Blackberry Crush Time

The dramatic arc that RIM is following is now clear for all to see. It goes like this. In 2008, RIM achieved an average selling price of around $400; by the middle of last year this had fallen to $356, and by the last quarter of 2009 it had fallen again to $311. Next stop will be closer to $305. Yet, as Best Buy has just confirmed, the fourth quarter of last year was an exceptionally strong one for smartphones, Apple’s average selling price rose above $600. If you are a seller of smartphones, life had never been better, so why did ASPs drop for RIM?

RIM is following the same path beaten by Nokia at the beginning of the last decade. Average selling prices will continue dropping because RIM’s product is becoming passe, just as Nokia’s did. The next step will be that RIM’s market share in the US will drop as Apple picks up Verizon and Google’s Android operating system gains momentum. As they say in the pantomime, it’s curtains.

The latest results from Apple and others highlights the problem. On our estimates, Apple has taken about 40% of the smartphone industry's profits. But the REALLY big news, as highlighted by me in a SeekingAlpha piece back in January http://seekingalpha.com/article/185090-apple-s-real-big-news-massive-growth-in-asia is that Apple is now sweeping through Asia. For the quarter just reported, Asia represented close to 30% of Apple's profits. Asia had been Nokia's last hiding place and RIM was hoping to move into the same fox hole. Not any more, because Asia is developing a crush for Apple.

Or maybe we should call that Blackberry Crush. On the one side you have Apple rampant, on the other you have the Android. In the middle there is the Blackberry. Let's face it, Google’s Android is really aimed more at the Blackberry than the iPhone. The Android is a device that offers businesses the secure email that the Blackberry offered them. Secure email has, so far, been the Achilles heal for iPhone, which is a product that is largely focused at consumers.

 A recently published survey by Crowd Science, a US based market researcher, found that 40% of Blackberry users would make the iPhone their next smartphone. However, coming up quickly on the inside, Google’s Android operating system appealed to a third of Blackberry users.

Another recent survey, this time from ChangeWave, specifically looked at US corporate IT budgets. A total of 1,702 respondents involved in IT spending replied. Importantly, the Apple iPhone saw a five per centage point rise in share, while Google’s Android device saw a 4 per centage point rise. The Android is at an earlier stage of development, so as hardware vendors and Google continue to enhance the design it will become more competitive. In particular, there are more than 20 companies supporting the Android, so we can expect prices to fall rapidly, which will bring further pressure on RIM.There will come a day when even Apple has to drop prices.

Smartphone Ecosystem

 Smartphones are computers first and phones second, which means that applications and content are more important than the quality of voice calls. This is where RIM comes unstuck. There are now seven smartphone operating systems out there: iPhone, Symbian, RIM, Google, Windows, Palm and Meego(Nokia and Intel). This presents a headache for the hoards of developers who are, in reality, the people who decide which smartphones become successful. The developer has limited resources so they have to make a carefully considered decision over which operating system to commit resources to. The phone that gets the developers’ attention becomes the phone that has most to offer subscribers; more subscribers then buy the phone; result: a virtuous circle. The release of Apple’s iPad will make this even more apparent.  At present there are 75 million users of the iTouch and iPhone users, within a year another 6m or so million iPads will be sold. These three devices all share the same operating system, which in turn is supported by Apple’s wildly successful Apps Store. From the point of view of developers, Apple offers you a great environment to write for, a tremendous storefront from which to sell your software and a large and fast growing user base.

Like Nokia before, RIM has been slow to recognise that the market has changed. The Blackberry’s operating system is old, the web browser primitive and the device itself is still largely keyboard based.  Meanwhile, the market and even Nokia, has moved to touch sensitive screens. Eventually, RIM will launch a proper touch sensitive Blackberry and will improve its operating system, but by the time it does the market will have moved on. RIM is in catch up mode, it is not a leader.

What Blackberry does have going for it is market share. It has about 20% of the global smartphone market compared to Nokia’s 39% and Apple’s 20%. Mobile operators like the Blackberry device because it uses less bandwidth than either the iPhone or Android and, as we have seen, corporate like the email function. Kids like the Blackberry messaging function and, for the time being at least, the device is popular in emerging markets.

