BlackBerry Torch Fails to Brighten Future for Research In Motion

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The Torch is fizzling. Now what?

The Torch was Research In Motion's (RIMM) bid to return to the cutting edge of smartphones, a market that is at once a rare corner of the economy where consumers are eager to spend and perhaps the most intensely competitive in terms of tech innovation. Every few months, either Apple (AAPL) or Google (GOOG) announces some new improvement to their smartphones. Keeping up with them is all but impossible.

And that's not good news for Research In Motion. For years the company was the strongest brand in smartphones, thanks to the BlackBerry. The early generations of BlackBerrys were ubiquitous at business gatherings and airports, as their owners frenetically thumbed out emails on the go. Jokes about CrackBerrys grew so commonplace they became tiresome.

Then came the iPhone and the Android phones, with their touchscreens and their cornucopias of apps that could do things like edit movies on the fly, practice piano chords and even create works of art if you needed a break from those emails. But the BlackBerry clung to its advantages: Its signature keypad was much easier to type on than iPhone's touchscreen, and Verizon offered two-for-the-price of one deals to entice consumers.

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Plummeting Market Share

That wasn't enough, however, to keep RIM's share of the U.S. smartphone market from falling to 28% in the second quarter, from 37% a year earlier. Verizon also sells Android phones, and Android's share of the smartphone market surged to 33% last quarter, displacing BlackBerry as the best-selling smartphone operating system. Half of BlackBerry owners surveyed by Nielsen were ready to jump to the iPhone or an Android phone.

But for that other half, BlackBerry loyalty remained strong. Many of them still preferred BlackBerrys for email. Just as important, most IT departments preferred supporting BlackBerrys over newer, perhaps less secure phones. Then iPhones and Android phones started to be adopted as ideal business phones. And social media became as important as email for many people.

So RIM began introducing touchscreens to keeps its customers happy. But it turned out many wanted touchscreens and the old tactile keypads, So RIM gave them that in the Torch -- it was designed to be the best of both worlds. Its BlackBerry 6 operating software would appeal to all the BlackBerry brand loyalists who wanted a slicker touchscreen and faster web browsing of iPhones and Android phones, plus the old familiar keyboard if you slid it out.

But the Torch isn't a game-changer the way the iPhone was, it's just another player in a game whose rules Apple -- and increasingly Google -- are writing. Its early sales were respectable: 150,000 in the first weekend of launch. That number is overshadowed by the 1.7 million iPhone 4s that sold in its first three days on the market.

Lukewarm Reception from Reviewers

That lukewarm reception was reflected in the reviews. "It's tough to feel really excited about the BlackBerry Torch and OS 6 after heavy testing," wrote Engadget. Gizmodo, an equally influential blog, was colder: "If you don't already own a BlackBerry, you will not want this phone. And if you do, you still might not want it."

The general assessment was this: Yes, the Torch has touchscreen features like pinch-to-zoom and an improved browser. But its software is slower and the 3.2 inch display is smaller than its peers. The Torch may be the best BlackBerry phone to date, but it isn't better than an iPhone or some Android phones.

Wall Street's reaction to the so-so sales had a stronger tone of disappointment. Goldman Sachs called a bunch of stores and found few sold out of the Torch, declaring the debut "underwhelming." Pacific Crest thought RIM was "entering into a downward margin spiral."JMP Securities downgraded the stock to market perform from outperform. Even when an analyst at MKM Partners issued a report arguing that RIM's sales in Latin America and Asia would remain strong, he cut his target on the stock to $69 from $75.

Perhaps the most dire forecast came from Bernstein's Pierre Ferragu, who focused on the speed with which corporate IT departments are abandoning BlackBerrys. People want to use their personal smartphones at work, and companies are noticing that letting them do that helps reduce their operating costs. There's not much RIM can do to reverse this trend, Ferragu concluded.

In other words, RIM's insistence on designing the BlackBerry as a business phone isn't working anymore. In fact, it's hurting RIM because smartphones designed for consumers are taking over. The weird thing is, as a consumer phone, the Torch is actually very good. But in the hyper-competitive smartphone market, very good isn't good enough anymore. You have to blow people away just to stay alive.
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