Research in Motion’s stock price assumes it will take over the handheld world. It won’t

Research in Motion’s handheld two-way pager, the BlackBerry, has developed such a passionate following in some parts of the U.S. that one water-cooler humorist dubbed it the “CrackBerry.” Devotees can be seen obsessively checking their e-mail and tapping away on its tiny keyboard with their thumbs during meetings, in restaurants, in buses or taxicabs, or any time they are sitting down.

The rise of the Waterloo, Ont.-based company’s stock since 1999 produced a core of devotees who believed that RIM, as it’s known in financial and stock circles, was destined for once-in-a-lifetime mass-market success. But RIM’s stock plunged in early 2000 as the air escaped from the dot-com bubble. Despite the dose of reality that hit the rest of the market, RIM’s share price then climbed again. That share price still seems to assume that RIM will fulfill the wildest dreams of its supporters, and then some.

Is that possible? Anything is possible, of course. Is it likely? There are some fairly compelling reasons to believe that it’s not. That’s not to say Research in Motion isn’t a good company, or that the original BlackBerry and its newer cousin, the 957, which looks a bit like a Palm handheld, aren’t useful products. But it’s often said that investors shouldn’t confuse a good company with a good stock, and RIM is a good example.

At RIM’s peak price of $260 on the Toronto Stock Exchange in March, 2000, its market capitalization was $18.6 billion, more than the Canadian Imperial Bank of Commerce or Canadian Pacific, and twice as much as Petro-Canada or Canadian National Railways. That couldn’t last. RIM sank to $35 last May, which reduced the company’s market value to $2.5 billion. But the stock turned upward as RIM signed various distribution deals, including one with America Online, even though those deals had no immediate impact on the bottom line.

After climbing into October, RIM’s share price sagged into the new year. In January, it was near $90. At that level, RIM was trading for 1,125 times its earnings per share for the previous 12 months, and 26 times its sales per share for the same period. By comparison, the much larger handheld- maker Palm, Inc., based in California, was selling for 230 times its trailing earnings and 10 times its sales.

In other words, investors seemed to feel that RIM was somewhere between 2.5 and 5 times more valuable than Palm, the company that virtually invented the handheld device market in 1996 with its PalmPilot. Palm still has a worldwide market share of over 80%, and had revenues of $1.55 billion (U.S.) for calendar 2000. RIM’s revenues during the same period were roughly $157 million, and it was expected to make about 54 cents a share in the 12 months ended February, 2002, meaning this February the stock was trading at 170 times forecast earnings.

One reason RIM’s fans believe the company is worth more than its competitors is the unique nature of the BlackBerry, which can be summed up in three words: instant e-mail access. Like the pager that inspired it, the BlackBerry is always connected to a wireless network, meaning e-mail can be sent and received instantly at all times. Other devices require users to connect to a phone line and dial their provider, or connect to a web site, or call a special phone number.

But that instant access may not be worth as much as RIM fans think it is. Nor is the BlackBerry all that unique. Motorola also has a line of two-way pagers that can retrieve e-mail, and they come in a range of cool colours. Plus, they’re popular with the Los Angeles sports and entertainment crowd. Basketball star Shaquille O’Neal uses one, and rapper Jay-Z wrote a song in which he used the popular phrase “two-way page me.”

Defenders point out that the RIM product has more features than Motorola’s, and that it is designed to integrate with a company’s internal e-mail system, whether that is Microsoft’s Exchange network or IBM’s Lotus Notes/Domino system. That’s one of the main reasons why the BlackBerry is so popular with brokers, traders and sales representatives of any kind. RIM’s strategy is to derive much of its revenue from its proprietary server software and other elements of its system, as opposed to sales of the BlackBerry device itself.

Palm, meanwhile, is focused more on consumers, potentially a far larger market. Palm users can access any e-mail account, not just corporate e-mail. The company also permits designers to create add-on software for its devices. So does a Palm-like competitor called Handspring, formed by the three original developers of the Palm after they left its parent, 3Com Corp. Handspring went public last year, and it markets the Visor, which some industry watchers see as a cheaper and more flexible version of the Palm. Using various plug-in modules, the Visor can become everything from an MP3 player to a GPS receiver to a cellular telephone.

