Q-News

July 2011

Off With Their Heads!

Posted in Mike's Commentary

I’m amazed at how quickly people have turned on Research in Motion, Mike Lazaridis and Jim Balsillie, who until recently were held out as the bastions of the Canadian Technology scene.  We have proven once again that Canada’s tall poppy syndrome is still alive and well.  Let’s just go ahead and cut off the heads of the achievers and those who stand out above the crowd, even if it means killing everything in our garden.

The rush to jump off the RIM bandwagon is accelerating and we’re now seeing individuals rushing to be the first to declare the company deceased.  To quote one blogger, “So, who is going to raise the Gravedancer Fund and where do I sign? Waterloo is on it’s way to becoming the center of startup activity in Canada and the death spiral of RIM needs to be seen as an opportunity, not a threat.  It’s painfully obvious and we should stop ignoring the facts: Rim is cratering and there is nothing that can be  done to save them, short of firing the confused people who are running the show these days”. 

Analysts are running like sheep (never wanting to be free thinkers, stand out from the herd or be the last one on the street  with a buy recommendation), reporters and self important bloggers (who have never built or run a business) pillory Jim Balsillie and Mike Lazaridis, and shareholders sell out of their positions (as is their right). 

It reminds me of the bubble days when many of the analysts rushed to be the first to have the highest target price on a stock based on some mindless new valuation metric such as eyeballs, clicks, page views or price/hit.  Some of you may even remember Henry Blodget’s famous call on Amazon in October 1998 when young Henry achieved stardom by predicting that Amazon’s stock would hit $400. 

Well, it turned out that Henry knew just how to play to the greedy, salivating crowd but at the end of the day he was no better than anyone else in predicting the value of a company’s shares.  In 2000, Henry was voted the top Internet/eCommerce analyst on Wall Street by Institutional Investor, Greenwich Associates and TheStreet.com and in 2001 was drummed out of the industry in disgrace.  So just keep that in mind as you read the reports of the scattering analysts.

I’m not making a market call here and I truly have no idea how this saga will end.  I just think its time for a little rational thought and less panic and hysterics.  What I do know is that you can count on one hand the number of Canadian technology entrepreneurs who have managed to build multi-billion dollar global enterprises and, after working for 25 years to make RIM a success, I don’t see Jim or Mike walking away. Despite all of the current challenges, I wouldn’t bet against them. 

Certainly, management has made mistakes, particularly, in my opinion, in misreading the demands of transitioning to the consumer market from the business market.  This is understandable, particularly given the company’s hardware, email, power efficiency and bandwidth focus.  But again, who am I to criticize, I have never built a multi-billion dollar company and set the tone for an entirely new industry.

I wish management caught on earlier to the fact that a large portion of today’s smartphone consumers are more concerned with being able to play “Angry Birds” and less concerned about security.  Blackberry’s App World undoubtedly trails it two largest competitors in terms of ease of use and the number of apps available, but I’m sure that RIM continues to work on resolving this disparity.  Let’s face it, for the majority of users the measure of success for app markets will be quality and not necessarily quantity – do you really need access to 350,000 apps to find those that are really useful to you?

I would like to have seen RIM be more aggressive in bidding for and acquiring the Nortel wireless patents and possibly even been the top bidder for Palm.

As a long-time RIM supporter, I truly hope that these individuals are wrong and that following a period of retrenchment RIM will once again offer truly innovative smartphones, a compelling line of tablets and a compelling app offering. 

