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Selasa, 17 April 2012

The Two Faces of RIM

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The Two Faces of RIM

At the risk of turning this weblog into the "BlackBerry channel," I wanted to add a couple of additional thoughts to my post on Research in Motion's recent earnings and strategy announcement ( http://syafiqzulkarnain2.blogspot.com /2012/04/rebuilding-rim.html" target="_blank">link).  There was an interesting divergence in the press and analyst comments about Thorsten Heins' statement that RIM would refocus on enterprise customers.  Commentators in the US and Canada generally responded to it fairly well, while those in Europe and other parts of the world were a lot more negative.

I think that's because there are really two BlackBerry customer bases, one in North America, and one in the rest of the world.  I wrote about this a year and a half ago ( http://syafiqzulkarnain2.blogspot.com /2010/12/rims-q3-financials-tale-of-two.html" target="_blank">link), but I didn't think about how it related to RIM's earnings situation, and neither did a lot of other people.

To summarize, in North America, where RIM first came to prominence, its products tend to be seen as business tools.  They were first adopted by businesspeople who had a strong need for up-to-the-minute communication, including Wall Street traders and government officials.  As a result, RIM's image and core customer base in North America has always focused on business professionals.  The reality was more mixed; RIM did reach some non-professional users in North America, aided by operator marketing campaigns that included a memorable T-Mobile TV ad that praised the benefits of a BlackBerry flip phone designed to prevent "butt-dialing" (link).  But the most popular smartphones for non-business consumers in North America tended to be the Sidekick, and later iPhone and various Android models.

The situation was different in the rest of the world.  BlackBerry came to market there later, and people in many countries were not as enamored of real-time e-mail as they were in the US and Canada.  In those countries, BlackBerry generally caught on as a low-cost youth messaging phone, aided by RIM's BlackBerry Instant Messenger service, which lets consumers see when their texts have been read.  The relatively low parts cost of a BlackBerry compared to other smartphones also helped RIM reach consumer-friendly price points.  In some countries, BlackBerry established a strong network effect among young people.  If everyone else in your social group has BlackBerry Messenger, you'll be completely left out if you don't use it as well.

As in North America, there are exceptions.  You can find business users of the BlackBerry anywhere in the world.  But I think it's fair to say that the average person in North America tends to see BlackBerry as a professional business product, while the average person in the rest of the world tends to see BlackBerry as a youth consumer product.

This explains the differing reactions to RIM's announcement.  Observers in North America (including me) tended to view it as a long overdue refocusing on RIM's first and most loyal customers.  Observers in other parts of the world tended to view it as a thick-headed betrayal of RIM's fastest-growing customer group.

Some of the reactions outside North America were very acerbic.  My favorite came from Andrew Orlowski of the Register (link), who noted the irony that RIM had made its announcement "with the English rioting season fast approaching."  Yes, he was that upset.

So which group is right?  I think they both are; it just depends on which face of RIM you see around you.  Both sides of RIM have a core of loyal customers, but both sides also have risks.  In North America, I think business users are largely saturated with smartphones, and this is where RIM's business has been losing the most share.  On the other hand, these customers produce the highest gross margins when happy, and they are not being targeted heavily by other smartphone companies.  In the rest of the world, RIM's base is younger and growing faster than its North American business base, but it's hard to picture BB Messenger competing successfully in the long term against social messaging through sites like Facebook.  RIM might be able to maintain BBM as a standard by licensing it to other phone companies, but that would destroy the differentiation of the company's hardware, leaving it to compete on raw price against Android licensees like Samsung and China, Inc.  I'd rather walk on razor blades.

So I can easily make a case for focusing on either one market or the other, with the idea being that if you work very hard you can at least hang onto part of your current base, giving you a foundation to grow from in the future.  But it's not clear that RIM is ready to make that sort of apocalyptic choice.  Instead, it sounds a lot like a company that wants to ride two horses at once.

A small group of observers said Heins' comments about enterprise had been taken out of context, and that it was important to listen to all of RIM's conference call, something that many people apparently didn't do at the time (including me, I am ashamed to say).   So I went back and reviewed the full transcript of RIM's call (link), and here's what I think I read:


"We plan to refocus on the enterprise business and capitalize on our leading position in this segment." 

RIM did definitely say that it's re-dedicating itself to serving enterprise customers.  But I am not clear on whether that means serving IT managers or individual business users (or both).  As I mentioned in my previous post, that is a big difference.  Individual business-oriented users are a segment; they will not go away.  And anyone who thinks those users all want to play games and listen to music on their smartphones is out of touch with reality.  But IT as a major channel for smartphone sales is waning.  Although focusing on IT might be a good tactic to preserve some short-term revenue, it's not a long-term strategy for the whole company.


"Other products competing in the bring-your-own-device segment is to create a compelling consumer offering. We believe that BlackBerry cannot succeed if we try to be everybody's darling and all things to all people. Therefore, we plan to build on our strengths to go after targeted consumer segments, and we will seek strong partnerships to deliver those consumer features and content that are not central to the BlackBerry valuable position, for example, media consumption applications."

So RIM did say that it's backing away from some investments on the consumer side.  But that does not mean it is abandoning its young users.  I think Heins is hinting that RIM will focus on messaging phones and use software licensing to give those phones media playback and gaming features.  Outsourcing is a typical tactic that tech companies use when in financial trouble.  Sometimes outsourcing actually does save you money, and sometimes you find that licensing and integrating the third party software costs you about the same as building it yourself.  So I don't know how well that will work out for RIM, but it doesn't necessarily mean they are dumping the consumer market.


"Another key area where we will be making significant change is in our services business. Here, I'm referring specifically to the consumer-oriented, value-added services business that we have attempted to build over the past 2.5 years through numerous various acquisitions....The heavy ongoing investment required to continue this initiative does not make sense given RIM's current market position and our relative strength. As a result, we will be looking at ways to scale back these activities and refocus resources on developing an integrated services offering that leverages RIM's strength, such as BBM, security and manageability."

This is the place where Heins definitely signaled cuts.  It sounds ominous for Gist and Tungle and the other mobile web startups RIM bought in the last couple of years.  I hope they're not all being thrown out, since I believe they could help to differentiate RIM's products, but recent acquisitions are often at risk in corporate restructurings because they are not viewed as part of the "core product offering."  (Just look at what happened to Palm.)  Besides, they do not usually have big revenue forecasts attached to them, so they can be cut without forcing a drop in the corporate earnings forecast.


Reading RIM's comments closely, it sounds like they're saying they want to preserve both their business user base in North America and their youth messaging base in the rest of the world.  That's sensible from a revenue preservation standpoint, but it means that RIM will continue to be serving two masters with very different needs.  Compare that to Apple, which basically makes one smartphone at a time.  It will be hard to cut a lot of engineering cost at RIM, and it will be very difficult to create products that please both North America and the rest of the world, especially if RIM tries to add some significant new differentiators.  Features that please its North American core are not likely to also please the international market, and price points that would be acceptable in North America will likely be too high for the rest of the world.  The danger is that RIM will be like an army fighting on two fronts, with its forces below critical mass on both sides.

For RIM, this is yet another layer of challenge and uncertainty on top of what was already a very challenging situation.  Although customers may be glad to hear that RIM's not abandoning either group, to me the two faces of RIM make its situation even more daunting.



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