RIM: how does the BlackBerry fit with Telco 2.0 strategies?

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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.

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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.

[Ed. We will also be focusing on the role of devices in new telecoms business models at our April 28th-29th 2010 Executive Brainstorm in London, and in our future research programme.]

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

...Members of the Telco 2.0TM Executive Briefing Subscription Service and Future of the Networks Stream can access the full item here. Non-Members, please see here for how to subscribe, or email or call +44 (0) 207 247 5003.