Summary: our analysis of how RIM’s BlackBerry business model may offer operators
interesting near term opportunities to manage smartphone data traffic
costs, and partner with to exploit future ‘Telco 2.0’ opportunities.
Overview
Previous Telco 2.0 Analyst
Notes and briefs have considered
the roles of Google Android,
LiMo,
Nokia
and the Apple ecosystem, Mobile
Software Consolidation, and the Smartphone
'Demolition Derby'. This note is a brief backgrounder to
developments and
opportunities around RIM (Research in Motion) and its BlackBerry
products and
services - often the unsung heroes of the smartphone marketplace. It has
sold over
75m devices, at a run rate of over 10m in its most recently reported
quarter.
Indeed, the BlackBerry represents a special place in the
Telco marketplace - its mobile email solution represents the only third
party subscription-based
data service successfully sold by virtually every mobile operator, with a
high
and ongoing uplift in ARPU. It also remains the only mass market
enterprise
mobile data service besides laptop connectivity. Yes, there are numerous
examples of other telematics or field-service applications, as well as
dedicated M2M devices, but these are small in number and aggregate
revenue,
compared to the many millions of BlackBerry users in normal white-collar
roles.
RIM's original enterprise business pre-dates the
smartphone
industry, instead having its roots in the much more primitive arena of
pagers.
Connected via RIM's server to a company's email system, the BlackBerry
pager
service used the network operations centre (NOC) for onward relaying of
messaging - especially used in the financial industry, for which email
became a
critical element of communications during the 1998-2001 boom. The
evolution of
the company from that base provides RIM with two of its most critical
differentiators:
The presence of trusted IT hardware within
the
enterprise itself, and a channel to sell and support it
The
centralised NOC function, which uniquely captures and processes
virtually all
data traffic going to and from the world's fleet of BlackBerry devices,
except
where it is diverted via WiFi
locally.
But even that enterprise-centric commentary
hides another
fact missed by most observers - the remarkable and often
counter-intuitive
upsurge in consumer use of BlackBerrys. The popular image of a harried
business
executive answering emails at the airport at 11pm on his "Crackberry" is
being
supplanted by a teenager sitting in Starbucks with her "BB" encased in a
lurid-coloured jacket, gossiping with friends via BlackBerry Messenger
and
posting pictures up on Facebook.
If you, the reader, think that a
PIN is just a 4-digit code
used for bank cards, then you're missing one of the most interesting
user-initiated
mobile service phenomena since the explosion of SMS.
[From Wikipedia:
BlackBerry PIN is an eight character hexadecimal identification number
assigned
to each BlackBerry device. PINs cannot be changed manually on the
device, and
are locked to each specific Blackberry. BlackBerrys can message each
other
using the PIN directly or by using the BlackBerry Messenger
application.]
As a backgrounder, it's worth
clarifying that there are three main ways that BlackBerrys are used:
The traditional enterprise model, where a large
company installs a BES (BlackBerry Enterprise Server) connected directly
to its
main email system, typically Microsoft Exchange. The BES then
communicates with
the employees' devices, but with all the traffic routed out of the
operator's
network and via RIM's own dedicated IP network and operation centre
(NOC). This
connection via the NOC also handles web browsing and other data
applications on
the device. Generally, the BES, mobile devices and services are sold by a
mobile operator, installed by IT specialists, with RIM taking a sizeable
revenue-share of the data services contract, as well as earning money on
devices sold via the carrier/IT channel.
The less-well known
variant, aimed at consumers
or small businesses without in house Exchange email servers, is called
the
BlackBerry Internet Service (BIS). This hooks the BlackBerry network and
NOC
into the user's email/Internet services (Gmail, Facebook, Yahoo, MSN,
ISP POP3
email etc), and allows "push" services and other capabilities, as well
as
routing web traffic via a compression engine. It also supports the App
World
appstore. In this model, operators sell the devices, usually along with
specific BlackBerry data plans.
