Wall Street Journal
Is smart-phone pioneer BlackBerry in danger of becoming the AOL of the mobile-device market?Verizon Wireless's launch on Friday of the Droid phone, a Motorola-built handset using Google's Android operating system, signals the opening of a new front in the smart-phone war. Early buzz on the Droid suggests it may be the strongest competitor to Apple's iPhone so far. But it is BlackBerry maker Research In Motion, more than Apple, that is particularly vulnerable.
BlackBerry has failed to build on the popularity of its email service with a robust Internet browser. That wasn't a major issue while the iPhone, available only on AT&T, was the only other game in town. But now the array of competitive smart phones includes the Palm Pre on Sprint Nextel as well as the Droid.
Apple already is closing the market-share gap with RIM, boosting its global smart-phone share to 17% in the third quarter, estimates Strategy Analytics, while RIM rose to 19.5%. For 2008, RIM was at 15.6%, and Apple, at 9.1%. RIM could see some defections in coming months. Consumers now represent the majority of new subscribers. But the percentage claiming to be very satisfied with their BlackBerrys fell five percentage points to 43% between June and September, according to research firm ChangeWave. Its research also showed erosion among corporate IT departments, historically RIM's sweet spot. Apple has made inroads among corporate purchasers, although it lags far behind RIM.
Of course, RIM could still reinvent the BlackBerry and recapture momentum. Even if it does, though, it may find it difficult to maintain profit margins. Consider: RIM's gross margin dropped to 44% in the latest quarter from 56% three years ago, despite little change in the average selling price of its devices. That is partly because the more complex devices coming onto the market are more costly to make.
Devices aren't likely to become simpler. Yet prices are likely to come under pressure as competition intensifies. RIM also could face a squeeze on the fee it charges carriers for each subscriber.
All that suggests RIM's gross margin will continue declining. What's more, as Deutsche Bank analyst Brian Modoff says, RIM will likely have to boost spending on R&D and marketing if it is to maintain its market share. The combined impact would be weak profit growth even if sales boomed. Citigroup analyst Jim Suva estimates RIM's operating margin will drop to 19.2% in fiscal 2011 from 23.1% last quarter, excluding litigation expense. That would slow EPS growth to just 1.7% in fiscal 2011 from this year, assuming 18% sales growth.
In the wake of a recent selloff, RIM is trading at 13.9 times consensus 2010 earnings. That appears cheap relative to stocks like Apple. But given the potential for slow earnings growth, it may be still pricey.
