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RIM shocks market with service fees warnings

New structure for BB10 services could hit primary source of profit hard, but quarterly loss narrower than expected


Published: 21 December, 2012

READ MORE: Financial | Research In Motion | BlackBerry

After some more positive feeling about RIM lately, based on apparent strong reception for its BlackBerry 10 previews, the firm's quarterly results threw the enormity of its turnaround challenge into sharp relief again. The firm did post a smaller than expected loss, and in many ways these results are irrelevant, as RIM is in a holding pattern until the impact of the make-or-break BB10 can be assessed after its January 30 launch. However, shares still fell by as much as 13% when the company said it would alter its service fees structure, threatening the source of about one-third of its revenues.

CEO Thorsten Heins said on the analyst call that subscribers will still pay a fee for enhanced services such as advanced security, but those who do not use such add-ons "are expected to generate less or no service revenue". That should make the platform more cost competitive but service fees totalled $982m out of the quarter's revenues of $2.73bn.

Heins said: "We will see pressure on pricing for BB OS-related services in order to make sure we stay relevant in our markets. However, I want to be very clear on this: Service revenues are not going away." He was criticized for not giving more detail about the changes. Assuming RIM has 15m enterprise and 60m consumer users, service fee revenues could fall by one-third, calculated one analyst.

Jennifer Fritzsche, an analyst at Wells Fargo Securities, told Bloomberg: "By doing this and lacking details, RIM has created a very large cloud of doubt about that high margin revenue. By our estimates, it's really the only real source of profitability."

This adds to the pressure on BB10 to perform strongly when the first devices debut next month. If it fails, RIM is expected to have to break up or find a buyer. Nonetheless, without the news on service fees, the markets would have been fairly pleased with the quarterly results, which turned in a net loss of $114m, or 22 cents a share, less than the 35 cents anticipated but far lower than last year's figure of $1.27 a share net income. Cash increased by $600m to $2.9bn but revenue nosedived by 48% to $2.73bn, from $5.22bn in the year-ago period. After items, net income was $9m or two cents a share, helped by a $166m tax settlement, compared to $265m a year earlier.

RIM says more than 150 carriers are preparing to offer BB10 and over 120 companies are testing the new platform even though the company will finish 2012 with a market share of just 4.7%, according to IDC. The total number of BlackBerry subscribers has been rising all the same, until this quarter, when the numbers fell for the first time, from 80m to 79m, another cause for concern among analysts. RIM shipped 6.9m BlackBerrys last quarter, in line with estimates. Its PlayBook tablet shipments were 255,000, beating the 150,000 predicted by analysts.

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