Entry into consumer markets could undermine RIM prospects

Research in Motion (RIMM) made the decision to move beyond its traditional strength in the business market to try to capture consumer smartphone buyers. The reason for the decision was simple. Because of the size of the consumer market, RIM could expand its top line quickly. It turns out the the move has unintended consequences and they were not good.

According toThe Wall Street Journal, sales to consumers are hitting RIM margins and could badly hurt its profits. The paper writes that "these efforts eat into gross profit margins, which have fallen to 40 percent from about 50 percent in the last six months."

The news raises the age-old business question of whether it is better to be small and very profitable or big and modestly profitable. In RIM's case, it may face the worst of both worlds. The recession is slowing smartphone sales as the handset company pushes into the consumer market. So, its plans for substantial revenue from its new initiative may not materialize. It is also moving into a very competitive section of the market dominated by companies including Samung, Sony Ericsson, and Apple (AAPL).

The risks of being small and profitable are simple. Smaller companies are often overwhelmed by larger rivals as the big companies push for additional market share.

Things at RIM are looking grim.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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