Analysts Say RIM's New Services Model Will Pressure Margins

Published December 21, 2012

| Reuters

BlackBerry maker Research In Motion Ltd's plan to revamp its services revenue model will put pressure on its high-margin services business, which accounts for about a third of the struggling company's revenue, analysts said.

RIM's Nasdaq-listed shares were down 11 percent before the bell after stronger-than-expected earnings on Thursday were overshadowed by news that subscriber numbers had dropped for the first time and that the company planned a "tiered" model that would charge advanced users more for services.

At least two brokerages cut their price targets on RIM's Nasdaq-listed stock.

Some analysts said there was a danger that RIM, which plans to launch its BlackBerry 10 smartphones on January 30, would become just another handset company without a service ecosystem.

RIM will not be able to sustain profitability by relying on its hardware business alone, said National Bank Financial analyst Kris Thompson, who is rated the top analyst by Thomson Reuters StarMine for the accuracy of his RIM earnings estimates.

Thompson downgraded RIM's stock to "underperform" from "sector perform" and cut his price target to $10 from $15.

Canaccord Genuity analyst Michael Walkley said there was a very low probability that the market would support RIM's new mobile computing ecosystem, and he remained skeptical about the company's ability to survive on its own.

"... We believe RIM will eventually need to sell the company," said Walkley, who cut his price target on RIM's stock to $9 from $10.

Baird Equity Research analysts said BlackBerry 10 faced a daunting uphill battle against products from Apple Inc, as well as those using Google Inc's Android operating system and, increasingly, phones using Microsoft Corp's Windows 8 operating system.

Baird maintained its underperform rating on the stock.

Credit Suisse maintained its "neutral" rating on the stock, but not because it expected BlackBerry 10 to be a big success.

"Only the potential for an outright sale of the company or a break-up keeps us at a neutral," Credit Suisse analysts said.

Positive early feedback on BlackBerry 10 devices has helped RIM's stock more than double in value over the last three months. RIM shares fell about 9 percent after the bell on Thursday. They closed at $14.12 on the Nasdaq.

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