RIM May Feel Android Effect

Verizon Wireless made clear from the start that its Droid smartphone was designed to put pressure on Apple, the maker of the iPhone, and AT&T (T), the exclusive U.S. iPhone carrier. As part of a $100 million marketing push, Verizon Wireless enumerates several ways it believes the Droid outperforms the iPhone. Yet analysts say the Droid and other devices that sport the Android operating system may also take a toll on Research In Motion, the maker of another smartphone, the BlackBerry. "It's clear there's been a lot of marketing at Verizon around the Droid, so that is going to hurt RIM," says Raymond James (RJF) analyst Steve Li. On Dec. 17, investors will get a glimpse of how big an impact, if any, when Research In Motion (RIMM) releases results for the quarter that ended Nov. 28. Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone Group (VOD), began selling the Droid on Nov. 6. Other Android phones have been available longer, but the Motorola (MOT) phone carried by Verizon Wireless has received some of the most glowing reviews and is generating the greatest buzz. Mobile analytics firm Flurry estimated that the Droid sold as many as 250,000 units its first weekend on the market. Droid sales neared 1 million by the end of November, according to RBC Capital Markets analysts. Neither Motorola nor Verizon Wireless has released an official tally. Narrowing MarginsRIM's results already reflect increasing competition from the iPhone. For the current quarter, which ends in February, RIM is expected to forecast narrowing margins, a measure of profitability, according to analysts surveyed by Bloomberg News. Slipping margins indicate that RIM is spending more to produce feature-packed phones that can more readily vie with the iPhone and other advanced handsets. In the third calendar quarter, RIM had about 19% of the smartphone market, compared with 38% for Nokia (NOK), owner of the Symbian operating system, and more than Apple (AAPL), which had 17%, according to researchers at IDC. To keep from losing share, RIM introduced the BlackBerry 8520, a low-end device sold at Wal-Mart (WMT). Li expects RIM to report sales of 9.7 million devices and 4 million new subscribers in its third fiscal quarter, compared with 6.7 million devices and 2.6 million new subscribers a year earlier. Analysts surveyed by Bloomberg expect RIM to report sales of $3.78 billion and per-share earnings of $1.04. As the largest carrier of the BlackBerry, Verizon Wireless has to be careful not to push the Droid as a BlackBerry alternative, says IDC analyst Ramon Llamas. "Verizon is being very savvy about this," Llamas says. "The Droid is a consumer phone, and with consumers increasingly picking up BlackBerry devices, that's forcing Verizon to walk a tightrope between them." Verizon Wireless didn't respond to a request for comment. Curve CampaignEven as it promotes the Droid, Verizon Wireless also puts its weight behind the BlackBerry. Buy-one-get-one-free campaigns helped make the BlackBerry Curve the best-selling smartphone during the third quarter, according to a study by NPD Group. Verizon Wireless has been a strong backer of RIM's Storm touchscreen phones, which are also aimed at the iPhone. Analysts say sales of the Storm haven't lived up to expectations. RIM declined to comment for this story but its executives have in the past said they're wiling to accept narrower margins in exchange for higher sales volume. In 2008, RIM stock was punished after CEO James Balsillie said the company planned to boost its appeal to mainstream consumers. "We believe that now is the time to aggressively pursue adoption," Balsillie said in a conference call on Sept. 25, 2008. That push would come at a cost. Gross margins would fall to 47%, from 51% the prior quarter, as a result of the decrease in overall handset margins. The stock fell more than 27% the following day. In the succeeding months, RIM's strategy showed signs of success. On Feb. 11, RIM said it was adding more subscribers than previously forecast. The stock surged. And after a dip in May, it kept climbing to a June peak of 85.44. On Dec. 16, the shares closed at 64.08. RIM may be due for a similar turnaround, says analyst Charles Wolf with Needham & Co. in New York. First, RIM will need to show it can withstand a threat from not only Apple's iPhone but also the Droid.

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