Make no mistake, the Canadian technology sector has much to lose from the demise of such an important Canadian technology icon.  Those who blithely call for the resignation of the CEOs and see RIM fading to black appear to quickly overlook the positive impact that RIM (and its leaders) have had on Canada and Canada’s tech sector.  The loss of RIM will have a significant and long lasting impact on the Canadian technology scene.  Just looking at some of the positives:

  • RIM created world beating technology and overcame competition from the likes of Palm, Nokia, Ericsson and Motorola;
  • It generated billions in sales and profits and tax dollars for Canada;
  • Created employment for over 17,000 people and created significant wealth for hundreds, if not thousands of employees;
  • Buoyed a community and helped to turn Waterloo into Silicon Valley North;
  • Drew attention to the talents coming out of the University of Waterloo and helped in building the University’s worldwide recognition;
  • Created wealth that will continue to invest in technology companies for years to come;
  • Funded the Blackberry Partners Fund;
  • Acquired key Canadian technology companies; and
  • Gave engineers their start and the experience that allowed them to go off and start their own businesses, much like the founder of Pushlife.

The demise of RIM would have negative implications on the Canadian tech scene for many years to come:

  • Canada, and Waterloo in particular, would experience a substantial brain drain as the cream of the crop of Canadian research, development and engineering move elsewhere to take jobs in their field.  One can be sure that the best of the best are already being poached by the competition;  Also, a significant portion of the next generation of University of Waterloo engineers will be forced to find employment outside of Canada;
  • Canada would lose a foothold in the growing and ever more important mobile space;
  • Billions of family income dollars will no longer flow through the economy;
  • Waterloo will become a commercial office moonscape;

Ok, I’m not ready to pronounce them dead.  In fact, one has to be very careful to separate the stock market from the company.  Often, as a company moves through its lifecycle, a good company may not represent a good stock to buy or hold and it appears that time is now for RIM. 

Here are some of my thoughts, for what its worth:

RIM has disappointed the market by overpromising on new products, delaying the introduction of new products to market, launching its “not ready for prime time” PlayBook and announcing the launch of new Blackberry’s this fall that will not incorporate the highly touted QNX operating system.  For these, the Company deserves to be in the dog house.

The co-CEOs have been unable to articulate a clear vision to the market and, while it is understandable, it is not acceptable.  Balsillie is a numbers and deal guy and Lazaridis is an engineer.  They are not Steve Jobs, but then again, there is only one Steve Jobs.  The guys at RIM don’t need to leave, they just need to use their bundle of cash to go and acquire the best talent around to get the R&D, marketing, PR and application offering back to world-class levels.  At current share prices, the upside should look pretty good for highly talented, game-proven individuals willing to strap on the challenge in exchange for a bundle of options. 

Cut fast and cut deep.  Pre-announcing layoffs and then doing 200 at a time destroys company loyalty and is unfair to all of the employees.  Make all the necessary cuts and reassure the rest of the employees that there will be no more.  If there are, make sure your name is at the top of the list.    Don’t do the Nortel “death by 1000 cuts routine”.  It kills employee moral and at the end of the day the only employees left at the firm are those who are unable to find employment elsewhere.

Give the app development community an 18 month “amnesty” on fee sharing.  RIM didn’t have App revenue 24 months ago and the lack of developer support and Applications is a hurdle to growth.  Give them all the money for 18 months as a carrot to get them back on board.

Stop focusing on RIM’s share price.  The market has abandoned the Company for the time being and will be watching closely for RIM’s response to the challenges set before it.  You only have to look at the Company’s current valuation to realize this.  Trading at a market capitalization of $14.7 billion, a Price/Sales ratio of .71 and a P/E ratio of 4.5 puts a valuation on the shares similar to a stagnant, old economy company.  Analysts are basically calling for the company to go the way of the buggy whip.

Forget buying back RIM shares.  Yes, the Company’s shares are undervalued, but cash on hand can be better utilized during the battle ahead.  Buying back shares sends the wrong message to the market and at the end of the day will have little positive impact on the success of the Company.

