenue, or sell off completely and throw in the towel.

Let's break this down a little further.

Option 1: A flat-out company sell off

BlackBerry is a tale of two fronts: BlackBerry smartphones and a data network.

Microsoft and Nokia have tossed around a thought or two in buying the company, but nothing emerged. Nokia, despite its own problems, could have made a break for it. Together, RIM and Nokia's combined resources could have seen a possible partnership.

Using a recycled analogy: "Unfortunately two poops just land you with one giant poop."

Microsoft, while still invested in a smartphone future with Nokia, could bite the bullet and take on the company. It has a healthy market cap of $251 billion, but it would be a risky bet and investors may revolt against the decision. While Microsoft --- as an example --- could benefit from its data infrastructure for mobile enterprise-focused email services, it wouldn't have a need for the smartphone-building side.

Having said that, RIM has $2.2 billion in cash and therefore has a strong savings position. RIM also has no debt. But as ZDNet's Larry Dignan noted, "that war chest could evaporate quickly the longer the company takes to deliver new products."

Microsoft aside, other companies may wish to make a bid. As Perlow said a year ago, "RIM is not a clean purchase for anyone," let alone now the company is in worse shape than ever.

Option 2: Split, asset strip and 'battery pull' the company

RIM could split itself off into two or more separate entities --- just like News Corp. did to separate and ringfence its profitable side away from its scandalous side --- and offer out its various divisions to any company wanting to pitch a bid.

In many cases, companies that split themselves into various parts and offer up the bits that other companies want can see a greater return than selling the company off as a whole. It's like cutting the fat off the roast chicken and serving up the thigh and breast to those who want those bits. Even the dog gets the fat and the scrapings. (That said, I have a cat, and have been vegetarian for more than 20 years. Go figure.)

The data network could be sold to Microsoft to use in its Office 365 email infrastructure, which then Nokia could benefit from as per its partnership to market itself as a "secure enterprise email smartphone provider."

Apple could make a similar move and acquire the data network for its iMessage platform. Outside of its corporate-focused enterprise email solution, BlackBerry Enterprise Service, it has more than 55 million BlackBerry Messenger users, its consumer-focused instant messenger.

Apple could do so much with those numbers; it's mouth-watering to just think about it.

But at present, the data network is worthless without a strong base of BlackBerry smartphones. A government could buy the network to continue its support for its existing range of enterprise-enabled BlackBerry smartphones with an eye on replacing them over time.

Wedge Partners analyst Brian Blair said this week: "We don’t believe RIM has much to offer." He noted that without BlackBerry handsets that need support, the data network is vastly redundant.

On which note, who might want the handset business.

No company that already has its hat in the smartphone ring wants to acquire the BlackBerry smartphone-building unit. It makes no sense. Even ailing Nokia couldn't do anything with it.

Devices aside, what the unit has is employable staff --- though the total number just got significantly lowered by today's earnings call --- and a next-generation operating system that could be licensed off elsewhere as the company noted in its post-earnings release call.

BlackBerry still owns a hearty 12 percent of the market share and could work its way in as a replacement or compliment to Microsoft's Windows Phone platform. It even has a stronger market share than Microsoft's, at around-about 4 percent mobile market share according to comScore.

Failing that, Microsoft could run Windows Phone on RIM's hardware, or could even rebrand BlackBerry OS as it is. Its future BlackBerry 10 software, which could be modified to run on Microsoft's smartphone partner's hardware, could see a combined market share reach of around 15 percent.

It's all about who gets the third-place slot, instead of focusing on taking on the behemoths of Apple and Google. The slower yet more interesting race is between RIM and Microsoft on mobile platform share.

RIM and Nokia have also failed to gain application store momentum, unlike Apple and Google. Apple has its App Store, and Google has its former Android Market, now called Google Play. RIM has a significantly smaller but nevertheless loyal base of developers writing applications and games for the platform, but it doesn't even come close to the market leaders with its meagre 89,000 apps.

Even Microsoft, which falls in fourth place behind third place RIM, has more apps in its Windows Marketplace.

