With the number of opinions being expressed on major companies like Research in Motion and Apple, it can get awfully overwhelming to try and understand from a high level what the situation is. This has especially been the case with RIM in the last few days when they released so called “mixed results” – which basically means that they disappointed the street, but not really.

It’s fairly easy to identify the things people agree on – RIM has a solid balance sheet, no debt, $2.9 billion in cash, strong growth in revenues (up 18% yoy, though still not enough for Wall Street), shrinking gross margins (now at 45.7%) and reductions in average selling prices (currently $311/unit). A brief look at any analyst report will give you that information. However, there is less certainty on other more contentious issues – as I see it, there are two big issues in the balance, and the one that comes to dominate in the next few years will determine where RIM goes from here.

Issue (Negative): Competitive pressure in retail consumer space

80% of RIM’s revenues still come from new device shipments, meaning that it still very dependent on new sales growth, as opposed to revenues from post-sale services, which make up only 16% of revenues. It’s this sales growth that many analysts feel will be compromised by the additional competitive pressures that BlackBerrys are facing in the retail marketplace from Apple’s iPhones and other Samsung and Motorola smartphones that operate on Google’s Android platform. RIM’s competitors are deemed to be better at providing a better user experience as the focus shifts away from smartphones providing just email access (where BlackBerry dominates) to a more complete experience including applications, browsing and connectivity (where BlackBerry loses out). As an analyst from Sandford Bernstein put it – RIM can expect “margin pressure as BlackBerry gets more and more into a mass-market role with vanishing product differentiation and eroding brand premium.”

So in the mass-market RIM’s products are expected to lose market share to its new rivals especially as the focus of the user experience shifts.

Issue (Positive): The enterprise market and love from carriers

It is well-established that RIM is a market leader in the enterprise space thanks to its superior security capabilities that are necessary in an environment which is less cost sensitive but also more functionally demanding. The enterprise market loves the BlackBerry for its superior email handling capabilities which are more important to that space than other “toppings” like applications and browsing. While the security features of other smartphones are likely improving, the BlackBerry still holds its own there. Its leadership in the enterprise space is the trump card that RIM holds and is using to enter new emerging markets. RIM is currently dependent on the North American market but the real growth lies elsewhere as smartphone penetration levels start to taper off in North America. With ongoing expansion efforts in China and Indonesia, you could start to see new engines of growth for RIM and this might have been reflected in the company’s higher than expected guidance for subsequent quarters.

Another area that is frequently overlooked is the relationship that RIM has with its carriers. RIM provides a lot more value to carriers than just being a handset provider. This point was well made in a feature in the Canadian Business magazine. RIM actually operates data-processing centres which look at all the information sent via BlackBerrys, in the process removing potential threats and providing a level of security that is hard to match. At the same time, the system also helps carriers manage its traffic and uses compression technologies which allow more information to be carried over the same network from the carrier – the importance of this value-add cannot be underestimated when usage is becoming increasingly data intensive and clogging most networks. One more plus point that ties carriers to RIM is the carrier’s need to differentiate its product offerings from other competitors. It’s hard for them to do that with the Apple’s iPhone which is the same across all providers since there is only one model. But with the BlackBerry, RIM actually provides each carrier with something unique through its different models and hence caters to their needs. With the carriers doing a lot of the marketing for the handsets, this relationship counts for a lot.

Watching how the cookie crumbles

Ultimately, RIM’s prospects depend on which of these issues end up being more important down the road. The big question is whether RIM’s dominance in the enterprise market, combined with its strong carrier relationships and emerging market growth is enough to outweigh or offset the market share it might lose in the North American retail space to competitive pressures from other smartphone providers.

Disclosure: Long RIMM

Image Credit: Aubrey Arenas under a Creative Commons license

Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Note: See important disclaimers below article.

The price chart below looks like any investor’s dream if they got in at the right time. Things definitely have been going Apple’s way of late – in their latest quarter, Apple had record quarterly sales for Mac products (3.05 million units), iPod Touch sales grew 100% year-on-year, iTunes maintained its position as the world’s largest music retailer, iPhone sales (7.4 million units) rose 185% year-on-year and Apple now has $34 billion in cash and other liquid securities on their balance sheet. Phenomenal – to say the least, considering that we are only now coming out of a recession. But here’s the million (or billion) dollar question – can Apple really maintain or improve on these staggering growth rates? Expectations for Apple are now set at stratospheric highs, only perfection will do – nothing less.

Losing their first mover advantage?

Apple benefited from being a first mover in each of its product lines. The iPod changed the portable music industry, iTunes changed music retail, the iPhone changed smartphones and the App store changed software. Being the first mover allowed Apple to aggressively increase market share. However, first mover advantage does not last forever, once new entrants adopt the new trends, competition gets very much down to trench warfare and who can hold their ground better.

That is what we will be seeing as Apple sees more competition in each product line. To take an example, in the smartphone arena, numerous phones have emerged such as the Palm Pre, HTC Touch, LG Vu, Samsung Instinct and new Blackberries. Not to mention Google’s open source Android operating system which is being seen as the biggest threat to the iPhone. Many people are seeing similarities between what happened to the Mac when the PCs started taking up market share in the 80s and what could happen to the iPhone because of the Android platform. Nearly all the major players in the smartphone industry are part of the Open Handset Alliance that developed the Android which has now been implemented on a wide range of devices, including those from Nokia, Dell, Asus and Motorola. As a result, the choice of devices using Android will be huge. In the 80s, this choice was generated by Microsoft’s new standardized operating system which could be run on many hardware platforms and thus pushed the Macintosh out of the market. Might we see a re-run?

Likewise, while the App store is being touted as the feature that’ll keep smartphone competition away, the App store is no longer a feature unique to the iPhone. From the developer’s point of view, they will tailor their new apps to take advantage of all platforms such as the Android, PSP and the Blackberry app store, because it doesn’t make economic sense for them to restrict their apps to iPhone users.

A Comparison – Research in Motion

All that to say, it will be immensely hard for Apple to keep up its rate of growth, and margins now that it has moved past the stage where it’s still benefiting from being a first mover. To offer a comparison, look at the price chart of RIMM below from Aug 06 – Jun 08. That was when RIMM was benefiting from its own first mover advantage and expectations for its future were sky high. The second chart shows the price till present day.

Here’s a quote from a research report on RIMM from early 2008 – “Wall Street has high expectations for RIMM, they believe the company will report a solid first quarter while preparing to release a flurry of new products in the coming months to ensure its dominance in the business-oriented smart phone market.“ Sound familiar?

While I agree that Apple has a lot more loyalty towards its products than Research in Motion did, Apple too will suffer from competition and to continue to expect blow-out quarters (which analysts continue to do, hence an average price target of $234) might be asking for a little too much perfection.

Disclosure: No position in AAPL.

Image Credit: Dan Diemer under a Creative Commons license.

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.