Then there’s Microsoft. As part of its ongoing attempt to diversify away from the slow-growing PC industry, Microsoft has developed a version of its Windows operating system for handheld devices that competes with Palm’s. As well, Compaq Computer Corp. has introduced a handheld Palm-style device called the iPAQ. It doesn’t do instant e-mail–at least not yet. But not everyone wants instant access to their e-mail in the same way stockbrokers and day traders (or basketball stars and rap artists) do. Even if they do, iPAQ, Palm or Visor users can add that capability fairly easily using a snap-on modem to access a digital cellular or data network.

In late January, most analysts still rated RIM a “strong buy.” But when it comes to the consumer market, the BlackBerry faces some stiff competition. Unfortunately for RIM fans who are also shareholders, the stock price seems to assume that the company will not only succeed, but will virtually take control of the entire sector. And that isn’t going to happen.

Nortel investors enter a world of pain

To paraphrase John Goodman’s character from The Big LewbowskiNortel investors have just entered a world of pain. Their beloved company – the pillar of everything technological in Canada, the superstar of the networking equipment sector, the big fish of the Toronto Stock Exchange – has just fallen from its pedestal. Anyone who bought shares a month ago has lost 35 per cent of their investment, and those who got in last September have seen more than 75 per cent of their stake obliterated.

More important than just the stock-market losses, however ($260-billion and counting), is the loss of faith in Nortel’s ability to continue its remarkable growth – not to mention the loss of faith in the company’s ability to forecast. As everyone knows, stock prices rise and fall based not on current performance but on future potential, and investors aren’t likely to trust Nortel’s crystal ball gazing as much as they did a week or so ago. How long will it take for that trust to return? Good question.

Just three weeks ago, Nortel reassured the market that its business still looked strong – despite all the warnings from telecom equipment companies such as Lucent Technologies and even Cisco Systems. The company made a point of saying it still expected to increase its revenues and earnings by 30 per cent this year, projecting a profit of 16 cents a share in the first quarter and revenues of $8.3-billion. Now it says its revenues will be $6.3-billion or so, and it will lose 4 cents a share for the first quarter – and growth for 2001 will be more like 10 to 15 per cent.

The difference between those two forecasts is a massive, head-rattling change for a business the size of Nortel to undergo in just three weeks – the kind that should give a chief financial officer or a CEO whiplash. It’s certainly the kind of change that would make the most trusting investor wonder what the hell is going on over at Nortel HQ.

How could the business have gone sour so quickly, for the company to lose almost $2-billion in sales and 20 cents a share profit in three weeks? Either the company doesn’t know what is really going on in its industry – which is hard to imagine, given the obvious warning signs over the past months – or Nortel suffers from a massive case of hubris, believing it could somehow win while everyone else was losing. In the West, this is known as “drinking your own bathwater,” and it is bad news.

If you’re a retail investor who has a few bones to pick with John Roth about his ability to manage his business, you’d better get in line. The phones at Nortel probably started lighting up within moments of the announcement about slower growth, and the list of aggrieved investors and others is likely to be long. Up near the top would be JDS Uniphase, which just a week ago took $2-billion in Nortel stock in return for a plant in Zurich, Switzerland – those shares are now worth 35 per cent less.

Nortel’s bombshell announcement about slower growth has also torpedoed the share price of many other members of the telecom equipment sector, stocks that just finished getting a boost from a bullish report by optical equipment maker Ciena on Thursday. JDS Uniphase tanked by more than 20 per cent on Friday, as did fibre-optic maker Corning, which said its growth would be hurt by lower sales to a certain customer – a customer analysts said was likely to be Nortel itself. Even Ciena was down 8 per cent.

