Research in Motion: Will the volatility continue?

There nearly hasn't been one day this past month that an analyst didn't decide it was time to opine on Research in Motion Ltd. (RIMM). The BlackBerry maker made $400 million last quarter and is set to report earnings in line with consensus analyst expectations on April 2.

It had to contend with investors putting this top quality company on a higher level of expectations than many others. RIM's shares (see analyst debate) gained 11 percent year-to-date outperforming the Nasdaq. To compare, Palm Inc. (PALM) saw its shares soar over 186 percent year-to-date ahead of the Pre smartphone release. So what's going on?

Investors have been mostly concerned about margins following declines over the past two quarters. The company's sales mix has shifted to include more consumer phones, which due to stiffer competition, have lower margins. RIM has also felt pricing pressure and high development costs, which affected margins, as it tries to stay ahead or at least keep up with the competition.

Another question: Can RIM maintain its strong position -- a 19.5 percent share -- in the smartphone segment in light of the competition? Does it have a strategy that would keep and grow its market share?

Let's examine the devices quickly first. The market is anticipating the new Palm Pre, but it's not the only phone maker to come out with a new smartphone. There have also been rumors that Apple will unveil several new iPhone models this summer, including a cheaper, lighter iPhone, a business use iPhone, and a netbook. Then there are devices from Nokia, Samsung, HTC and so on.

What can RIM counter with? In 2008, RIM has released several different consumer devices like the Pearl flip phone, Curve, Javelin and Storm, which have been selling very well but also hurt margins. Going head-to-head with Apple's iPhone, the Storm has also received some very unfavorable reviews, but perhaps they would improve given the recent firmware update. For business users RIM is coming out with the BlackBerry Niagara-9630, a smaller and sleeker version of the Bold that's dual-mode (CDMA/GSM). The hope is the Niagara could jolt sales and reverse RIM's declining gross margins. It has been dubbed "probably the best phone we've ever used" by the Boy Genius Report.

Another question remains: As RIM further strides into the consumer market, can it duplicate the iPhone's appeal? It's no secret that Apple Inc. (AAPL) iPhone's biggest attraction (other than the forward thinking, consumer-in-mind design) is its mammoth App Store with thousands of programs users can download. Research in Motion is lagging (understatement) in that department, but is trying to catch up with its new online application store, BlackBerry App World. RIM may launch the store in the upcoming CTIA conference, on April 1. RIM has been working with many established developers which it is said is paying them handsomely over the "paltry" earnings they can get at Apple.

One of the innovative applications there, rumored to launch on the same day is a TV download service, which would allow users to download full-length television episodes to their BlackBerry devices via Wi-Fi. The rumored service, said to be better than other services offered, may help drive mobile traffic down the line.

Of course, RIM isn't the only one that started an online app store. Microsoft Inc. (MSFT), Google (GOOG) through its Android Market, Nokia (NOK), Palm and Samsung among others also joined the trend.

Other initiatives include a recent launch by Barnes & Noble (BKS) of a free electronic-reader application for the BlackBerry. And Google just released a new mobile application that brings its Voice Search feature to BlackBerrys, just as it does for the iPhone.

But RIM also needs to remember its strengths. The success of the BlackBerry has stemmed from its super-efficient wireless data/messaging, especially its push-email application. No matter what, and despite strides Apple has made, users say BlackBerry's email is still the superior one on the market. That could change. That's why RIM isn't resting and keeps improving -- as its recent investment in Xonbi Corp., which makes an e-mail search tool, demonstrates. No doubt, RIM will continue to build on its other advantages in super-efficient wireless data/messaging and its other strengths too such as end-to-end security and unique Network on a Chip (NoC)-based service infrastructure

The advertising and the outreach into the consumer market need to be different. Indeed, there has been been added advertising, but again, investors are concerned about its effect on margins. Still, it seems RIM at least gets it. For example, it has recently managed to break the bond between Bono and Steve Jobs. While the two cooperated in 2004 with a special iPod and the head of U2 praising Apple and its innovation, it is Research in Motion that will sponsor the Irish supergroup's upcoming tour. The announcement from U2 said that there is a "shared vision between RIM and U2 that we expect will lead to new and innovative ways to enhance the mobile music experience on the BlackBerry platform for U2 fans."

As for the macro environment, smartphone sales grew only 3.7 percent in the fourth quarter. In 2008, they grew by 13.9 percent, according to Gartner, with Apple and RIM eating into Nokia's share. Gartner believes that while the overall cellphone market will contract, smartphone sales could jump 28 percent in 2009, with the key players being Nokia, Samsung Electronics and LG Electronics. Others believe smartphones will grow from at 12 to 15 percent only with the drivers being faster 3G networks, consumers relying more on handhelds for computing and communications, growing carriers subsidies and more applications.

Taking into account its recent launch in India, under these settings, RIM could certainly continue to grow its share. As for margins, RIM could, as some analysts believe, show that margin contraction has finally halted, but as the incumbent company in the field, it has been more susceptible to attacks from new entrants which have proceeded into the consumer market with game changing innovations just as RIM once did. To better compete, RIM may have to lower its prices, especially on the consumer models. Carriers might insist on it, given their margins may be hurting too. For now, at least in this current economic environment and as RIM is still new to the consumer market, it may be lower margins or lower market share growth in existing markets for RIM.

Disclosure: Considering long position.
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