One final note:

Ok, so the Company is out of favor, but as we saw with Apple when Steve Jobs returned, it is possible to turn around a company.  Before you commit RIM to a place in history alongside Nortel, take a look at some of the comments, headlines and prognostications that have been published about Apple and Steve Jobs during the past decade (Apple Death Knell Counter). You may even find some of them to sound eerily familiar:


Jan 29, 2010:  Hello, giant iPod Touch  By John C. Dvorak, Published in MarketWatch

http://www.marketwatch.com/story/apples-ipad-is-far-from-revolutionary-2010-01-29?siteid

"Jobs himself is a tech maven constantly looking for nifty new developments that he can employ in Apple products. Apparently when it comes to tablet computing, this is the best he can do. Insanely great it is not. [...] The tablet market has only succeeded as a niche market over the years and it was hoped Apple would dream up some new paradigm to change all that. From what I've seen and heard, this won't be it."

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Jan 13, 2007:  Apple iPhone Will Fail in a Late, Defensive  By Matthew Lynn, Published in Bloomberg

www.bloomberg.com/apps/news?pid=newsarchive&sid=aRelVKWbMAv0

 

Jan. 15 (Bloomberg) -- Few products have been launched with such a blizzard of publicity as Apple Inc.'s iPhone.

 

To its many fans, Apple is more of a religious cult than a company. An iToaster that downloads music while toasting bread would probably get the same kind of worldwide attention.

 

Don't let that fool you into thinking that it matters. The big competitors in the mobile-phone industry such as Nokia Oyj and Motorola Inc. won't be whispering nervously into their clamshells over a new threat to their business.

 

The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant.

 

“The iPhone will not substantially alter the fundamental structure and challenges of the mobile industry,'' Charles Golvin, an analyst at Forrester Research Inc., said in a report this month.

 

There are three reasons that Apple is unlikely to make much of an impact on this market -- and why it is too early to start dumping your Nokia shares.

 

First, Apple is late to this party. The company didn't invent the personal computer or MP3 player, but it was among the pioneers of both products. Yet there is no shortage of phones out there. There are already big companies that dominate the space, all of whom will defend their turf. That means Apple will have to fight hard for every sale.

 

Next, the mobile-phone industry depends on cooperation with the big networks. Phones -- the high-end ones in particular --are usually sold with a network contract. The provider subsidizes the handset in the U.K. and hopes to recoup its money with ridiculously expensive charges for calls and data. Yet Apple has never been good at working with other companies. If it knew how to do that, it would be Microsoft Corp.

 

Lastly, the iPhone is a defensive product. It is mainly designed to protect the iPod, which is coming under attack from mobile manufacturers adding music players to their handsets. Yet defensive products don't usually work.


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Apr 3, 2006:  Apple faces second attack of the clones  By Alan Kohler, Published in The Age (The Age is a broadsheet daily newspaper, which has been published in Melbourne, Australia since 1854)

http://www.theage.com.au/news/technology/apple-faces-second-attack-of-the-clones/2006/04/01/1143441370852.html

 

APPLE Inc's iTunes music store seems to be rapidly becoming one of the most powerful retailers in the history of the world.

 

In fact there is a good chance the whole thing will end up like the Macintosh computer: early dominance through its beautifully designed integrated package of hardware and operating system, but later obliterated by Microsoft Windows, which was licensed to any manufacturer.

 

The key is the device — the beautiful iPod — and the simplicity of buying stuff through iTunes, which is why Apple is becoming such a powerful retailer.

 

That is, until Microsoft and/or Google come along, which will be soon. The shock troops for Microsoft's victory over Apple in personal computers in the 1980s were Intel, Compaq, IBM, Dell, Toshiba and so on — that is the chip manufacturer and the cheap PC makers that licensed the Windows operating system.

 

With digital music and video it will be Nokia, Samsung, Motorola and Sony Ericsson — the mobile phone manufacturers.

 

Microsoft's software will power the new generation of phone/music players, and the business of selling digital songs and TV shows will open up. Google will probably run the most popular online store, but there will be thousands.

 

The iPod/iTunes system will move into a niche with Macintosh computers because Steve Jobs has again stuck with closed architecture and total control. This will happen quickly because mobile phones are being turned over about every year.

 

We will witness the creation and destruction of a market dominance in the time it used to take to work up a business plan.


