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RIM's Helping Hand from Palm

In late September, when Research In Motion (RIMM)

executives appeared overflowing with optimism about quarterly results, Wall Street analysts were scratching their heads. A host of competitors, including Microsoft (MSFT), Palm (PALM), and a slew of upstarts, were already lining up to tap the brakes on growth for the e-mail-device and software company (see BW Online, 09/29/05, "RIM Prepares to Defends Its Turf").

Now, RIM execs are showing a few more of their cards. Waterloo (Ont.)-based RIM was set to announce on Oct. 17 a partnership with No. 1 hardware rival, Palm, a move sure to surprise observers. RIM will tie its BlackBerry Connect service to Palm's Versamail application on the popular Treo 650 phone and e-mail device.

The sudden detente at first blush appears to be a much-needed shot in the arm for RIM. Company execs have vowed to fend off increasing competition by becoming more of a software company. Even as they protect their hardware niche by offering sleek new devices and services, they're also trying to add the BlackBerry wireless-paging service to competitors' non-RIM handsets.

MOVING TOO SLOWLY? The software push has had mixed success. Many device makers have shunned BlackBerry Connect. In the U.S., only Nokia's (NOK) 9300 handset uses the software, which allows communication between BlackBerry and non-BlackBerry handsets (see BW Online, 09/21/05, "Few Links for BlackBerry Connect").

The slow acceptance has led to criticism that RIM is not committed to quickly adopting a more software-centric model. RIM co-Chief Executive Jim Balsillie begs to differ. "There've been a lot of misinformed characterizations of the BlackBerry Connect program," Balsillie says. "We're fully committed to supporting the BlackBerry middleware for our carrier partners and for end-user customers."

Even if it takes off, the transformation from a primarily hardware-driven business into a software and services provider comes with its own potential pitfalls. It could slow revenue growth and spook investors. A closer inspection of the Palm-Nokia deal highlights why. Nearly 75% of RIM's revenue comes from handset sales. But with BlackBerry Connect partnerships, Palm, Nokia, or some other handset maker would rake in revenue from selling the hardware -- and RIM would only get revenue from user licenses and monthly subscription fee.

READY RIVALS. Because handsets comprise three times the revenue RIM takes in compared with services and fees, it must quickly triple the number of new BlackBerry Connect subscribers just to maintain its current revenue and earnings growth. "The real question here is -- is RIM going to be able to attract incremental business beyond what they're doing, or are they going to be losing handset sales to the competitors?" says ThinkEquity wireless analyst Pablo Perez-Fernandez, who advises his clients to sell RIM shares.

In the fiscal fourth quarter, which ends Mar. 4, 2006, the outfit expects diluted earnings per share (diluted EPS) of 64 cents to 81 cents a share, on revenue of $590 million to $620 million. It expects to add between 775,000 to 825,000 subscribers in the period.

RIM and Palm's collaboration is also a matter of necessity. Execs at both companies have been pressured by mobile-phone service providers such as Cingular Wireless to offer as many e-mail choices on their devices as possible. Consumers then have greater options and more enticements to buy the add-on data plans essential to carriers' growth. And corporate customers are flocking to the Treo, but say they want to attach e-mail to the 55,000 RIM servers already deployed to enterprises, says Palm CEO Ed Colligan.

LEGAL OBSTACLES. The move may slow competitors' march on RIM, but long-term obstacles remain. Analysts say privately held Good Technology, along with Intellisync, Seven, and Visto may be more attractive to corporations because they offer their data services on many different devices, giving them the ability to mix and match. And as RIM adds more features to its hardware a core selling point -- battery life -- has suffered, Perez-Fernandez says.

In the short-term, there's also uncertainty about RIM's prospects because of a drawn-out patent lawsuit with NTP, a private holder of patents. A U.S. Appeals court recently rejected RIM's attempt to get another hearing on an earlier patent-infringement ruling against RIM (see BW Online, 10/10/05, "RIM Edges Closer to the Edge"). The decision revives concern RIM will be forced to shut down service in the U.S., unless the two sides settle.

While the Palm deal may be more symbolic than financial, it signals that RIM is making progress on its transformation plans. But it will need to make a lot more headway to keep the competition at bay.


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