RIM at a crossroads

At a recent technology show in Europe, Research In Motion launched a new, consumer-friendly version of its popular BlackBerry handheld device – a smaller, blue-coloured unit dubbed the BlueBerry, expected to be much cheaper than its predecessor. In many ways, the device is a double-edged sword: it has the potential to expand RIM’s market reach, but it also thrusts the company further into a competitive minefield.

Until recently, RIM has concentrated on the corporate market, in part because the “always on,” instant e-mail features of its device – which began as a souped-up pager – appealed primarily to businesses, the kind with salesmen or executives who needed to be available at all times. Politicians and day-traders have also embraced the it, but the corporate market has been the company’s main beachhead and the core of its revenue base.

RIM has also focused on corporations out of necessity, partly because the BlackBerry and its monthly fees have been too expensive for non-business users – and partly because RIM’s e-mail software works best when installed and configured with a corporate e-mail server. Over the last year, however, RIM has been trying to broaden its appeal by licensing its software to other hardware makers, including phone companies such as Nokia. The launch of the BlueBerry is another step down that road.

Many of the analysts who follow the company have applauded these moves, since RIM was seen as too dependent on its own hardware in the past, and restricted to a single niche. They say the new unit – expected to cost $300 (U.S.), compared with the $500 price tag on the regular BlackBerry – could be a winner, and could help the chronically money-losing Waterloo, Ont. company make the leap into profitability. There are some hurdles that RIM has to overcome on the way, however, and they are substantial.

For example, as the company pursues licensing deals with phone companies such as Nokia and distribution arrangements with other providers to sell BlackBerrys and BlueBerrys, it becomes even more reliant on two things. It becomes more reliant on licensing fees and a share of the monthly charges phone companies charge, and it has to rely on those partners to market and sell its devices properly. If they don’t, RIM suffers.

In other words, if Vodafone or other phone company partners don’t discount the BlackBerrys and BlueBerrys to stimulate demand – or don’t discount them enough – they may not sell well. Part of the problem with that equation is that all the major telecom carriers are watching their pennies after the telecom market blowout, and may not be sufficiently motivated to eat into their cash flow for some theoretical future benefit. Even if they are, they could pressure RIM to take a smaller cut of the proceeds.

A related issue is that the phone companies are already busy pushing expensive e-mail-ready devices to stimulate demand for their new services – they’re called cellphones. Many of the newer phones that run on the GPRS, 1XRTT and GSM networks the companies have spent millions building are e-mail capable with always-on capabilities. They may not have thumb keyboards, but plenty of Europeans seem pretty happy with them.

And that’s not all. A U.S. company called Good Technology has been winning RIM customers away with its software – which runs on the BlackBerry, as well the Palm and Pocket PC. Although RIM denies that Good represents real competition, some analysts disagree. RIM has even had to play catch-up with Good: Good’s software offers e-mail updating (in which an e-mail read or deleted on the handheld is automatically read or deleted on the user’s PC), as well as viewing of attachments such as Word documents, and support for web-based e-mail accounts. RIM’s did not, until recently.

As if that weren’t enough, RIM is also wrestling with legal issues – issues that are crucial for a company that plans to gain revenue from licensing. As well as suing Good, the company is fighting a patent case launched by a U.S. company called NTP, which claims it developed technology used by RIM in its devices. After an initial ruling in NTP’s favour, a judge has sent the matter to mediation, and RIM said it has increased to $40-million the reserve it is keeping in case of a negative outcome.

RIM maintains that the NTP lawsuit has no validity, and some analysts agree; but they also note that the suit constitutes an “overhang” that affects the share price. Combined with the tricky transition RIM is trying to engineer, and the substantial risks it entails, even analysts who applaud RIM’s strategy are hesitant to rate the stock anything more than a “market perform” or “hold” – at least until the smoke starts to clear.