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Dec 20, 2005:  2006 could be year that Apple CEO Jobs falls off pedestal  By Kevin Maney, Published in USA Today

http://www.usatoday.com/tech/columnist/kevinmaney/2005-12-20-jobs_x.html

Sometime in 2006, Steve Jobs will probably get hosed. That's not so much a prediction as it is playing the odds. Nobody in America gets such a long ride on the oh-we-sooooo-adore-you bandwagon

Well, except maybe Jennifer Aniston. But look what happened to Martha Stewart. Or Hootie and the Blowfish.

 

For that reason, Jobs' popularity will be one development to watch in 2006.


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Dec 30, 2004:  12 Big Surprises for 2005  By John D. Markman, Published in TheStreet.com

http://www.thestreet.com/_yahoo/funds/supermodels/10201037.html 


Apple Computer (AAPL) releases two new handheld devices in an attempt to follow up its iPod mega-hit, but they fail to gain traction. iPods begin stacking up at electronics stores when it is discovered that, after a Christmas buying frenzy, there are now 2.7 iPods for every American over the age of 6. Apple turns to Philips Electronics (PHG) for a bailout and is sold to the Netherlands-based consumer electronics giant for $80 a share.

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September 15, 2004:  Apple Must Change, or Die  By Paul Thurrott, Published in Connected Home Magazine


Apple's short-term success is very real and quite admirable, but the company's inability to see coming trends in video, subscription content, and interoperability suggests that Apple is repeating the mistakes of the past. In the 1980s, the Mac held an early lead over the PC but was quickly buried after the industry standardized on a common Microsoft technology. Today, that series of events is repeating itself, and online music services -- and to a greater degree, the digital delivery of all media types -- is very much at a nascent stage. If Apple doesn't change its ways, the company simply won't survive.


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Mar 17, 2004:  Why iPod can't save Apple  By Stephen Gandel, Published in Money

http://money.cnn.com/2004/03/17/markets/freeintro_ipod_0404/index.htm

As for the iTunes music service, Apple makes little on downloads. Of the 99¢ it charges for each song, it has to pay the record labels 65¢. Another 25¢ covers the cost of distribution and credit-card processing. So even if you sell an impressive 30 million songs, as Apple claims, that adds up to only a paltry $2.7 million.

 

Jobs' other strategy to boost market share is Apple retail outlets. In 2001 he began opening company-owned Apple stores. The company now has 76 branches and expects to open another six by year-end.

 

Jobs says Apple has no plans to become a retailer. The strategy is to open stores in high-profile locations to showcase Apple's products and demonstrate their central position in the digital media world. Apple calls the venture, which lost $5 million in 2003, a form of advertising.

 

But so far the stores have done little to increase market share, and they could be bleeding a lot more red ink than Apple is letting on. Over the past year and a half, four of Apple's former authorized resellers have sued the company, asserting that its stores competed unfairly with them. Among their claims: Apple cuts sweetheart deals with its own stores to mask losses, such as charging them less for hardware and warranties than it does Apple's resellers.


Apple's core


This much is certain: Jobs' mass-appeal strategy has crimped the company's historically high profit margins. Apple's net profit margin is just 1 percent. That's down from 10 percent four years ago.

 

And Apple's earnings would have been worse had it not been for $4.8 billion the company has in cash and short-term securities. In fact, the cash hoard made more money last year than Apple's operations -- which lost $1 million while the computer maker booked a $69 million gain on interest income.

 

Even when you factor in Apple's $13 a share in cash and almost no debt, the company's stock, at a recent $23, trades at 20 times estimated 2004 earnings. Dell's shares, on the other hand, go for 26 times projected 2004 earnings -- but its business is three times as profitable as Apple's.

 

The company's supporters say current profits matter little because Jobs has proved time and time again that he can create new products and trailblaze markets. That may be so, but as Transamerica portfolio manager Chris Bonavico, who doesn't own Apple's stock, notes, "Apple will remain a company that is neat from a product and consumer standpoint but crap from an investor standpoint."

