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Research In Motion: BB10, Services Pose Too Much Risk

 January 13, 2013 08:43 PM

(By Mani) Research In Motion Limited (NASDAQ: RIMM) (TSE: RIM) is betting on BlackBerry 10 devices, which will be introduced later this month, to recapture lost market share. However, it is unlikely that the new operating system revives RIM's fortunes as the new platform and services pose too much risk.

RIM, which makes BlackBerry phones, has been ceding market share for a few years, dropping from a peak of 21 percent in 2009 to 5 percent in 2012. North and Latin America have seen the greatest drops, with some emerging markets holding in better.

BlackBerry is the third ecosystem in terms of subscribers now, but it seems more developer attention is focused on Windows Phone.

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"We are not expecting BlackBerry 10 devices to reverse the market share losses from the last few years," BMO Capital Markets analyst Tim Long said in a client note.

While most agree that the software will be better, it is unclear if it would be differentiated enough to challenge Apple's (NASDAQ: AAPL) iOS or Google's (NASDAQ: GOOG) Android.

RIM is expected to launch six BB10 handsets this year. Some are expecting a full touch product first initially, although most operators and distributors seem to be looking for a qwerty model.

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"We estimate that there were about 300 million high-end phones (US$500-plus) sold in 2012. We believe the device will initially sell for slightly over $500," Long said.

The addressable market for RIM is more likely a subset of its 79 million Blackberry subscribers as so many high-end users upgraded to iOS or Android devices last year.

RIM may not release a low-cost BB10 device until 2014, thereby ruling out any chance of a major upgrade cycle from the low end, which could be more than half of RIM's subscriber base.

"We expect BB10 devices to sell in February, so we could see a few hundred thousand in the fiscal fourth quarter. We expect only 1-2 million per quarter after that," the analyst said.

Moreover, the existing portfolio is weak. Carriers and distributors would be hesitant to invest too much in BB7 devices since the channel has been bloated over the last two years as demand stalled.

In addition, Korean giant Samsung would continue to dominate while low-end smartphone players such as RIM and Nokia Corp. (NYSE: NOK) will lose more share as the Chinese vendors export cheaper phones.

"We estimate that gross margins on devices have been negative for the past three quarters. This, to us, is an indication of the lack of competitiveness of the portfolio," Long noted.

Adding salt to the wound, the company is losing subscribers. Last quarter was not good for the service business at RIM. The company lost subscribers for the first time, and average revenue per user (ARPU) dropped. This is a bad sign as services has been viewed as the key value component of RIM's business model.

RIM lost about 1 million subscribers in the November quarter to end up with 79 million, and the launch of BB10 is unlikely to spur growth in subscribers as most sales will be upgrades for existing Blackberry subscribers.

"We are modeling 1 million subscribers lost per quarter, but would not be surprised if the base falls faster than that," Long said.

On its last earnings call, RIM discussed the transitioning of its services model. While there are no details yet, it seems that RIM will be moving from a pure ARPU to a more menu-driven option for the multiple services offered.

RIM's move to cut its high-margin services fees, which it earns via its messaging services for retaining and attracting customers, makes difficult for the BlackBerry maker to sustain its profitability.

Currently, service revenues account for about 36 percent of RIM's overall sales, and investors and analysts are wondering how this will be impacted by the transition and eventual adoption of BB10.

RIM is facing increased pressure from carriers about the ARPU the company charges as it no longer dominates smartphones, and some of the advantages of running traffic through the network operations center are less meaningful.

"While we don't know the full pricing strategy, we are assuming that with the introduction of BB10, there may be significant changes. We are expecting that enterprises will be mixed, with some taking a full set of services and paying comparable amounts to today. On the consumer side, we believe ARPU will be much lower, and even zero in some instances," Long wrote.

The consumer segment will be challenged to extract the same fees as its preceding platforms and enterprise looks to be following suit, hurting service revenue. Enterprises will be required to add a completely new server infrastructure, which could be a significant hurdle. This would sit alongside the current infrastructure needed to support older devices.

"We believe the stock will be driven by the reception and results of BB10 products over the next few months, which we don't expect to be positive," Long added.



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