The last main option is rather
frowned-upon by
RIM - the user buys an unlocked "vanilla" device and selects an
operator's SIM
/ subscription from another source. In this case, it is possible that
there is
not even a data plan involved, with the user just using the BlackBerry
as a
QWERTY device for SMS. Alternatively, either a postpaid or prepaid data
plan is
used - where the user might not activate the NOC-based BIS service, but
just go
out and connect to the Internet directly with the browser or other
applications. In essence, this reduces the BlackBerry to being a
featurephone,
rather than a smartphone, as most of the high-end features of the
integrated
system (such as many apps) are only available to BlackBerry subscribers
using
the end-to-end system.
Chart 1: Most BlackBerry data
traffic transits RIM’s own infrastructure
Source: Telco 2.0
The big surprise is that the majority of
BlackBerry
subscribers (now approaching 40m in total) are now BIS customers, rather
than
being connected via the traditional "big corporate" BES. Both services,
however, benefit from RIM's proprietary data-compression algorithms,
which can
reportedly reduce Internet bandwidth consumption by 80-90% compared with
uncompressed data.
Business models
RIM currently has three main sources of revenue:
Hardware
sales of devices account for over 80%
of total revenues, primarily from selling to telcos with a smaller
volume of
shipments through other channels. The average selling price of
BlackBerrys has
been in the $320-350 range in recent quarters, which is much higher than
generalist phone manufacturers like Nokia (around $85 ASP), but
considerably
lower than Apple's (thought to be around $620).
Service fees,
which are charged by RIM to telcos
on a "per account" basis for subscribers (the operator themselves bills
the
end-user), make up around 14% of revenues. The operators tell RIM when
to
create new subscriber accounts or deactivate them. It is understood that
fees
for BES users are higher than more consumer-oriented BIS accounts.
Software
sales are about 2% of revenues,
primarily for the BES and per-user access licences, sold to enterprise
customers through various channels.
Chart 2: RIM revenue
breakdown, Q3 FY2010
Source: Telco 2.0, RIM financials
While this model has worked well for RIM in the past, it is
not without its challenges. Clearly, it is most exposed to any loss of
market
share in its core smartphone hardware segment. Thus far, it has
continued growing
despite the arrival of Apple, although it may face increasing challenges
from
the growing range of Android licences and (perhaps) a resurgence of
Nokia's
high end during 2010-11. Its increasing consumer device focus is also
likely to
drive it to lower ASPs and tighter margins, since that end of the market
tends
to be less-subsidised and obviously not differentiated by the inherent
value of
the BES.
A corollary of the rise of consumers, and the cheaper BIS
vs. more expensive BES balance, has been a slow but steady downward
pressure on
average access fees paid by carriers. RIM now makes an average of around
$5.5
per active subscriber per month, down from over $12 per month in 2005.
Nevertheless, this still represents a substantial slice of consumer ARPU
in
most national markets, especially as BlackBerry service fees are often
charged
instead of (rather than incremental to) ordinary data plans.
Nevertheless, most operators still spend more on acquiring
iPhone customers (including an upfront subsidy), than on acquiring
BlackBerry
customers and paying RIM for its service fees for the duration of the
contract
- although among consumers the iPhone normally attracts higher "headline
ARPU"
numbers to offset this somewhat. The comparative ease of set-up for
BlackBerrys,
plus the typically far lower data consumption reduces opex costs of
serving
users. Anecdotal evidence suggests that, on balance, BlackBerry users
can be
more profitable for operators than Apple customers although hard data is
difficult to establish.
Chart 3: Increasing consumer BIS use
vs. corporate BES has driven reducing monthly access payments by
operators to RIM
Source: Telco 2.0, RIM financials
In terms of ongoing strategy, RIM has a number of distinct
target areas:
Sell devices (and enable services / apps) within
the consumer domain to compete with Apple, Nokia and others
Increase
penetration deeper within existing
enterprise bases (numbers of users)
Increase enterprise usage beyond basic email / calendaring
towards horizontal and line-of-business applications, as well as
advanced voice
services and unified communications
Start deriving new revenue streams from areas
like App World and advertising
To read the full article, covering...
Comparison with Apple
BlackBerry and the Consumer Market
RIM device shipments and BIS/BES account net adds
Evolving the enterprise proposition
Risks and recommendations for operators
Strategic positioning of major Smartphone Platforms
BlackBerry SWOT Analysis
Conclusions
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