Research In Motion Ltd. (RIMM:US)’s pricing power with carriers shows signs of slipping after the BlackBerry maker was forced to cut subscriber service fees as demand for its smartphones in emerging markets slows.
Chief Executive Officer Thorsten Heins, who will introduce the BlackBerry 10 operating system next month, told analysts on a Dec. 20 conference call that RIM faces pressure to reduce fees to “stay relevant in our markets.” The Waterloo, Ontario-based company dropped the most in more than four years on Dec. 21 in Toronto.
Before the arrival of Apple Inc. (AAPL:US)’s iPhone, carriers were willing to absorb the monthly subscriber fee to tap into BlackBerry’s sales (RIMM:US) momentum and its data compression technology that ate up relatively little bandwidth. Both those advantages are disappearing with iPhones outselling BlackBerrys and RIM’s new devices set to use much more data, said Avi Silver, a Credit Agricole Securities analyst.
“RIM’s high-margin services revenue stream is slated to come under significant pressure as operators push back on sharing data revenue,” said Silver, who is based in New York and rates RIM a sell.
The pushback from carriers comes as new data suggests BlackBerry demand is slowing in markets such as India. Emerging markets have helped RIM shore up sales as consumers elsewhere wait for BlackBerry 10 phones due to go on sale in February, or flock to the iPhone 5.
Sales in the U.S., U.K. and Canada dropped by 53 percent last quarter from a year earlier to $949 million, according to a Dec. 21 company filing. Revenue from the rest of the world including markets like Nigeria and Indonesia, where BlackBerry is the No. 1 ranked smartphone, fell 44 percent to $1.78 billion. RIM doesn’t provide further breakdowns of country or regional sales.
RIM is set to finish 2012 with a 4.7 percent share of the global market, compared with almost 90 percent for Apple and Google Inc. (GOOG:US)’s Android software combined, according to research firm IDC.
RIM fell 2.8 percent to $10.61 in New York after plunging 23 percent on Dec. 21, the biggest drop since Sept. 26, 2008. RIM had initially risen in extended trading after the company’s third-quarter earnings report on Dec. 20, when RIM topped sales estimates and reported a smaller loss than analysts projected.
The stock had doubled in the three-month run-up to the earnings report on growing optimism for BlackBerry 10. More than 150 carriers are now testing BlackBerry 10 phones, which RIM will publicly debut on Jan. 30 in six cities worldwide.
Major carriers are reluctant to discuss their negotiations with RIM over service fees. Torod Neptune, a spokesman for Verizon Wireless, the largest U.S. mobile-phone carrier, declined to comment on fees it pays RIM, as did Brad Burns, a spokesman for no. 2 carrier AT&T. (T:US) Spokesmen for Canada’s three largest wireless operators, BCE Inc. (BCE), Rogers Communications Inc. (RCI/B) and Telus Corp. (T), also declined to comment.
Subscribers who want enhanced services, including advanced security, will continue to pay a fee, while others who don’t use such services “are expected to generate less or no service revenue,”Heins said on the conference call. RIM said it will give details on the new fees when BlackBerry 10 services are introduced.
RIM’s hesitancy to share details suggest that it’s still negotiating with carriers over fees for current BlackBerry 7 customers and the billing mechanism for BlackBerry 10, said James Faucette, an analyst at Pacific Crest Securities LLC. That is “good news” as it “may help RIM preserve at least part of the services revenue stream,” said Faucette, who rates RIM the equivalent of a sell.
Service fees accounted for $974 million in sales last quarter, or 36 percent of total sales of $2.73 billion. Given RIM’s 79 million subscribers and assuming that revenue on an annualized basis, RIM gets about $4 per subscriber a month. The company does not disclose its subscriber fee, said Nick Manning, a RIM spokesman.
“It’s changing and it’s under pressure,” Steven Li, a Raymond James analyst, said of RIM’s services model. Li, who rates RIM the equivalent of a hold, estimates the revenue decline will range from 34 percent to 67 percent.
The services business was the most profitable unit at RIM, if not the only one, said Kevin Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 40,000 RIM shares.
“There’s going to be a revenue reset,” he said.
To contact the reporter on this story: Hugo Miller in Toronto at firstname.lastname@example.org
To contact the editor responsible for this story: Nick Turner at email@example.com