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RIM Expects Government Customers to Embrace BlackBerry 10

Research In Motion Ltd. (RIMM) Chief Executive Officer Thorsten Heins expects his million-plus government customers in North America to embrace the BlackBerry 10 devices the company is counting on for survival.

About 400,000 government customers worldwide got new BlackBerry phones last year, and Heins said he sees at least that many splurging on the new BB10 models next year. RIM, based in Waterloo, Ontario, said this week that it will begin selling the products in February on multiple continents.

“I would be surprised if we don’t see quite a wave moving over to BlackBerry 10,” Heins said in an interview yesterday at Bloomberg’s Washington office.

The BlackBerry 10 is the linchpin of RIM’s comeback fight, following years of market-share losses to Apple Inc.’s (AAPL) iPhone and devices running Google Inc.’s (GOOG) Android operating system. The company’s shares have plunged more than 90 percent from their peak in 2008, underscoring investors’ concerns that the BlackBerry can regain customers and beat back challengers such as Microsoft Corp.’s Windows Phone 8.

One analyst has said the new device may be dead on arrival.

“We believe BB10 is likely to be DOA,” James Faucette, a Pacific Crest Securities analyst in Portland, Oregon, said in a report last week. “We expect the new OS to be met with a lukewarm response at best and ultimately likely to fail.”

BYOD Policies

Some of RIM’s earliest and most loyal customers have been U.S. government agencies, which have used BlackBerrys for more than a decade. Faced with a growing number of federal offices that have embraced a bring-your-own device policy as a way of saving money, Heins said he’s determined to keep their business.

“I want to capture the BYOD -- let me say, a significant part of the BYOD segment -- in government and military,” said Heins, dressed in a white shirt with an embroidered BlackBerry logo on the pocket, a burgundy tie and matching BlackBerry cufflinks.

RIM may need to sell more than 400,000 new phones in the government market if it wants to make an impact, said Sameet Kanade, an analyst at Northern Securities in Toronto.

“Government is definitely one of their bread-and-butter revenue streams, and so a big push from them for BB10 is key,” he said. “If you have more government entities migrating to other platforms, that will create more headwinds for RIM.”

Security Advantage

The BlackBerry has had an edge in security compared with Apple’s iOS devices and Android phones, though that advantage is shrinking, said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco. He has a neutral rating on RIM.

At the same time, the BlackBerry lags its competitors in the number of applications it offers, he said. For government agencies, that may trump the security benefits, Wu said.

“Security on both iOS and Android have been greatly strengthened,” he said. “It’s arguably easier to replicate that than the range of apps that Apple and Android offer.”

RIM rose 1.1 percent to $8.49 at the close in New York.

Heins said the chief information officers he’s been meeting with tell him that the BlackBerry 10 has put RIM back in the running. “Many of them actually really said, once they saw this concept and saw this product, ‘OK, looks like you guys are back,’” Heins said.

Heins’s main selling point for the BlackBerry 10 is that it lets users see multiple applications such as e-mail, texting and social messaging in a central BlackBerry hub -- without having to tap a home button to flip between apps like on the iPhone. Apple’s approach was novel when it first arrived in 2007, but it’s now outdated, he said.

IPhone Fatigue?

“We know there’s certain tiredness with other platforms coming,” Heins said. “We see it and we hear it.”

RIM needs to challenge the perception within the U.S. government that it’s losing ground to competitors, said Larry Allen, president of Allen Federal Business Partners, a consulting firm in McLean, Virginia. To win back business, the company will have to increase its sales calls, marketing presence and overall visibility, he said.

“That’s great if you have new technology, but technology is only going to get you so far,” Allen said in an interview.

Heins, 54, a native of Germany who previously worked at Siemens AG (SIE), has been circling the globe in recent weeks showing carriers and customers what the BlackBerry 10 can do. He took over as CEO in January following the resignation of founders and former co-CEOs Jim Balsillie and Mike Lazaridis. Since then, he’s hired new marketing and sales chiefs and begun cutting 5,000 jobs as the company works to save $1 billion in operating costs and return to profitability.

Licensing Deal?

Heins said in September that he plans to hold more meetings in coming months to discuss BlackBerry 10 licensing and partnerships. Securing a licensing deal before the introduction of the new platform isn’t a priority, he said yesterday.

RIM also faces possible headwinds from government cutbacks. Under last year’s deficit-reduction legislation, the U.S. faces $1.2 trillion in automatic spending cuts over a decade, with half coming from defense. If the reductions, known as sequestration, take effect on Jan. 2 as scheduled, it would require cutting $110 billion from the budget for the fiscal year that began Oct. 1.

Even if the White House and Congress negotiate a deal to avert the cuts, information-technology budgets aren’t protected, Allen said.

“IT budgets outside of the cyber world are fairly static, if not diminishing,” he said. If RIM is going to win back customers, the company will “have to take market share away from someone else. With the sequestration, it certainly would make it that much more difficult.”

To contact the reporters on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net; Brendan McGarry in Washington at bmcgarry2@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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