If you’re wondering who comes out of all this looking pretty good, look no farther than Sanford Bernstein analyst Paul Sagawa, the guy who was jumped on by many of his fellow Nortel-watchers when he came out with a negative report on the company and the entire sector in September, when Nortel was at $66 (U.S.). He looked smart when Nortel underperformed expectations in October, at which point the stock lost 25 per cent (and pushed the TSE down by over 800 points) and he looks even smarter now.

The financial wizards at BCE Inc. also look pretty good, seeing as how they locked in their profits on their remaining stake in Nortel when they spun the company off as a separate entity a year ago. They “hedged” the Nortel stake by striking a deal with a consortium of banks to guarantee BCE $90 a share on Nortel, regardless of what happened to the stock after the spinoff. In effect, the company has $2.8-billion more now than it would have if it had not hedged that Nortel stake. Let’s hope the banks sold those shares short at some point, or they are now stuck holding the bag.

As for the retail investors who believed Mr. Roth’s repeated reassurances that all was well at Nortel, they are now holding the bag as well, and they aren’t likely to cut the CEO much slack for the foreseeable future. Does Nortel still have good prospects? Yes – it’s still a leader in the optical equipment game, and it will continue to grow (although at a much slower rate). But investors are going to feel burned, and rightly so – and they will be twice as reluctant to believe any future rosy forecasts.

By crushing Napster, record labels could kill the golden goose

The major music labels may be crowing about their legal victory against Napster earlier this week, but there are those who believe that the record industry would have far more to gain from working with the “peer-to-peer” file sharing service than by trying to crush it in the courts. For one thing the disk drives of more than 50 million Napster users are a huge storehouse of information – information that could be used by smart companies as an unparalleled marketing database.

For example: Over the past month or so, thousands of Napster users who have songs by the independent artist Aimee Mann on their computer have had messages pop up that appear to be from another user, messages that mention a new song by the artist that is available on her Web site. These messages actually came from an Internet-based marketing firm called BigChampagne, which chose Napster as a novel way of promoting Ms. Mann’s new single, Ghost World.

In a recent interview with about the campaign, BigChampagne co-founder Eric Garland said that by trying to put Napster out of business, record companies were ignoring the potential gold mine that users of the service represent. Music publishers “have just been given the greatest marketing tool they have ever had,” he said, but most of the major record labels are still determined to put the company out of business, rather than trying to find a way of working with the technology instead.

Customer surveys and marketing research are a huge part of other retail sales-oriented businesses, Mr. Garland points out. Packaged-goods companies pay millions of dollars to do research on shopping behaviour as it relates to the colours and shapes of their products, where they are placed in a store, and so on. They “can model whether the shading on a package will gain them an extra 10th of a per cent of market share,” BigChampagne partner and market research expert Tom Allison told

In fact, some consumer goods companies such as Procter & Gamble, Mr. Garland said, “used to pay housewives 10 bucks to look in their fridges” so they could try and get some insight into buying patterns and consumer behaviour. The ability to look at which songs Napster users have chosen to download would give record labels a similar insight, allowing them to see patterns – do most users with the latest Jennifer Lopez single also have Puff Daddy or Eminem? – and also make various promotional offers.

BigChampagne isn’t the only firm to come up with the idea: When the rock band Metallica sued Napster, it got a British firm called NetPD to collect the names of users who had the band’s music as evidence of copyright infringement. But NetPD now reportedly also does peer-to-peer marketing using such lists, and has even done some research for the same record labels that are busy suing Napster. According to a recent story at, smaller firms such as A.D.D. Marketing are also conducting Napster campaigns, as are independent music labels such as

Many Napster users might not like the idea of letting some marketing firm snoop into their hard drive, but that ability is built right into the structure of the file-sharing service: You show what you have to share, and others show what they have. The fact that this could be used for marketing purposes is just a byproduct of the original intent of the software – and marketing messages such as those from BigChampagne are a nuisance Napster users might be willing to put up with if it kept the service free, or reduced the price that a user would have to pay for access.

