RIM shares dive as fee changes catch market off guard

Shares of BlackBerry maker Research In Motion Ltd plunged more than 20 percent on Friday on fears that a new fee structure for its high-margin services segment could put pressure on the business that has set the company apart from its competitors.

It was the stock’s biggest, single-day, percentage price drop since September 2008. But shares were still nearly 80 percent above the year’s low, which was reached in September. They started to rally in November as investors began to bet that RIM‘s long-awaited new BlackBerry 10 phones, which will be unveiled in January, would turn the company around.

The services segment has long been RIM’s most profitable and accounts for about a third of total revenue. Some analysts said there was a risk that the fee changes could endanger its service ecosystem and leave the Canadian company as just another handset maker.

The fee changes, which RIM announced on Thursday after market close, overshadowed stronger-than-expected quarterly results. The company said the new pricing structure would be introduced with the BlackBerry 10 launch, expected on January 30.

RIM said some subscribers would continue to pay for enhanced services such as advanced security. But under the new structure, some other services would account for less revenue, or even none at all.

Chief Executive Thorsten Heins tried to reassure investors in a television interview with CNBC on Friday, saying RIM’s “service revenue isn’t going away”.

He added: “We’re not stopping. We’re not halting. We’re transitioning.”

Since taking over at RIM in January, Heins has focused on shrinking the company and getting it ready to introduce its new BB10 devices, which RIM says will help it claw back ground it has lost to competitors such as Apple Inc and Samsung Electronics.

But the new services pricing strategy came as a shock to markets, and some analysts cut their price targets on RIM stock.

RIM will not be able to sustain profitability by relying on its hardware business alone, said National Bank Financial analyst Kris Thompson, whom Thomson Reuters StarMine has rated the top RIM analyst based on the accuracy of his estimates of the company’s earnings.

Thompson downgraded RIM’s stock to “underperform” from “sector perform” and cut his price target to $10 from $15.

Forrester Research analyst Charles Golvin said the move was likely about stabilizing market share: “At the moment, they need to stem the bleeding.”

He said the tiered pricing might line up better with RIM’s subscriber base as it expands in emerging economies.

RIM’s Nasdaq-listed shares closed down 22.7 percent at $10.91 on Friday. The stock fell 22.2 percent to C$10.86 on the Toronto Stock Exchange.

Countdown to launch
The success of the BB10 will be crucial to the future of RIM, which on Thursday posted its first-ever decline in total subscribers. Heins said on CNBC that the company expected to ship millions of the new devices.

He cautioned that this will require heavy investment, which will reduce RIM’s cash position in its fourth and first quarters from $2.9 billion in its fiscal third quarter. He said, however, it would not go below $2 billion.

Still, doubts remain about whether RIM can pull off the transformation. Needham analyst Charlie Wolf said the BB10 would have to look meaningfully superior to its competitors for RIM to stage a comeback.

Canaccord Genuity analyst Michael Walkley said it was highly unlikely that the market would support RIM’s new mobile computing ecosystem, and he remained skeptical about the company’s ability to survive on its own.

“We believe RIM will eventually need to sell the company,” said Walkley, who cut his price target on RIM shares to $9 from $10.

Baird Equity Research analysts said BB10 faced a daunting uphill battle against products from Apple, as well as those using Google Inc‘s Android operating system, and, increasingly, phones with Microsoft Corp‘s Windows 8 operating system.

Baird maintained its “underperform” rating on the stock, while Paradigm Capital downgraded the shares to “hold” from “buy” on uncertainty around the services revenue model.

“RIM has gone from having one major aspect of uncertainty BlackBerry 10 adoption to two, given an uncertain floor on services revenue,” William Blair analyst Anil Doradla said.

RIM will have to discount BB10 devices significantly to maintain demand, Bernstein analyst Pierre Ferragu said.

The BlackBerry, however, still offers the security features that helped it build its reputation with big business and government, a selling point with some key customers.

Credit Suisse maintained its “neutral” rating on the stock, but not because it expected BB10 to be a big success.

