RIM may need to ditch BlackBerry to survive

The Canadian firm’s network is the jewel in its crown, not its handset business
RIM may need to ditch BlackBerry to survive
BlackBerry
By Reuters
Sun 18 Dec 2011 04:47 PM

It
might seem like corporate heresy but an increasing number of technology
investors and experts are asking whether Research in Motion needs to ditch its
BlackBerry handset business to survive.

The
idea that is gaining favour, albeit only among a minority of shareholders,
would see the Canadian company fully open its secure and highly respected
network to rival smartphone providers and concentrate on that business while
getting out of the hardware game altogether through a sale.

Disappointing
quarterly results, including a dismal outlook for Blackberry sales and word
that RIM would delay the introduction of new devices, sent its shares down more
than 11 percent to their lowest levels in almost eight years on Friday.

Just
before those numbers were released, activist shareholder Jaguar Financial
called on the company to sell its handset business and monetize its patent
portfolio while retaining the high-margin services business. "Jaguar
believes that the road map to value restoration lies in a sale of RIM whether
as a whole or in separate parts," it said.

RIM's
spidery, data-crunching network reaches behind corporate firewalls and taps
into mobile networks globally.

The
network, unique among handset makers, has been a cornerstone of the
BlackBerry's growth - with email and instant messages routed through RIM's own
enterprise servers and data centers, where it is encrypted and pushed out to
subscribers.

There
are no middlemen to intercept corporate or state secrets, or even the flirty
chats of teenagers who love the free BlackBerry messaging.

Jaguar,
which claims support from shareholders who own about 8 percent of RIM's stock
but only owns a tiny fraction itself, also reiterated its call for a change in
the company's leadership.

It
has called for a new "transformational" leader to replace RIM's
co-CEOs Mike Lazaridis, the company's co-founder, and Jim Balsillie, the
mercurial salesman who has marketed the BlackBerry to the world.

It
is not alone in wondering whether a sharp decline in Blackberry sales - the
company said it expects the number of devices it ships in the quarter including
Christmas will drop as much as 26 percent from a year ago - is a sign of
terminal decline for the product.

The
company's network has stronger margins and more secure recurring revenue,
though it still needs to be fully exploited.

"If
they want to maintain that asset, if not stabilize or grow it, they need to open
it up to the other platforms and look at themselves as an enterprise software
company," ThinkEquity analyst Mark McKechnie said.

RIM
is likely already working on just such a change, said a US-based shareholder,
who declined to be identified. The fund manager, whose firm owns more than 1
million RIM shares, said delays launching new software and devices may reflect
efforts to fully accommodate devices from outside RIM's own stable.

A
year ago, talk of ditching the BlackBerry would have been almost unthinkable,
let alone garner any serious attention. That was before a spectacular meltdown
that has seen the device, once an essential tool in the top echelons of
business and politics, being pushed aside by Apple's iPhone and smartphones
powered by Google's Android software.

The
deterioration in the business has been so great that some analysts now estimate
that RIM is barely making money on BlackBerry sales.

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That
isn't its only problem. The PlayBook, the company's latecomer in the tablet
market dominated by Apple's iPad, has been a deflating disappointment, forcing
RIM to offer massive discounts on the unloved device. It took a $48m pre-tax
charge for the Playbook, which runs on QNX software that RIM plans to use in
its future devices.

The
severity of RIM's problems shows up in its share price. It crashed to a low of
just $13.12 on Friday, after trading as high as $144 in 2008 and about $70 in
February this year. A company that was once worth almost $80bn is now valued at
barely $7bn.

Meanwhile,
the subscriptions that businesses and network operators pay RIM each month
brought in more than $1bn in each of the past two quarters.

The
company declined to comment on talk that it will ever abandon the BlackBerry
and did not grant interviews with either Lazaridis or Balsillie for this story.

Balsillie
announced a comprehensive review of RIM's operations on a conference call with
analysts last week.

"We
plan to introduce new devices into the smartphone and tablet market, as well as
products and services that better leverage our global cloud infrastructure, and
unique capabilities within the smartphone market, he said.

While
RIM hasn't given any indication it plans to give up on its BlackBerry handset,
it has started to emphasize its services business.

In
late November, RIM took a first step that could eventually lead to establishing
the network as a standalone operation. It introduced a software tool giving
corporate customers the option of linking iPhones and Android devices to the
BlackBerry network.

The
move stops short of offering outsiders access to its unique technology that
encrypts data and pushes it out to the BlackBerry. Going that extra step is
exactly what some critics suggest that RIM needs to consider.

RIM
charges a monthly fee to every BlackBerry user, making its network a stable
stream of revenue and giving the company an advantage over every other handset
maker. For RIM, it has become a more reliable source of profit than shipping
its own smartphones.

The
strategic reasoning goes: Why build a staid Volvo or a flashy Ferrari when you
can own the toll highway on which they drive?

"There
is a massive under-utilized asset in the services infrastructure which is very profitable.
I think they are getting ready to come to market with a way to leverage
that," said the US fund manager. "At a minimum, I think they are
going to start aggressively doing things that leverage their infrastructure
beyond RIM handsets."

Mike
Abramsky, an analyst at RBC Capital Markets, raised the prospect of RIM
splitting in two back in July. For him, the biggest risk is waiting. He says
RIM's still-growing global subscriber base gives it time to make the move, but
the network too would suffer if the BlackBerry keeps slipping.

Alternative
networks that provide many of the same features as the BlackBerry enterprise
network are already making inroads. Eventually even that jewel could lose its
cachet, he says.

"The
risk in waiting is that as more companies switch over to alternatives, it will
be difficult to attract them back to BlackBerry even as a network-only
business," he said, referring to companies such as Good Technology and
SAP's Sybase, which encrypt and manage data for iPhones and other devices.

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Abramsky
said offering a managed network for users of all handsets would expand RIM's
potential market by six times or more. At the same time, the network business
likely boasts an 80 percent gross margin versus a handset business in the high
20 percent range.

Lazaridis
has been betting on reinvigorating the Blackberry by hoping that QNX, the new
operating system, will help RIM catch up and perhaps overtake the iPhone and
Google's Android and stifle Microsoft's emerging mobile platform.

The
new system is supposed to allow devices to be updated on the fly and should
also help third-party developers that struggle to write appealing apps in RIM's
aging framework. A dearth of BlackBerry apps compared with Apple and Android
has limited RIM's attractiveness to many consumers.

But
RIM has yet to show it can make the transformation successfully. The first of
the new generation of QNX-equipped smartphones - the BlackBerry 10 line - was
initially promised for early next year, but on Thursday RIM said it did not
expect to release a BlackBerry 10 device until the latter part of 2012.

The
delay in the make-or-break QNX line will only accelerate the drive among
investors for sweeping change.

What's
clear to many investors and analysts is the status quo will mean an
accelerating fade into irrelevance.

"Investors
have been extremely patient and they're being asked to wait another year,"
said a Canada-based shareholder. "A year from now, will all this be too
little, too late?"

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