Napster is working with Bertelsmann AG – owner of the major record label BMG Music – to try and create a subscription service, in which users would pay a monthly fee for access to Bertelsmann music. But what about music from other record labels? So far, none of the other major music distributors have said they are interested in such a service – at least, not one they don’t control – which means users would be restricted to downloading songs that happen to be produced by BMG artists.

That kind of market fragmentation, with 5 or 6 or 10 different services to sign up for, doesn’t seem like a good way to get music into the hands of music lovers. Napster already makes it quick and easy – why not find a way of working with it instead of trying to kill it?

Music industry’s case against Napster misses the point

The U.S. music industry is already boasting about how the Napster ruling on Monday is a major victory – how the U.S. appeals court upheld an injunction against the file-swapping service (pending certain modifications) and ordered it to stop letting its users trade copyrighted material. But the industry is wrong, as it has been all along: The music business has been the big loser in the Napster case, and will continue to be the big loser regardless of how the whole affair finally ends – if it ever does.

While the 9th U.S. Circuit Court of Appeals decision didn’t pull the plug on Napster right away, it appears to have set a chain of events in motion that will lead to the demise of the popular digital music-sharing service, or could at least force it to remake itself dramatically. It said that a lower-court injunction against Napster would be upheld, provided the court alters the ban to make it less “broad,” and agreed with the lower court’s finding that Napster could be liable for copyright infringement.

Whether Napster is or isn’t guilty of what the court calls “vicarious infringement” of copyright has yet to be proven in a trial. The appeals court ruling is a response to an earlier decision by District Court judge Marilyn Patel in July: After the record industry argued that Napster’s service was causing it undue harm, Judge Patel handed down an injunction against Napster until the case could proceed to trial.

Like the rest of the music industry’s continuing war against on-line music sharing, however, the case against Napster is a classic case of missing the point, and that’s why the music business is still the big loser. In many ways, Napster is a footnote to the real story, which is how record companies and music publishers have missed the boat when it comes to taking advantage of the potential for digital delivery of music.

So far, the big five record companies who control the Recording Industry Association of America – Sony, Universal, BMG, Time Warner and EMI – have shown that they are a lot better at filing lawsuits and deploying battalions of high-priced law firms than they are at serving the needs of their customers. The time that the big music distributors have devoted to filing briefs might have been better spent coming up with compelling ways of convincing music lovers – which is what Napster users are – to buy their products.

At the moment, if you want a copy of that song that you heard on the radio but feel that using Napster is morally wrong, your only choice is to buy the entire CD for about $20, or to get one of your friends to make you a copy of the song from their CD (which is also technically illegal). For the past two years or more, the record companies have been saying that they plan to make downloading music from their artist catalogue as easy as Napster is – and yet music fans continue to wait, as one clunky and expensive subscription site after another tries and fails to get up and running.

Why haven’t the music companies gotten their act together sooner? Partly because they’re afraid of what might happen if they let “their” music to be distributed on the lawless Internet. In some cases, record companies have prevented artists they represent – such as Tom Petty – from releasing even one song from their CD on the Internet, because of concerns about copying. Music companies are also afraid of eating into their existing revenue stream, and it’s easy to see why: a U.S. trade ruling last year found that CD buyers have been overcharged by billions of dollars.

The Napster ruling is a footnote for other reasons as well, one of which is the fact that there are plenty of other ways of downloading digital music files that are far harder to police than Napster. Some, such as Emusic and, have signed deals with music labels that allow users to download some songs for free and others for a small fee. Others such as Gnutella and Hotline simply provide software that lets users connect to each other (in contrast to Napster, which uses its own servers).

It’s true that the music industry can pursue cases against these other services, as they did against – which filed for bankruptcy protection last year as a result – but that too will miss the point. Not only will it be a lot harder to stamp out services that are based on true peer-to-peer networks, but putting out dozens of little fires will continue to divert the industry’s attention from what it should be focusing on: how to convince an entire generation not to desert the traditional music business, which has so far done everything it can to push them away.