RIM Needs a Lift with BlackBerry 6

Research In Motion (RIMM) presented Queen Elizabeth II with a white BlackBerry during a royal visit to the Canadian company's headquarters on July 5. Her Royal Highness is an apt representative of RIM's customer base: established, traditional, and likelier to use a phone to e-mail instructions to staff than download Lady Gaga videos. In short, not the audience co-Chief Executive Officer Jim Balsillie has to woo as RIM loses ground to Apple's (AAPL) iPhone and handsets running Google's (GOOG) Android operating system.

Despite an 11 percent drop in RIM's share price on June 25 after the company released first-quarter results, Balsillie is buoyant. With RIM poised to unleash a wave of new technology, he says, "the wind is about to gust on our back." Consumers, he promises, will be "blown away."

Investors are skeptical. The problem isn't just Android and Apple, with their hip handsets and vast libraries of applications that let users customize their phones. (The latest tally gives the iPhone about 225,000 apps and the Android some 65,000, vs. roughly 7,000 for BlackBerry.) They're worried about RIM's growing reliance on lower-revenue customers and the erosion of its once-airtight lock on the business market. Add to that the challenges of using a BlackBerry to surf the Web, watch video, or do much other than e-mail, text, or talk, and Balsillie has a lot to prove. BlackBerry's "weak browser capability is a huge issue," says Paul Taylor, chief investment officer at BMO Harris Private Banking in Toronto, which owns Apple and RIM stock. "The right thing to do is to invest every dollar they need to refresh the product and excite people again."

That's the reaction from a self-professed fan who expects new devices will close the gap with rivals. Dean Crutchfield, senior partner at branding agency Method in New York, is less optimistic. RIM "is a bit of a one-trick pony," says Crutchfield, noting that the technology that made BlackBerry famous—wireless e-mail—is "no longer a game-changer." While the stock is trading at about nine times estimated earnings, vs. a multiple of 19 for Apple, "it's only cheap if they come up with a sexy device," says Buzzy Geduld, chief executive officer of New York hedge fund Cougar Trading, who recently sold his RIM stock.

Subscriber Issues

RIM still reigns in smartphones, with 41 percent of the North American market, vs. 22 percent for Apple, according to researcher Gartner (IT). Yet two-fifths of BlackBerry's 46 million users now reside outside of North America, up from a third two years ago, and those people tend to choose cheaper phones. "The only reason that RIM was able to boost subscribers [overseas] was through heavy subsidies," says Ashok Kumar, an analyst with investment bank Rodman & Renshaw. And while the number of BlackBerry subscribers worldwide has nearly tripled over the past two years, RIM's average revenue per user has fallen to $92 from $140 during the same period. Balsillie says overseas markets are lucrative, pointing to RIM's 41 percent jump in earnings per share last quarter. And he predicts that a shift away from all-you-can-eat data plans may hurt rivals that have less efficient technology.

Because of their strong security features and data capabilities, BlackBerrys have long been the handset of choice for companies. CTOs don't typically covet or even welcome fun features like games and video apps for their workers. But ever more buyers want their companies to support the iPhone and other similar devices. Mike Kourabas, an attorney at Weil, Gotshal & Manges in New York, uses an iPhone for personal calls and a BlackBerry at work. If the firm supported the iPhone, "it'd make my life easier," he says. "I wouldn't have to carry around two phones."

A Goldman Sachs (GS) survey of global IT managers, published on July 1, notes that more companies are willing to indulge the likes of Kourabas. It reports that RIM saw "significant erosion" in interest among tech managers. Only 59 percent of respondents plan to issue new BlackBerrys over the next 12 months, down from 84 percent in December. PayPal, for instance, has gone from all BlackBerrys two years ago to about half iPhones today. "For us it's about being open-minded," says technology chief Scott Guilfoyle. Balsillie acknowledges consumer pressure in the business, but insists it's overstated.

Consumer Challenge

The big challenge for RIM is to woo consumers, who are fueling global demand for smartphones. To do that, the company needs to focus first on software developers like Wade Beavers, whose Minneapolis company DoApp has built 142 apps for iPhone, 130 for Android, and, he says, "no more than seven" for BlackBerry. Beavers complains that RIM is hard to work with because programs need to be tweaked for its different devices. Moreover, he says, interest in apps among BlackBerry users is so limited that it's hard to make money from the programs he does write for it. "Developing for RIM is just a waste of time until they can show there's an appetite for apps on their platform," Beavers says.

Balsillie and co-CEO Mike Lazaridis say the world won't have to wait long. While RIM's sneak peek of the BlackBerry 6 technology in April didn't spark much enthusiasm, Balsillie says there's much more to come. He's planning a new look for BlackBerry's devices, enhanced software, and a better user experience. "The whole global computing game is very turbulent right now," he says. "There are always things you can do better, but we have a great strategy. Be careful not to look at just a short period of time and draw conclusions."

The bottom line BlackBerry's dominance in the business market may wane unless RIM can come up with sexy devices for consumers, too.

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