“Only the potential for an outright sale of the company or a breakup keeps us at a neutral,” Credit Suisse analysts said.

Separately on Friday, ailing Finnish mobile phone maker Nokia said it had settled its patent dispute with RIM in return for payments. Nokia did not disclose detailed terms, but said the deal included a one-time payment to be booked in the fourth quarter, as well as ongoing fees, all to be paid by RIM.

RIM outlines programme for enterprise clients to adopt BlackBerry10

Research In Motion outlined a step-by-step programme on Thursday to help its large base of enterprise clients transition across to its soon to be launched new BlackBerry 10 platform.

RIM is betting that the new devices, set to be launched on January 30, will revive its fortunes. But the fate of the BB10 smartphones will in a large part be decided by corporations and government agencies the world over that are big users of RIM’s BlackBerry devices, which have long been renowned for a strong set of security features.

The Waterloo, Ontario-based company, once a pioneer in the smartphone arena, has ceded market share to Apple Inc‘s iPhone and devices powered by Google’s market-leading Android operating system.

RIM promises its new devices will be faster and smoother than previous smartphones, and will have a large catalog of apps that are crucial to the success of any new line of smartphones.

While RIM’s low-end smartphones still enjoy strong sales in emerging economies across the globe, sales of its higher-end phones, especially in the developed world have fallen sharply.

RIM, which initially plans to launch only a high-end touchscreen and a high-end QWERTY keyboard-based device on the new platform, is hoping that these two BB10 devices will reverse this trend.

The new operating system can only be used on the new handsets.

Early adoption of BlackBerry 10 by government and corporate clients, who have been abandoning RIM’s currently aging line-up of devices in droves, will go a long way in easing the concerns of both RIM’s clients and investors. Many fear that a lackluster market reception to BB10 could seal RIM’s fate.

BB10 ready
RIM said the BlackBerry 10 Ready Program for its enterprise customers will be introduced in a phased approach over the next two months.

“We will be aggressively reaching out to our customers to make sure they are aware of this program,” said Bryan Lee, who is senior director of enterprise at RIM. “We see this as really the lynchpin for helping our customers to transition to BB10.”

The first two components of the program, which include online training and a webcast series, are already in place. The latter two portions that include a free trade-up of BlackBerry Enterprise Server licenses and services around the migration to the new platform will be available ahead of the January 30 launch.

“We remain committed to our enterprise customers and want to provide them with a head start on understanding the power of BlackBerry 10 and preparing their existing environments for the new mobile computing platform,” said Lee.

“The BlackBerry 10 Ready Program gives customers access to a variety of services, information, tools, and special offers to help ease their transition to BlackBerry 10 and BlackBerry Enterprise Service 10,” he said.

Lee said he sees tremendous excitement and anticipation from enterprise customers who want to transition to the new platform, but he would not speculate on what percentage of the enterprise customer base would be ready to transition to the new platform come launch day.

RIM, last month, said BlackBerry Enterprise Server 10, which runs the devices on corporate networks, is in beta testing with around 20 key government agencies and corporates.

Views split
So far feedback from both carriers and developers, who have tested the new devices and platform, has been largely positive. But views among financial analysts have been widely split, while some analysts have recently upgraded their ratings and targets on RIM’s share price in anticipation of BB10, others have opined that the new platform has little chance of succeeding.

TD Securities analyst Scott Penner on Wednesday raised his price target on RIM to $12 from $9.50, but cautioned that the company still faces significant hurdles ahead.

Despite lingering doubts RIM’s stock, which is still more than 90 percent below an all-time high of around $148 touched in 2008, has surged over the last two months as the launch date for the new devices nears.

Shares in RIM, which fell to $6.22 in late September, closed on Wednesday at $11.94 on the Nasdaq. Its Toronto-listed shares have also jumped about 90 percent in the same period and closed at C$11.84, as investors bet that pent-up demand will result in a large number of users upgrading to BB10.

The latest TSX data also indicates that short positions in RIM shares have fallen dramatically in the last two weeks. The total short positions in RIM on the TSX fell to 15.2 million as of November 30, down from 20.6 million in the prior two weeks.