Motion Sickness Plagues BlackBerry Holders

JUNE 23, 2011   THE WALL STREET JOURNAL

By MARTIN PEERS

There's good news and bad news for Research In Motion shareholders. As Tuesday's recovery suggested, the plunge in RIM stock is likely over for now. The bad news: It will likely fall much further eventually.

Having lost half its value since Jan. 1, RIM is now trading at just 5.4 times expected 2012 earnings. That isn't surprising. Given its smartphone market-share declines and failure to keep up with consumer tastes, RIM's trajectory is beginning to look like that of handset rivals Nokiaand Motorola over the past decade. Both are now struggling to turn themselves around.

Bloomberg News

Michael Lazaridis, co-founder of Research In Motion, addresses the audience at the BlackBerry World conference in May.

Precisely what that means for RIM's share value is tough to quantify. There is a possibility its new operating system, due next year, will restore momentum. Even if that doesn't happen, RIM retains many loyal customers who are unlikely to give up their BlackBerrys anytime soon.

The most loyal are likely to include certain enterprise customers, such as those in the defense industry and government, who put a high priority on the security of RIM's proprietary email service. Gartner analyst Ken Dulaney estimates this kind of customer probably accounts for about 15% of BlackBerry users. Another likely band of loyalists will be those who don't feel comfortable with touch-screen keyboards.

View Full Image

Bloomberg News; Getty Images

These loyal customers will upgrade their BlackBerrys every few years. But more important are the recurring per-subscriber fees RIM receives from carriers. These are paid because RIM's BlackBerry email service, which routes messages through its own data centers, takes pressure off carriers' overloaded wireless networks. These payments are the primary source of RIM's service revenue, which accounted for 20% of total revenue in the May quarter. And the profit impact is likely much higher. ThinkEquity analyst Mark McKechnie estimates that, by next fiscal year, service revenue, combined with revenue from the much-smaller software business, will account for 24% of revenue but a mammoth 71% of RIM's operating profit. The danger: If RIM's loses handset customers, this revenue will also suffer over time.

The hard-core loyalists, combined with the intellectual property behind its email service, could make RIM an attractive buyout target for rivals. Trouble is, the most obvious buyer is probablyMicrosoft, for whom enterprise customers are already important. But its alliance with Nokia and a recent deal to buy Skype would likely make another risky Microsoft deal unlikely. After all, it would be taking on a big risk that handset sales continue to suffer.

RIM's co-chief executives, Jim Balsillie and Mike Lazaridis, could also be huge obstacles to a deal. The two together own about 10% of the stock, far more than any other shareholder, according to FactSet. Just as the two have rebuffed recent suggestions that they switch to a single CEO arrangement, they are unlikely to want to sell until the situation gets dire. RIM's best chance for a turnaround is an infusion of fresh blood. Without such a catalyst, RIM will remain downwardly mobile.

Write to Martin Peers at martin.peers@wsj.com