April 09, 2007
Why Stand in the Crossfire, Go Buy Some Pearls with RIMM
There are two pools of uncertainty in the handheld communications industry.
1. Nokia (NOK) and Qualcomm are currently disputing over not just the widely published 3G patents (which resulted in a preliminary payment by Nokia of $20 million), but also a series of smaller patents with claims pending in countries including France, the UK, Germany, Italy, and China.
2. Palm (PALM) is currently waffling in the past with no new products to compete with the new smart phone handsets or the new PDA’s. To inject new blood into the company, Palm has been subject to a whirlwind of buyout rumors. Most rumors have included Motorola, but those are just rumors. To this end Palm is a great short or put opportunity.
Research in Motion (RIMM) unveiled its new, more consumer friendly, Blackberry Pearl back in 2006. The Pearl does have competitors, namely Nokia’s line of business smart phones and Motorola’s Blackjack and in June the iPhone. RIMM has a couple of competitive advantages:
1. Respect of the business community, approval and trust is essential to gain market share in the business PDA industry. A similar case, AMD has long out performed Intel in benchmark tests for computations per second, but Intel maintained its market share because AMD does not have the respect level of Intel within the business community.
2. Niche approach (i.e. specialization), Nokia and Motorola (and Apple will) derive the majority of their revenue from the consumer market; hence their appeal should target their breadbasket market segments. Growing into a new market can be a complex and risky. Development of products specialized for business purposes can be expensive and incur smaller returns due to economies of scale. Economies of scale applies to the business handheld industry. Specializing in the business tier of the handheld communications market, has allowed RIMM to reap the competitive advantages of the economies of scale. This will have long-run effects in revenue and market share.
With handheld communications sector poised for growth as the market for handhelds is far from saturated, especially when looking at the future demand for connectivity in the developing countries (namely the BRIC countries), RIMM has upside that has yet to be realized by the market.
More information and financial figures on RIMM
Posted by jwbir at April 9, 2007 12:53 PM