Month: October 2000

Is it possible not to love Research In Motion? Not lately, it seems. The handheld device maker’s shares have been on a rocket ride to the moon since May, when they bottomed out at about the $35 level. The stock is now trading in the $190 range, having risen by almost 450 per cent in less than five months. The shares are still short of their record high of $260 set in March, but they’re getting closer every day (chart).

RIM now has a market value of about $14.5-billion – more than Canadian Pacific, more than Petro-Canada, more than twice as much as TransCanada PipeLines and just slightly less than Imperial Oil and the Canadian Imperial Bank of Commerce. At $9.5-billion (U.S.), it is larger than Kellogg Co., forestry firm Weyerhauser, Starbucks and Occidental Petroleum, and is worth about $2-billion more than investment bank Lehman Brothers.

The company’s stock-market success has made at least one of its founders a billionaire: CEO Mike Lazaridis said Monday that he will donate $100-million (Canadian) to set up a Waterloo, Ont.-based research centre to study theoretical physics. RIM has taken advantage of its climb by issuing six million shares, which could raise more than $1-billion, although the company didn’t say what it planned to do with the money.

RIM will need a good portion of that cash to fight for market share with the other two major handheld players – Palm Inc. and Palm-clone maker Handspring, which recently went public. Both companies are larger than RIM: Palm, the company that arguably invented the current handheld market, has a market value of $34-billion (U.S.). Handspring, which was formed by the two developers of the original Palm and sells a Palm-compatible device called the Visor, has a market value of about $11.5-billion.

Fans of RIM’s products, which include a small pager-like device and a larger Palm-sized one, say they are better than either the Palm or the Visor because they are “always on” – that is, they are connected at all times to a pager-style network that allows a user to send and receive e-mail wirelessly at any time. The Visor, however, can be used in a similar way, thanks to plug-in modules that attach Game Boy-style.

Analysts say RIM is in a good position to form alliances with mobile phone giants, particularly in Europe, where next-generation wireless networks are more advanced – there have even been rumours that a cell phone maker such as Nokia might buy RIM. Others, however, say cell-phone companies are more likely to want to licence products rather than buy companies, and Palm is already working with several companies. Handspring, meanwhile, recently introduced a plug-in that makes the Visor a cell phone.

It’s true that RIM has a devoted following, particularly among Wall Street stockbrokers and traders, and there are some who maintain that it can not only compete with Palm and Handspring but perhaps even eclipse them in the handheld market, and make its software and/or hardware a new standard for handheld wireless data. But at its current level, it’s worth asking how much of that optimism is already priced into the stock.

First Call/Thomson Financial has analysts looking for $180-million (U.S.) in revenue for RIM next year, which makes the current price of $125 a multiple of about 54 times sales per share. Handspring is selling for 29 times its projected sales per share for 2001, while market leader Palm is trading at about 17 times its sales – which are expected to hit $2-billion next year. RIM and Handspring are both expected to lose money in the current fiscal year, while Palm is expected to make a profit of 13 cents a share.

By way of comparison, Nortel Networks – which some analysts have criticized for being overvalued – is trading for about five times its projected sales per share for 2001. Cisco Systems, one of the leading makers of computer networking equipment and another stock that is regularly criticized for being overvalued, is trading for about 20 times its sales per share, and software giant Microsoft sells for 15 times its revenues.

If Nortel is trading so high that it is “priced for perfection,” as some analysts have put it, what does that say about RIM? As one stock watcher at the Motley Fool investment Web site put it, the company had “better not make a single mistake, or it’s toast.”

What if an 18-year-old college student had invented the VCR as a way of trading movies with his frat-house pals? The court case launched against him might look a lot like the lawsuit against Napster founder Shawn Fanning, a battle winding its way through the courts. At stake in the case is the future of digital delivery of music, movies and any other copyright-protected work that can be stored as ones and zeroes.

In fact, the VCR comparison is more than just a metaphor: A 1984 ruling by the U.S. Supreme Court involving the then-new technology of videotape recording forms a key part of Napster’s defence against the lawsuit by the Recording Industry Association of America. The suit was launched by the movie industry against Sony Corp., inventor of the Betamax VCR standard, when that technology was just becoming part of popular culture.

To movie studios and TV networks, videotape was a nightmare come true. A device that would allow people to make copies of TV shows and movies at will, and then share these copies with their friends – what could be worse? With its lawsuit, the industry did its best to extinguish this new technology before it could spread, just as the record industry is currently trying to get the U.S. courts to put Napster out of business.

Jack Valenti, president of the Motion Picture Association of America, told the U.S. House of Representatives in 1982 that “The growing and dangerous intrusion of this new [VCR]technology,” threatened an entire industry’s “economic vitality and future security.” The development of the videocassette recorder, he said, “is to the American film producer and the American public as the Boston Strangler is to the woman alone.”

Legal experts have also pointed to another landmark case that addressed some of the same issues as the Betamax judgment, but revolved around a much earlier breakthrough in technology: the player piano. The forces of the sheet music industry went after the creators of the player piano roll, alleging that this new technology infringed on the copyrighted musical works that were their bread and butter. The Supreme Court ruled in 1908 that player piano rolls did not amount to a copy of existing works.

In the Betamax ruling, the court rejected the movie industry’s case, and within a decade the returns from video rentals had almost eclipsed the profits from the movie industry. The crux of the ruling was that the industry’s case – which hinged, as Napster’s does, on a legal concept known as “contributory infringement” – could not succeed if it could be shown that the technology could also be used for legal purposes.

Napster’s legal team is arguing that its software falls into the same category as the VCR: a new technology that can be used to reproduce copyrighted works, but can also be used in other ways that aren’t illegal. The judge in Napster’s original case said the Betamax decision doesn’t apply to Napster – if the U.S. Court of Appeal agrees, it could uphold the injunction against the company, which would effectively shut it down.

Napster’s critics, including several legal experts who have filed briefs in support of the injunction, say the Betamax case was a completely different animal. In that case, they argue, the court ruled in favour of Sony because to accept the movie industry’s argument would have meant outlawing an entire new technology – that is, the VCR. That would be going too far, the U.S. Supreme Court ruled in its 5-4 decision.

In Napster’s case, however, the record industry isn’t trying to do away with the Internet, or even digital file swapping (known as “peer-to-peer file sharing”) – it’s merely trying to shut down a software company that it says facilitates the piracy of copyrighted material. While Napster users can theoretically use it to share music they have paid for, the prosecution says the majority of files are illegal copies.

A group of legal experts who have filed briefs supporting Napster, however, are convinced the VCR case does apply. They said the trial judge’s interpretation of the Sony Betamax decision “provides the opportunity for Hollywood to essentially declare war against the technology industry,” Pamela Samuelson, a law professor at the University of California, told the San Francisco Chronicle after the ruling.

Prof. Samuelson and several other experts say the Sony decision means that “intellectual-property owners are not entitled to prohibit or exercise monopoly control over new technologies that… threaten their established business.” They said the law was not meant to protect industries from new technology, and that “having to change business plans in response to evolving technologies is what competition is all about.”

As many analysts have pointed out, even if the appeals court upholds the lower court’s injunction against Napster, file-swapping will inevitably continue through services such as Gnutella and Freenet, or through older-style means such as Usenet newsgroups or Internet relay chat. But the court’s decision will say a lot about whether peer-to-peer file sharing takes place as part of the underground Internet, or out in the open as part of the inevitable digital evolution of the entertainment industry.