Is Blackberry Doomed To Be The Billy Big Mouth Bass of 2005?

Several years years ago, a clever inventor came up with the Singing Fish - a startling little fish plaque that sung a tune and moved its head when you walked in front of it.  At first, you could only buy the "Billy Big Mouth Bass" or "Boogy Bass" at at small outlet stores and flea markets but by Christmas of 2000, they were practically everywhere - CVS, Wal-mart, Hecht's Department Stores.  You couldn't go into a store without walking by one singing some 1960s doo-wop tune. 

When you see a product everywhere all of a sudden, it's known as "flooding the channels" in marketing speak.  Each retail outlet - drug stores, department stores, dollar stores, Wal-Mart, specialty stores, the Internet - is a separate "channel" through which to distribute a product.  Based on how marketers want to be positioned (luxury, value, middle tier), they will choose one or two of the channels through which to sell.  When a product starts getting to the end of its life in one channel, often you will see marketers "flood the channel" or start selling the product everywhere.    This often happens with luxury goods that "don't take" - one day you'll see a brand like Tommy Hilfiger being sold for a premium at a specialty store, the next day at a department store for a discount.  It's usually a sign of trouble because it indicates a company has lost its identity or has saturated its intended market.  And that's what happened to the singing fish - one day they were everywhere - then they dissapeared.  Everyone that wanted one bought one and there wasn't any demand left. 

So what does a high tech company like Research In Motion (RIMM) have to do with fad-toy singing fish?  I think Research In Motion's Blackberry could go the way of "Billy Big Mouth Bass" because I saw the following odd cross promotion of Blackberry and Papa John's Pizza today -

For a limited time, get a FREE* BlackBerry 7100GTM (after rebate) wireless handheld with integrated cell phone, email, SMS text messaging, web browsing and personal organizer (a $349.99 value).

Just add any Papa John's side item and two 20-oz. beverages to your online order to get this great offer. This offer is only available online. Upon completion of your Papa John's order you will immediately be linked to the site where you will sign up for your free* BlackBerry, which will be delivered by mail.

The real question is what does pizza delivery have to do with a snazzy little communications device?  I think RIMM is "flooding the channel" with Blackberries.  This will turn the niche product used by investment bankers and hedge fund traders into a mass market gadget.  And it will eventually kill demand...everyone that wants one will have one.  Being that RIMM is a one product company, I think it will eventually kill RIMM's stock as well.  While Blackberry's won't dissapear completely like the singing fish, I think flooding the market will put pressure on RIMM's margins and, eventually, its sales as demand dissapears. 

RIMM probably has perfectly good reasons to flood the channel.  Technology from other handset manufacturers is finally starting to catch up to that of the Blackberry.  And the Blackberry is much easier to use now than it was several years ago when you needed the tech guru to load RIMM software onto the mail server in order to be able to check your email.  So flooding the channel is probably the right strategy.  But it won't help the stock if demand does become saturated.   

RIMM's stock is still being valued at over 27x forward earnings and almost 10x sales vs. Nokia (NOK) which trades at 16x forward earnings and 1.8x sales.  If the Blackberry is simply a mass market hardware gadget, like a cell phone, and not a niche high end tech product, why would the market value it at such a premium?  I don't think it should and I don't think it will.   

Looking at the chart, RIMM is tracing out a 1-2-3 "Trader Vic" reversal pattern on the weekly chart.  All that the stock needs to do now is break the sideways triangle consolidation to the downside.   I wouldn't be shorting the former mo-mo stock at this moment since I could be wrong and the stock could break to the upside.  But I would keep it on my screen for a potential violation of the downside trendline. 

Comments

[rupert]

you are forgetting that in all likelihood, this Blackberry would only be received for free if you sign up for a 1 or 2 year deal with a phone service. So it could well be that it is the phoneservice that created this marketing ploy. i think this is a n important distinction from the Bass gadget.....

[ContraHour]

Very true - it is a marketing ploy. My analogy with the Singing Fish is a bit over the top and absurd. However, I think it's no more absurd than selling a Blackberry with pizza.

A better analogy to RIMM is Apple and the iPod...AAPL simply built a better mousetrap through meticulous design. But even AAPL trades at only 3.4x sales.

If margins fall for the Blackberry because they start selling it everywhere, saturate the market and have to discount it to keep demand high, I just don't see why it should be valued any higher than a cell phone handset manufacturer.

[rupert]

I completely agree, and am short RIMM. PALM dropped 20% by the way last night. Another ubiquitous cross-marketing presence is the Ipod of course. You can get them for free when opening bank accounts, renting an appartment, etc. As for Rimm, will their loss on margins in their hardware be compensated by their licensing deals? We'll see!