TORONTO: Research In Motion's (RIM) decision to scrap service fees for some users is threatening its most profitable source of revenue, ending the BlackBerry maker's three-month stock rally.
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," chief executive Thorsten Heins said on Friday. Service fees accounted for about $982 million in sales last quarter, out of a total of $2.73 billion.
The move jeopardises the company's services business and casts a pall over its turnaround plan, which centers on the introduction of the BlackBerry 10 early next year. A shortage of detail on the change is contributing to investor concerns, said Jennifer Fritzsche, an analyst at Wells Fargo in Chicago. RIM shares tumbled 23 per cent to $10.91 at the close in New York, the biggest decline since September 26, 2008.
"By doing this and lacking details, RIM has created a very large cloud of doubt about that high-margin revenue," she said in an interview on "Bloomberg West." "By our estimates, it's really the only real source of profitability."
Separately, Nokia said yesterday that RIM agreed to make one-time and 'ongoing' payments as part of a patent-licensing deal that ended all legal disputes between the companies.
RIM is changing its services-fee approach as mobile-phone customers put pressure on wireless carriers to cut their monthly bills. Carriers have traditionally passed on the fees to consumers, something that's now harder to do. The BlackBerry operating system has to adapt to trends, Heins said on the conference call.
"We will see pressure on pricing for BB OS-related services in order to make sure we stay relevant in our markets," he said. "However, I want to be very clear on this: Service revenues are not going away."
Heins reiterated that view in an interview, saying that existing subscribers would help maintain service revenue. He also said the company would return to profitability in the "near future," aided by a cost-cutting plan.
Under the assumption that RIM has about 15 million enterprise customers. - Bloomberg News
and about 60 million consumer users, service-fee revenue could decline by as much as a third, said Kevin Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 40,000 RIM shares. "It's going to be a big hit,"he said.
Paul Carpino, RIM's head of investor relations, said the company will disclose details about the pricing and structure of the new fees when BlackBerry 10 services are introduced.
Kris Thompson, an analyst with National Bank in Toronto, cut his rating on the stock to the equivalent of a sell. "Management was ill-prepared to provide satisfactory answers," he said in a note. "Investors will punish the stock until service revenue can be better quantified."
Avi Silver of Credit Agricole Securities also lowered his recommendation, from an underperform rating to a sell. The company's business model "is being challenged by operators that are unwilling to both subsidise devices aggressively and hand over a slice of their data revenue," he said in a note. Paradigm Capital dropped its rating to a hold from a buy, as did Cormark Securities.
Before Heins made the comments, RIM had pleased investors with yesterday's third-quarter results, which included an increase in its cash by about $600 million to $2.9 billion. The stock had gained almost 10 per cent in after-hours trading following the earnings, only to plunge during the services discussion on the conference call.
Excluding some items, the company posted a third-quarter loss of 22 cents a share, beating the 35-cent loss predicted by analysts. At $2.73 billion, revenue exceeded the $2.66 billion estimate in the period, which ended on December 1.