GMP research on GOOG, MSFT and RIM

Here is today’s wireless research note from GMP’s equity research group:

Wireless Technology – Google, Microsoft, and RIM summary perspectives

FCC sets rules for spectrum auction and understanding Google’s perspective

The U.S. Federal Communications Commission officially voted on the rules governing the upcoming 700 MHz spectrum. There were no surprises relative to the original proposals put forth by FCC Chairman Kevin Martin in June which, in our opinion, results in a split decision in the Google versus incumbent wireless industry lobbying battle.

In our note “Google commits $4.6 bn for wireless spectrum: Implications to our coverage universe of a Google inspired World”, published on July 23, we indicated that the most likely outcome was a partial support of Google’s initiatives. As expected, the FCC has included provisions for 22 MHz out of the available 62 MHz to allow open access for devices and open applications. The FCC did stop short of making the spectrum open to all service providers, a key shortfall from a Google perspective. The 22 MHz remains extremely valuable due to the capacity capability and broad geographic coverage, amongst other reasons. For perspective, 10 MHz of the 62 MHz available will be given to public safety and the balance will be split among several hundred pieces throughout the country.

We believe that the driving motivator behind Google’s wireless ambitions is access. We believe that this is also the driving motivator behind Google’s dark fiber and hosting center purchases throughout the World. The reality of the Internet is that a small portion of sites represent a
disproportionate amount of bandwidth stress (e.g. YouTube). Google is struggling to avoid the drive by incumbent carriers to charge high volume websites based on bandwidth taxation, a concept know as Net neutrality. We believe that Google’s strategy in wireless is akin to what they are doing in landline which is positioning to preserve their access to the user base, especially as mobile search is emerging as one of the most important mobile applications. This is why we previously indicated that Google would attempt a wholesale carrier arrangement which was subsequently confirmed when Google announced a joint venture plan with Sprint Nextel.

The FCC auction is expected to start in early 2008 through a blind bidding process. The handover of spectrum will officially occur in 2009 which means that services will be launched sometime early in the next decade. Therefore, we reiterate that the most significant implication of recent spectrum developments is that the trend towards the integration between Internet computing and wireless access is increasingly evident.

Market update from Microsoft – estimates 20 mm unit sales in F08

Robbie Bach, Microsoft’s President Entertainment and Devices Division, recently provided an update to three business unit areas under his responsibility including entertainment strategy, Windows Mobile platform, and online advertising.

In F07 (ending June) Microsoft sold over 11 million phone enabled licenses and the company expects to sell over 20 million in F08. Comparatively, RIM shipped 6.4 million units with net BlackBerry sub adds of 3.3 million for a total sub base of 8.3 million in F07 (ending Feb). During a recent speech to analysts, Bach stated that Microsoft would expand its offering to the consumer market including plans to integrate lifestyle offerings (such as additional entertainment applications like music), mapping and location sensitive applications, as well as search products. Our interpretation is that Microsoft is planning more of the same (i.e. absorb as much functionality within its ecosystem to provide preferred access to core Microsoft products like Explorer or Office) and we do not view his comments as providing significant
new information on strategy.

Surprisingly Bach indicated his belief that Windows Mobile now enjoys a substantial market advantage over RIM from a license/subscriber perspective. Bach further emphasized that Microsoft brand awareness in the wireless industry is growing, however, RIM has surpassed expectations in their market strength and establishing its own brand awareness that BlackBerry is the de facto reference point for wireless email and data. In our view Microsoft is making substantial inroads into the market (overall) and is taking share from other suppliers such as RIM. We also view Microsoft’s 20 million unit estimate in F08 is likely conservative. Time favors Microsoft as wireless email is becoming a commodity, especially within the consumer and SME segment.

Separately, Bach indicated that the impact of the iPhone is positive for the wireless industry. This has become the cliche perspective offered by competitors throughout the sector and is uninspiring. We believe the best way to describe Apple’s influence is that the company is becoming a driving force in the convergence theme between Internet computing and wireless communications. This will generally benefit suppliers in the smartphone or feature phone category while hastening the price and margin decline of more basic handset technology.

Consumers will surely gravitate to the richer experience provided by smartphones increasing which is why competitors to Apple such as RIM or Microsoft see the iPhone as a net market expander. Recently AT&T announced that the company had activated 146,000 iPhones in the last 2 days of Q2. Apple also recently announced last week that the company had sold 270,000 iPhone units in a similar time frame (the difference in units representing inventory sell-in to the channel). Based on our views of market consensus we place this roughly 50% below
expectations, however, views on forward sales targets for Apple of 10 million units per year remain unchanged as the company has yet to expand beyond the US market.

BlackBerry service outage

On Monday select T-Mobile USA customers experienced a service outage for nearly two hours from 4:00pm to 5:45pm PST. The service disruption was due to a damaged router component. The total number of BlackBerry customers affected has not been determined. For the most part BlackBerry service has been reliable and accurate, however, users have been affected by service disruptions in 2007. Recall in April, a system crash at RIM’s Waterloo network operating center facility caused a major service outage for over 12 hours. Coincidentally we have experienced minor delays of data traffic on our BlackBerry over the past couple of days.

We have mentioned in the past that service disruptions are a risk for RIM. Monday’s developments also raise concerns that customers may pursue alternative email solutions as well as concerns of RIM’s NOC capacity and ability to scale.

MRM