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RIM Prepares to Defend Its Turf

By Heather Green Investors scoured Research In Motion's (RIMM) earnings on Sept. 28 for any signs that rivals have begun taking a big whack out of growth for the maker of the popular BlackBerry wireless pager. At first glance, the evidence was scarce. RIM said fiscal second-quarter profit rose 57% to $111.1 million, or 56 cents per share, on revenue of $490.1 million. Net income met analysts' estimates and revenue slightly exceeded them.

And the company increased its revenue forecast for the fiscal third quarter, which ends Nov. 26, to $540 million to $570 million, from a previous forecast of between $525 million to $550 million. RIM predicted it would break the milestone of 5 million subscribers by February.

NEW PRODUCTS. In the three months ending Mar. 4, 2006, the outfit expects diluted earnings per share of 74 to 81 cents a share on revenue of $590 million to $620 million. The company expects to add between 775,000 to 825,000 subscribers in the fourth quarter.

What's got RIM brimming with optimism? For one, it's planning a slew of new products. RIM is expected to launch a new device, code-named Electron, that will run on the so-called EDGE network of wireless carriers, including Cingular Wireless, the No. 1 U.S. mobile-phone company. It's also set to unveil versions of its popular 7100 device for use on the networks operated by Verizon Wireless and Sprint Nextel (S).

What's more, the company continues to sign up overseas carriers eager to offer the BlackBerry brand. "New product development and carrier growth will fuel growth" in the third quarter and beyond, says Jim Balsillie, the company's co-founder.

"CULTURAL ICON." RIM also said this week it's teaming with a powerful partner, Intel (INTC), the world's biggest maker of computer chips. On Sept. 27, the companies announced that RIM would use Intel chips in future devices. Under the nonexclusive deal, the next version of the BlackBerry will used Intel's processor, code-named Hermon.

The processor is designed to boost the BlackBerry's data transmission rate, improving browsing speeds and enabling the display of applications, such as PowerPoint presentations. "There are very few pieces of technology that cross the line from being a technology to a cultural icon," Sean Maloney, an executive vice-president and general manager of Intel's mobility group, said during the announcement. "It has crossed the line into being a noun, a verb, and most recently a target -- the BlackBerry killer."

On closer inspection, though, RIM's figures gave some investors reason for pause. Last quarter, RIM added 620,000 customers, for a total of 3.65 million. That was at the low end of company guidance, and related in part to creeping competition.

PALM'S MOVE. In the current period, RIM anticipates attracting 680,000 to 710,000 subscribers, less than some analysts were expecting. Before the earnings release and conference call, UBS forecast additions of 738,000 for the fiscal third quarter, while Bear Stearns forecast 768,000.

Adding to question marks for some, much of the company's guidance is based on a bet that BlackBerry users will upgrade to new products just as competition gathers steam. Motorola (MOT) is moving to December from January the launch of its Q smart phone, a device that boasts a BlackBerry-like keyboard. On Sept. 26, in a significant blow to RIM, Palm announced that it was teaming up with one-time rival Microsoft (MSFT) to include the software giant's operating system in the next version of the popular Treo. The fruit of that alliance, the Treo 700, will hit shelves IN 2006.

Meantime, on Sept. 13, handset making giant Nokia (NOK) introduced a new product for mobile e-mail called Nokia Business Center. This all comes on top of existing competition from a host of e-mail software and data-services startups, including Intellisync, Good Technology, and Visto.

SLOW START. Key to RIM's strategy of confronting the long-term onslaught is to become more of a software company. The goal? Protect a hardware niche, but turn the BlackBerry service into the leading standard for corporate workers on the move by getting the software on other non-RIM devices.

During the past two years, RIM has licensed its BlackBerry e-mail and data software to handset makers, including Nokia, Motorola, and Samsung, via a program called BlackBerry Connect. To date, the effort has had limited success. In part, that's due to uncertainty around a drawn-out patent lawsuit with NTP, a private holder of patents, analysts say. "I just haven't seen a whole lot of devices with Blackberry Connect used or sold," says Gene Signorini, an analyst at researcher Yankee Group.

RIM says it's excited about a new group of agreements and phones for BlackBerry Connect. On Sept. 28, it announced that Cingular would be the first carrier to offer BlackBerry Connect in the U.S. Cingular will begin offering BlackBerry Connect on the Nokia 9300 in November. Balsillie said that around 30 carriers have launched or plan to launch the Nokia 9300 with BlackBerry Connect.

GANG ATTACK. "The carriers are really digging it," Balsillie says. A deal with Palm is imminent he says. Still, RIM said that BlackBerry Connect wouldn't contribute in a significant way to subscriber growth until next year.

RIM has repulsed threats to its dominance in the past, and none of RIM's rivals may prove to be the BlackBerry killer. Still, taken as a group, they could take a toll that even a host of new gizmos and partnerships will be able to withstand.

Green is BusinessWeek's Internet editor in New York

with Arik Hesseldahl in New York

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