RIM's Real Battleground: App World

Research In Motion (RIM) shares took a beating on Friday and several analysts cut their ratings on the stock after the company posted disappointing sales for its fiscal second quarter and ratcheted down expectations for the current one. But while increasing competition and ever-dwindling price points may bring RIM some rough months in the smartphone market, the company's long-term prospects will hinge on the success of its new app store.

Smartphone manufacturing is becoming a cutthroat business as the sector heats up. Verizon Wireless—which provided a huge boost to BlackBerry sales with its buy-one, get-one-free offer—is slated to launch several competing devices in the coming months. The iPhone appears to be making substantial headway into the enterprise market. Meanwhile margins are thinning as carriers look to target data-hungry customers with high-tech handsets that sell for less than $100. Those factors bode poorly for RIM, whose products—aside from the Storm—are "largely unchanged from a year ago," Deutsche Bank analyst Brian Modoff wrote in a research note released today:

"We see several dozen new smartphones coming on stream in the next six months. This includes solid offerings from Motorola, Palm, HTC, Samsung and LG. Our checks with carriers indicate that they are looking to drive smartphone prices to subsidized levels below $100. RIM may be able to manage its bill of materials down in this environment, but we think price declines will have an impact on gross margins. And this transition will likely be a painful process," Modoff wrote.

Can App World take the high-end road?The BlackBerry has deftly morphed from a business-focused handset to a more consumer-friendly device. Sales have been impressive, even as Apple's iPhone has taken consumers and the entire smartphone industry by storm. The Curve actually outsold the iPhone in the first quarter of the year, and RIM claims that more than 80% of its new customers last quarter were nonbusiness users who chose the BlackBerry over the iPhone, Palm Pre, and Android devices. But with a slew of attractive new smartphones coming to market and pricing continue to fall, I think that kind of momentum will be impossible to maintain. I expect RIM to lose ground over the next few months.

Which is why RIM's app storefront will be key to the firm's long-term success. Just as Apple's App Store and iTunes drive sales of the company's hardware, App World—which has received generally positive reviews—must be attractive enough to lure users away from the other smartphones on the market. And while Apple has built its empire largely on the strength of free or cheap, gimmicky apps, I think RIM has a real opportunity to market App World as a high-end retail destination for on-the-go users. This would allow the company to polish its image as it creates a lucrative new revenue stream with premium mobile applications.

That won't be easy in this fiercely competitive market, especially when carriers such as Verizon Wireless are trying to elbow RIM off the app-distribution playground (GigaOM Pro, subscription required). But if RIM can continue to attract developers and build out an attractive storefront—and if it can churn out sexy, user-friendly handsets—it will fare well in the superphone era.

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