RIM: Backed into a Corner?
With a simple stroke of his pen, the nation's new Chief Justice set the high-stakes world of mobile e-mail atwitter. Shares of Research In Motion (RIMM), maker of the popular BlackBerry e-mail device, slumped to their lowest level in a year: $51.90. The cause: U.S. Chief Justice John Roberts on Oct. 26 rejected RIM's request to stay a lower court's patent-infringement ruling while the high court decides whether to hear RIM's appeal. But ever since, the stock has been roaring back. On Oct. 28, shares closed at $62.58.
Executives at the Waterloo, Ontario-based company declined to comment. But in a press release, they said "further review by the Supreme Court is generally uncommon," and acknowledged that the next step will likely be a scheduling conference before a lower court -- the same district court that earlier had issued an injunction, slamming the door on RIM's sales in the U.S.
So what has at least some investors upbeat? Analysts say it's the near-certainty that RIM will settle with its opposition, patent-holding company NTP, before such an injunction can be issued. "People have really worried about an injunction," says Susan Kalla of Caris & Company. "There was mass hysteria and uncertainty in the market. Now they've gotten over their initial panic."
Most figured Roberts' blow would bring RIM executives back to the negotiating table. "I'd be shocked if they weren't talking at this time," says one Washington patent attorney following the news. After all, the window for talks is fairly tight. It only takes about two weeks for the court to grant a scheduling session. Attorneys close to the case expect hearings to start sometime in December.
The stakes for both sides are high. A key issue is whether Research in Motion can reach a settlement with Arlington (Va.)-based NTP, the group of tech investors that initially filed for patent infringement in 2002. The parties agreed on $450 million earlier this year, but the deal fell apart in June.
RIM wants the lower court to enforce the agreement, but its bargaining leverage has been eroded by defeats in court (see BW Online, 10/24/05, "Dwindling Legal Options for RIM?"). NTP could wrangle as much as $1 billion in settlement fees from RIM and an 8% to 9% royalty, according to Citigroup Global Markets analyst Daryl Armstrong. With about $1.3 billion of cash on its books, that's a sum RIM can handle.
"NTP may not find another opportunity as lucrative as this," Armstrong says. They might figure, "Why press for pennies when you can get a bill [$1 billion]?"
For its part, NTP says it's keen to reach a settlement, and that it will press ahead with plans to ask the court to enforce the injunction. "We expect two of the first issues to resolved will be the settlement and the injunction," says Kevin P. Anderson, an attorney for NTP. "NTP is confident of its position on both issues."
Meanwhile, RIM is fighting for its dominant position in the mobile e-mail space. By most estimates, it owns about 80% of the e-mail device market. And anticipation is brewing over a new device called the RIM 8700 or "Electron," that Cingular Wireless, the largest seller of BlackBerry gear in the U.S., is preparing to unveil, BusinessWeek Online has learned.
Still, RIM's command of the market is slipping. In its most recent quarterly report, RIM said it netted 620,000 new users. But at the same time it lowered its total subscriber number by about 85,000, to 3.65 million. The reason: "Catch-up" of deactivation accounts -- those that were previously deactivated by the subscribers but were not reported to RIMM by wireless carriers such as Cingular, which is owned by SBC Communications (SBC).
CREATING A VACUUM?
Bear Stearns projects that RIM's growth rate for revenues and earnings will decelerate. Revenue that more than doubled, rising 127% in fiscal 2005, is expected to increase only 55%, reaching $2.1 billion, in fiscal 2006. Handset shipments will slip from 4.1 million to 4.06 million units, according to Bear Stearns (see BW Online, 10/17/05, "RIM's Helping Hand from Palm").
It's no wonder. Citigroup's Armstrong is growing increasingly concerned that the uncertainty around the patent case is opening the door for competitive vendors like Good Technology and Seven to gain traction with RIM's business partners. If big customers, such as Cingular, ultimately shift, Armstrong reckons it will be difficult for RIMM to recapture them, even if a settlement ultimately is reached.
A Cingular spokesman said the company can't comment on the case because it's a matter still in litigation. He acknowledged that Cingular continues to sell the BlackBerry, but Cingular also sells other e-mail devices such as the Treo. "We will ensure that customers continue to have the wireless e-mail solutions they need," says Cingular spokesman Mark Siegel.
With so much competition nipping at its heels, RIM might be well advised to pull out its checkbook.