Loss of Faith in RIM Deepens as PlayBook Debut Nears

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Research In Motion is facing skeptical investors unsure the BlackBerry maker can pull off a difficult transition as it promises strong growth based on a tablet and operating system few have seen.

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Shares of the Canadian company opened more than 10 percent lower on Friday, the morning after it warned of weak profit and revenues in the short term as it ramps up for next month's launch of the long-anticipated PlayBook tablet.

RIM has spent heavily developing and marketing the device, designed to snatch some glory away from Apple's iPad, which virtually invented the now-crowded tablet market.

To cushion the blow, RIM took the unusual step of providing Wall Street with a forecast for full-year earnings that topped the expectations of all but the most optimistic pundit. The number supported RIM's contention that the pain surrounding the PlayBook launch would set the stage for long-term gain.

By and large, investors and analysts were not buying the argument on Friday. Even Deutsche Bank analyst Brian Modoff - the lone analyst with a forecast that was above RIM's full-year figure - cut almost a full dollar off his earlier estimate on Friday. He also suggested clients sell their RIM shares.

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One of his reasons was a loss of faith that RIM can reverse its fortunes with the introduction of the QNX operating system, which will make its debut on the PlayBook.

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Modoff, among others, believes it's imperative that RIM move quickly to put QNX on its touch-based BlackBerry smartphones due out this year, replacing an outdated platform that's ill-equipped for today's data-heavy applications.

But RIM on Thursday said QNX won't appear on its phones until early next year.

Susquehanna Financial analyst Jeff Fidacaro said RIM desperately needs a high-end smartphone to woo back disgruntled users in North America. The Torch, launched in August with an improved browser, didn't fill the void.

"With no QNX on handsets until calendar 2012, we think RIM will likely continue to lose share to Android smartphones whose prices are rapidly falling," Deutsche's Modoff wrote in a note.

Google provides its Android software to Motorola Mobility, Samsung, HTC and other device makers.

IN NEED OF REBOOT

Adding to worries, RIM said the launch of the PlayBook would hit the company's prized gross profit margins and they would likely not recover anytime soon.

Yet the PlayBook, loaded with impressive parts and priced at par with the equivalent iPad 2, is only part of the reason RIM's margins are slipping.

"That is not 100 percent due to the PlayBook being put into the mix. There is some core degradation in the gross margin of their smartphone business," Susquehanna's Fidacaro said in an interview. "And I think that really surprised the bulls."

RIM is leaning on sales of its cheaper devices outside the lucrative North American and Western European markets as Apple's iPhone and Android-based devices steal thunder.

While those devices bring in decent income for the cost of production, sales volumes need to be high to keep revenue up.

When RIM finally brings out QNX-equipped smartphones -- what it dubs 'superphones' -- the big question is whether they will impress when stacked against the fast-moving competition.

More broadly, analysts are wondering if RIM is right to cling to an independent platform faced with the giant scale of Google's software, coupled with phone makers setting a furious pace of innovation.

"We've got Google out there flipping OS by themselves three times in a year and then all their hardware partner guys, beating their feet to the market as fast as they can with their latest and greatest hardware," said Ed Snyder from Charter Equity Research.

"Any one company that tries to do this by themselves will probably lose - including Apple in the long run," he said.

RIM's shares were down more than $7, or 11 percent, to $57.05 on the Nasdaq by midday and 10.8 percent lower at C$55.75 on the Toronto Stock Exchange.

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