A $7--8 share price for RIM looks like a bargain for any prospective buyer until one considers the underlying problems with the business. It has two partners in a symbiotic relationship where one cannot live without the other. That said, RIM still has a solid patent portfolio, which could be sold off for between $1.3---$3 billion, according to Macquarie analysts.

RIM has more than 11,000 owned and pending patents, along with the $750 million paid for the Nortel portfolio.

Macquarie added: "With just a round-about $3 billion enterprise value, RIM now appears digestible for a wide range of companies looking for optionality on mobility or to bolster their patent portfolios."

However, a patent sell-off seems possible in principle, but the demand may not be as high as one may expect.


General Patent Corp. chief executive Alexander Poltorak told ZDNet: "Most of RIM patents came from the Nortel auction won by RockStar consortium made up of Apple, Microsoft, RIM and Ericsson."

"All members of the consortium are licensed under all Nortel patents and, therefore would benefit little from reacquiring them from RIM."

Google has a particular thirst for patents following its 17,000 patent acquisition of Motorola Mobility for $12.5 billion. Sure, it received a wealth of knowledgeable and well-trained staff, and built an Android hardware and software ecosystem, but Google really saw benefit from its patent purchase as it continues to fight an indirect war with Apple, with Samsung as the front-line soldier stuck in the battlefield trenches.

Poltorak added: "Google would be a logical candidate since they had bid for this patents last summer at the Nortel auction and lost. However, Google's main purpose in buying up patents is to wield them at Apple, but Apple is already licensed under these patents so no one can assert them against Apple."

Outside of those three split-off businesses, everything else can be sold for scrap --- including the PlayBook business. In fact, sell off the PlayBook unit to a chopping board manufacturer. Maybe someone more technologically naive will get a better use out of them than the 260,000 who recently bought one.

What on earth were they thinking?

However, even after option 2, RIM could still end up with most of option 1 on its hands. The end result would be the same: an all out catastrophic "walk towards the white light" moment as doctors in the room shout, "clear!"

Option 3: Keep calm and carry on

RIM's failure can be left in the hands of the founders, Jim Balsillie and Mike Lazaridis; an almost ironic twist of fate that the duo all-but-killed the company they founded. At least Lazaridis stuck around as company vice-chairman so at least investors know where he will be so they can give him a good talking to.

Heins will likely be looked upon as the fall guy. He rose up the ranks when the two co-chief executives stepped down after they caused most of the damage to the company and plugged what he could while he had the chance.

But he wasn't fresh meat for the grinder, and could be argued under his leadership, the company slipped even more. It should be "out with the old and in with the new", not "out with the old and in with the just-as-old."

Send Heins along on his way, and throw him a similar severance package as the two founders received --- and boot out the rest of the company's leadership. They can hardly be absolved from the mess they in turn helped to create.

What next? Keep the data network for existing BlackBerry customers and ditch the BlackBerry 10 software and upcoming device hardware combination. Acquire licensing rights to Android and start shipping those new devices you have tucked away in your production labs.

BlackBerry 10 doesn't have to be put out to pasture, though. It could be licensed on to others who may want to use it, as suggested by Heins during the post-earnings conference call. Nokia may want a crack at it, because the Finnish-based phone giant hasn't got much else to lose. Samsung, with its wide choice range of Windows Phones and Android devices, could also make BlackBerry 10 work on its hardware as it seeks to expand its diverse selection of devices to cater for seemingly everyone.

RIM says it is "convinced" it will remain a hardware-software company, making option 3 look likely, but could also be its downfall should it fail to at least consider option 2 under its J.P. Morgan and RBC Capital "strategic review," which in corporate speak signifies a split-up and sell-off.

RIM probably should have agreed to start licensing its existing BlackBerry operating system and other software last year when it was allegedly approached by Samsung, HTC and others.

All RIM has to do is get its hardware and software out there --- no matter what. It's already pushed back the BlackBerry 10 release by a calendar quarter. Forget the hardware integration; just finish off the software and get it out to partners, friends, and even rivals.

Image credit: Research in MotionCNET, CNET.


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