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Oct 25, 2001:  Apple's Scraping the Bottom of the Barrel By Arne Alsin, Published in TheStreet.com

http://www.thestreet.com/_yahoo/comment/theturnaroundartist/10002957.html

Don't buy Apple's (AAPL) stock. And if you own it, sell it. I know the company has a core following that is loyal, even cult like, but the broader base of believers has been steadily eroding for years.

To wager on this company is to bet that the exodus of users can be staunched and then, implausibly, reversed. It's hard to imagine such a scenario, given Apple's shrinking girth. With less than 5% of the market, the company is no longer an afterthought in PCs -- it's irrelevant.

Here is a breakdown of my analysis of Apple Computer -- the good, the bad and the ugly.

Products: Don't tell me about the dazzling products that Apple introduces from time to time. Because I'll agree with you -- they can be impressive. From the iMacs to the PowerBook to the new iPod portable MP3 player announced this week, it is clear that Apple knows how to design cool products

Successful investors don't invest in cool products, though -- they invest in profits. In the past six years, against a backdrop of unparalleled profitability in tech, Apple was profitable in only three of those six years, despite a slew of provocative product introductions.

Business Model: It's safe to say that the business model at Apple is terminally flawed. The PC industry has been completely commoditized. And Apple loses on price because machines based on Microsoft's Windows are much cheaper. Apple also is a big loser compared with Windows based on the availability and breadth of applications.

To survive, Apple has to convince Windows users to migrate to the Mac platform. But since Apple is not competitive on either price or applications, there is no compelling reason for users to switch. The game is effectively over. Dell(DELL), IBM(IBM) and Hewlett Packard(HWP) have a stranglehold on the PC industry that is secure, with Dell's build-to-order model the clear winner over the long term.

…

But why should investors buy into a company with a deteriorating revenue base -- sales are lower at Apple now than they were three, five and even 10 years ago -- just so Steve Jobs can invest capital in short-term instruments that yield 3%? Large cash balances aren't bad if they are accompanied by a value-creating business model that can use the cash for growth, but that's not the case with Apple. It's no wonder then that, assuming the company can meet earnings estimates, the return on shareholder equity in 2002 will be a paltry 3%.

Retail Stores: It's desperation time in Cupertino, Calif., as Apple is going into the retail store business to ensure that its products receive enough attention. This move is fraught with problems, however, because the reason that Apple products are not getting the retailers' attention is because they are not selling well. If Apple machines were moving fast off the shelves, retailers would be happy to provide the shelf space.

And the move into retail takes Apple into an area where it has demonstrated no competence. Now it's going to take on Best Buy(BBY) and Circuit City(CC)? Have the executives at Apple considered the sobering retail experience of Gateway?

It's too bad for Apple that the ending to this chapter in the PC story has already been written. The company had the ultimate first-mover advantage many years ago with an array of better products, a vastly superior operating system and even the best commercials!

Apple's story now is fodder for business historians -- don't make it fodder for your portfolio.

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May 21, 2001:  Commentary: Sorry, Steve: Here's Why Apple Stores Won't Work (New retail outlets aren't going to fix Apple's sales)  By Cliff Eddwards, Published in BusinessWeek

http://www.businessweek.com/magazine/content/01_21/b3733059.htm

Now, he's taking matters into his own hands. On May 19, Apple will open a swanky new retail store--the first of as many 110 nationwide--at Tyson's Corner Galleria mall outside Washington.

The way Jobs sees it, the stores look to be a sure thing. But even if they attain a measure of success, few outsiders think new stores, no matter how well-conceived, will get Apple back on the hot-growth path. Jobs's focus on selling just a few consumer Macs has helped boost profits, but it is keeping Apple from exploring potential new markets. And his perfectionist attention to aesthetics has resulted in beautiful but pricey products with limited appeal outside the faithful: Apple's market share is a measly 2.8%. "Apple's problem is it still believes the way to grow is serving caviar in a world that seems pretty content with cheese and crackers," gripes former Chief Financial Officer Joseph Graziano.


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