RIM is not yet in a dire state. However, from the point of view of investors, the stock has a half life, despite the recent share buy back.  Before feeling more confident about this stock I think we need to wait  until there is evidence that ASPs have become stable.  That is unlike to happen anytime soon because it looks ominously as though RIM’s market share in the US is poised to implode.   

OLEDs- an overhyped technology

OLEDs - Overhyped and Over Priced.

If you have heard of Motorola’s Nexus One handset, you probably know that it supports Google’s Android operating system. What you are less likely to know is that it sports an Oled - organic light emitting diode - screen. Oled screens are supposed to be brighter and have a wider viewing angle than conventional LCD screens. Last year, 15 mobile handsets, supplied by Samsung, Nokia and Sony Ericsson, were equipped with Oled screens. Few people know this and fewer people care.

According to Display Search, the leading independent experts on screen technologies, in 2008, the global market for Oled was worth $600m. The two companies offering the most exposure to Oled are Universal Display (PANL US), and DS Hi Metal Display (077600 KS).

Samsung SDI, which has a 50/50 joint venture with Samsung Electronics, also offers exposure. LG Display and AUO of Taiwan are two of the other leading Oled wannabes. For each of these quoted companies, Oled is a miniscule part of sales. 

In the last two weeks, Sony announced that it was closing its Oled effort because of technical problems. Oled screens work fine for the small screens used in mobile phones unfortunately, they are between three to five years away from prime time as far as TVs are concerned. More worrying are the latest results of an independent test carried out by Displaymate, which found that for all the excitement, the Oled screen on the new Nexus was inferior to the conventional LCD screen found on Apple’s iPhone.  Oled’s and most other hardware innovations are a side issue. In the era of the Smart Paradigm, content, applications and brand determine the success of a product. This is bad news for Asian handset makers who depend on hardware innovations to make their products stand out.

Superior Technology

Besides the brighter colours and the greater viewing angle, Oled technology will, one day, be cheaper than TFT LCD screens to produce. To understand why, a basic comparison of the two technologies will suffice.  TFT LCD is made by laying an array of thin film transistors upon a glass substrate. Then, when an electrical current is applied to this matrix, some of the transistors are turned on while others remain turned off. This combination of on and off transistors create pixels, which are the basic element of any electronically created video, or picture. 

Like a TFT LCD, an Oled screen also requires a back pane, but instead of a matrix of thin film transistors a layer of organic diodes are deposited. When an electrical current is applied to the back pane the organic diodes emit different coloured lights. 

A TFT LCD screen requires a back light source, which increasingly is supplied by LEDs; in addition, various colour filters have to be applied to the glass. Non of this is required in an  Oled screen, which is why the technology promises, one day, to be cheaper to produce. In addition, to cheapness, Oled screens are thinner, consume less power and eventually will be flexible. What’s not to like? 

Unfortunately, the technical problems behind creating Oled are daunting, which is why Japanese manufacturers, such as Sony and Kyocera, have either abandoned or moth balled their Oled efforts. For the time being, Oled screens are expensive, as a quick analysis of the handset market will underline.

Today, an Oled screen in a mobile handset costs about 50% more than a comparable LCD screen. Even by 2013, it is believed that Oled screens will still be 8% to 10% more expensive than LCD screens. For televisions the comparisons are worse. By next year the production cost of a 42 inch Oled TV panel is expected, according to standard industry estimates, to be 73% more costly than LCD. By 2013, Oled screens will still be almost 40% more costly than LCD. Therefore, Oled is unlikely to be a significant feature in the TV market before the second half of the current decade. This is why Sony has just withdrawn from the market. 

Oled, therefore, will remain a side issue for a few more years. Any investor wishing to keep abreast of Oled should monitor Universal Display in the US. This company is the world’s leading supplier of both Oled intellectual property and the chemicals used to make the diodes. In particular, Universal Display is a leading supplier to the Samsung joint venture that is currently the biggest producer of Oled screens for smart phones.