The maker of the BlackBerry may be sacrificing profit as it spends more to build pricier devices
By Hugo Miller
(Bloomberg) — Research In Motion (RIMM), maker of the top consumer smart phone in the U.S., may project narrower profit margins for this quarter as it spends more to create pricier BlackBerrys.
RIM has poured money into feature-laden models like the new Bold to shield sales from Apple Inc.'s iPhone, raising research spending in the six months through August by almost half. At the same time, Wal-Mart Stores Inc. is selling cheaper models like the Curve, which may erode RIM's return on investment for high- end models like the Bold, said analyst Matt Thornton.
"The success RIM has had is with the association with bankers, lawyers, celebrities using the device," said Thornton, who works at Avian Securities in Boston. "Selling a $29 phone at Walmart can take some of the shine off the brand."
Gross margin, the percentage of sales left after production costs, may shrink to 42.6 percent in the period ending in February, the average of 10 analysts surveyed by Bloomberg shows. RIM, whose Curve 8520 sold this week for $28.88 through Bentonville, Arkansas-based Walmart, forecast gross margin of 43 percent for last quarter.
"It's a question to what degree the Curve 8520 will cannibalize Bold and Storm sales," said Nirav Parikh, a senior vice-president at Los Angeles-based TCW Inc., which manages more than $100 billion, including RIM shares. "The cheaper phone packs many of the same features as the more expensive devices."
RIM spokeswoman Tenille Kennedy said the company will provide an update on the business when it reports third-quarter results tomorrow after the close of markets. She declined to comment further.
Amazon.com Inc., based in Seattle, sells the Curve 8520 for 1 cent with a service contract. The 8520, like the updated Bold, has a track pad and Wi-Fi connectivity, though it's not as fast.
The deals reflect goals by co-Chief Executive Officer Jim Balsillie to make RIM a more mainstream brand and boost sales volume. The discounts at Walmart and Amazon.com helped catapult the Curve to the No. 1 spot in smart-phone sales last quarter, supplanting Cupertino, California-based Apple's iPhone, according to NPD Inc. in Port Washington, New York. The retailers declined to break out BlackBerry sales.
RIM aims to make the Curve as popular with students as its first devices were with bankers. The shift comes as financial services lost 344,000 jobs since 2007 amid the economic slump.
"With the first BlackBerry, I thought it was all corporate and ugly," said Sam Pulanco, 28, a pastor in San Francisco who has had a Curve for two years. "When the Curve came out, it looked sleek, and the way they marketed it really appealed to the twenty-something person."
Non-business customers made up more than 80 percent of RIM's new subscribers in the second quarter, compared with 50 percent two years earlier. The company said in September that more than half its total subscriber base was non-business customers.
In September, RIM forecast third-quarter revenue of as much as $3.85 billion, short of estimates. The stock slid 17 percent a day later. RIM said then that new Storm and Bold models would probably go on sale too late in the period ended Nov. 28 to have much impact.
RIM advanced 90 cents to $64.08 in Nasdaq Stock Market trading yesterday. The shares had gained 58 percent this year before today.
The average selling price is dropping as RIM offers more Curves and carriers pressure the company to lower prices. RIM forecast an average price of about $320 for the third quarter, down from $345 in the second and $357 in the first.
"Carriers only have so much subsidy to go around," said Mark Demos at Fifth Third Asset Management in Minneapolis, which oversees about $20 billion. Demos sold the RIM shares he directly managed after RIM reported its second-quarter earnings, which Demos labeled "disappointing."
Wall Street, Main Street
The Main Street approach is a long way from how Balsillie, 48, first promoted the BlackBerry. In 2000, RIM, based in Waterloo, Ontario, handed out the devices on Wall Street to build buzz. That popularity has spread to everyone from socialite Paris Hilton to U.S. President Barack Obama, who lobbied to keep the device despite security concerns after he took office in January.
Balsillie said in October that lowering prices to win more users is the right strategy, and the benefits outweigh costs. When Apple released the iPhone 3GS in June, it halved the price of an older model. Palm Inc.'s Pre debuted six months ago at $199.99 with a service contract. It now sells for $79.99 on Amazon.com.
RIM is doing what's necessary, said Tavis McCourt, an analyst at Morgan Keegan Inc. in Nashville, Tennessee, who has a "outperform" rating on the stock and doesn't own it.
"Discounts are not unique to BlackBerry," he said. "Everyone is trying to do it."
To contact the reporter on this story: Hugo Miller in Toronto at email@example.com