Is Apple's iPhone a threat to Research in Motion's Blackberry?

Over the past few years, smart phones have rocketed into people’s mainstream life across the globe. They have evolved over the years from business tools for those on the go, predominantly in the form of the BlackBerry, to novelty gadgets for everyone ranging from school boys to stay at home mums.

Does this fundamental shift in the way smart phones are used, mark the beginning of the end for the business orientated BlackBerry? The past few weeks have seen volatile times for the maker of the phone, Research in Motion (NASDAQ:RIIM, TSX:RIM)(“RIM”), with weak sales figures taking their toll on the company’s share price.

In addition, concerns surrounding their rivals growing strength, particularly Apple (NASDAQ:AAPL) and their iPhone, and in more recent months Google (NASDAQ: GOOG) and phones based on their Android operating system, have begun to take their toll as fears mount that these US tech giants will squeeze RIM ever further out of the market.

But what is the case for this? Are these smart phones truly direct competitors or will the different consumer base allow them to coexist? More importantly, what signs are there that this will or will not be the case, and what impact will it have on RIM’s bottom line?

The end of June saw RIM release their latest earnings results, which although generally improved on last year, showed sales numbers that came in below analyst expectations. At the same time, Apple launched the new version of its iPhone, iPhone 4, with sales in the first three days hitting record numbers.

During the month, Google has also announced that daily sales of phones based on their Android system had climbed from 100,000 units to 160,000 units per day. A further hit for RIM came in the last days of the month, after Bloomberg reported on rumours that US phone operator Verizon Wireless (NYSE:VZ) will be selling Apple’s iPhone next year. This sparked fresh concerns surrounding the impact on market share for the Blackberry, with RIM’s share price taking a 4% hit within minutes of Verizon’s news.

Research in Motion announced they shipped their 100 millionth BlackBerry in the first quarter of the year, but despite this benchmark, shipments of the phone were at the bottom end of their guidance; shipping 11.2 million devices with estimates of 11.2 – 11.8 million. They also added 4.9 million new BlackBerry subscribers in the quarter, but again, this came at the bottom end of their previous guidance of 4.9 – 5.2 million new subscribers.
RIM said net sales in the quarter increased compared to last year, up by 24% to $4.24 billion, but again this fell below analyst estimates, which averaged around $4.35 billion. At the same time, the company reported profit for the quarter increased from $643 million in 2009, to $769 million, with earnings per share (EPS) up 41% to $1.38.

While these results were somewhat disappointing, the new release of Apple’s iPhone 4 could not have seen a more opposite reaction. The first three days of the launch saw 1.7 million sales of the new phone, setting a new launch weekend record in the mobile phone industry. This included sales of 600,000 units in the first day, again an industry record, and also came despite supply problems and crashes in the online ordering systems. The numbers beat even the most optimistic analyst estimates, which suggested around 1.5 million devices may be sold. Although these figures are of course impressive, it is worth noting that the majority of these sales came from already existing Apple customers.

The latest catalyst for speculation that Research in Motion may continue to lose market share, and the subsequent drop in share price over the past few weeks, was press speculation at the end of last month that the US phone operator Verizon Wireless will be selling Apple’s new iPhone as of next year.
This has been a long anticipated move, but never the less additional press speculation that it will happen hit RIM hard. Although estimates vary, suggestions are that as a result, Apple could grow unit volumes in the US to at least 15 million in 2011 (compared with 10 million in 2010), with 9 million of this expected to come from Verizon, and 6 million from AT&T (who are currently the sole provider for iPhones in the US).

Potentially worse for RIM, is a survey conducted by the Royal Bank of Canada (RBC) suggested 45% of new Verizon customers may upgrade to the iPhone 4, while 28% may switch from other Verizon smart phones and data plans. Not only does this mean increasing sales and market share for Apple, but it could be directly at the expense of the RIM’s BlackBerry. Other estimates suggest that around 10% of Research in Motion’s sales could be at direct risk from a Verizon iPhone.

But to what extent will an improving outlook for Apple and the iPhone, really have on Research in Motion and sales of their Blackberry?

Considering this, there is really one main point which could offer RIIM a ray of hope. As previously touched upon, the Blackberry device is, and always has been, a phone aimed at the business market. One only needs to walk into any office in the western world to see virtually everyone checking emails on a Blackberry phone.

The iPhone on the other hand, has traditionally been aimed at the personal consumer market, generally a younger, more technical savvy customer, along the same kind of lines as their target market for iPods and more recently, the iPad. The key selling points of the two devices are themselves, tailored generally towards these groups; the BlackBerry benefits from strong email and instant messenger facility, with a built in keyboard for ease of typing. The iPhone on the other hand has a more intuitive and user friendly internet browsing facility, as well as a wide range of applications (Apps) available for download, much of which are aimed at a more novelty market.

These two totally separate target markets are likely to cushion the blow to Research in Motion of increasing iPhone sales and market share, as one would expect most of the growth for Apple to come from the personal smart phone user, not the business phone sector. Evidence of this has generally played out in other markets where Research in Motion has competed with iPhones, with BlackBerry seeing sustained growth despite some competitive gaps.

Already there are some factors that indicate a similar pattern may be followed in the US, despite the recent move from Verizon. According to many industry professionals, expectations for the new Verizon iPhone suggest Apple is still intending to target the personal consumer in the US. Specifically, Verizon are seen as likely to position the iPhone as an alternative to Google’s Android (also targeted at personal consumer market) rather than RIM’s BlackBerry, largely due to the differing nature of the two devices mentioned above.

Naturally, this would soften the negative impact to RIM’s market share and sales performance. At the same time, there has been much talk in recent months that Verizon Wireless will switch from unlimited data plans, to what are known as tiered data plans (where for differing subscription fees users purchase varying amounts of download capacity). General consensus is that this is likely to be the case when they begin to sell iPhones in 2011. Doing this not only makes subscribing to Verizon iPhone packages somewhat more complicated (particularly on say a corporate scale), but is also may also begin to highlight the comparative efficiency of the BlackBerry, which generally needs to download much less information than an iPhone.

Again, this may not be much of a problem for a personal user, however on a corporate scale, the efficiency savings would be much more significant. One could expect therefore, that going forward the two target markets are likely to remain separate in the US. In turn, we could expect this to limit the impact on market share for Research in Motion, at least to some extent, of these improving prospects for Apple’s iPhone.

At this stage, it is prudent to note one caveat to this target market business model however, which is in recent months at least one major business has switched its employee business phone usage from BlackBerry and to the iPhone. In May, reports came out that the UK listed, Asia focused Standard Chartered (LSE: STAN), was starting an initiative to switch its corporate email and staff cell phones, from BlackBerry to the iPhone. This was mainly due to the increasing business functionality the iPhone has been benefiting from this year (mainly with the increase in the number of business based apps). This sparked a flurry of speculation that other international corporations may follow suit, although to date, there has been no significant or fundamental moves form the business community away from the BlackBerry and into the iPhone.

So, there is no doubt that the prospects for Apple seem to be improving while Research in Motion suffers a somewhat more lacklustre outlook for the moment. The move by Verizon to adopt the iPhone would seem like a significant hit for RIIM in the US market, one which in recent weeks has been reflected in the share price.

However, there is some hope for the maker of BlackBerry, with very different target markets likely to limit the impact to its market share, of increasing sales of iPhones. The personal consumer and the corporate businessman have very different needs from their smart phone, and unless Apple begin to make significant moves towards the business market, it is likely the two phones can coexist for a few years yet.