Research In Motion is willing to absorb huge losses on its unloved PlayBook because the success or failure of the unloved tablet will fortell the fate of the operating system RIM hopes will revitalize the BlackBerry.
PlayBook, RIM's poor-selling entry into the tablet market created by Apple's iPad, is crucial to the company's drive to get developers to write apps for QNX - the operating system that will power BlackBerry smartphones from early next year. Since PlayBook is the first device to feature QNX, it can't entertain thoughts of abandoning the tablet, analysts say, as tempting as that may seem.
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That uncomfortable reality has forced RIM to offer heavy discounts on the hundreds of thousands of unsold PlayBooks piling up on stores shelves. On Friday it announced a C$485 million ($478.73 million) pre-tax writedown on the unsold inventory and warned that full-year profit would not meet earlier forecasts.
"This is their last shot, their only real shot to revive the business," Morgan Keegan analyst Tavis McCourt said, referring to the effort to adapt QNX, rebrand it "BBX" and introduce a line of BlackBerry phones powered by the system sometime in early 2012.
Getting QNX right has been no simple task. Analysts worry RIM's evident struggle to make the software work with legacy systems to handle email or run Android apps bodes ill for the incoming phones.
"Investors may be underestimating what it will take to transition to BBX - that's still a big unknown," Sterne Agee analyst Shaw Wu said in a phone interview on Monday.
On Friday, RIM said it had sold just 150,000 PlayBooks - one for every 74 iPads sold by Apple in its last quarter.
The problem extends well beyond the PlayBook. RIM needs to get the BBX-powered BlackBerry up and running as soon as possible. Last week it said it expects to ship fewer BlackBerry smartphones in the three months to early March than in the previous quarter, implying weak demand for the latest phones powered by its legacy operating system.
"BlackBerry 7 is just not selling like it should," McCourt said, referring to the new legacy line. "The fundamentals will be tough until BBX launches."
The once-dominant Canadian smartphone company's share price and U.S. market share have shriveled as consumers flock to Apple devices and others using Google's Android software.
The BlackBerry sales data is "further underscoring (RIM's) current lack of competitive edge and its urgent need to accelerate the migration to QNX-derived BBX," Exane BNP Paribas analyst Alexander Peterc wrote in a note to clients.
Even so, McCourt says RIM needs to make sure the BBX-equipped BlackBerry is ready before launching the product. "If BBX fails it's clearly over, so why would you rush that," he said.
RIM likely has a stockpile of at least 1 million unsold PlayBooks. The 7-inch device has no in-built email, lacks other standard functions and has a dearth of the kind of third-party applications that help sell rival devices.
RIM had hoped to get some Android apps to run on the PlayBook by the North American summer, but it has delayed that until a February software upgrade that will link the device to RIM's private network, which suffered a massive failure in October.
"The company seems to be mis-executing in hardware, software and service - the entire operation," Deutsche Bank analyst Brian Modoff wrote.
After the latest profit warning, at least four brokerages cut their price targets on RIM's U.S.-listed stock on Monday.
CIBC slashed its price target $25 from $55, while Nomura said RIM may have 1.2 million PlayBooks on its books.
Nomura cut its price target on the stock to $18.90 from $26. "This is the highest price we think any financial bidder is likely to offer in a take-over bid," it said. Speculation has been rife that RIM could be the target of a strategic buyout.
"An indefinite period of decline has now begun," analyst Matthew Robison at Wunderlich Securities said, cutting his price target on RIM's stock to $16 from $24.
After a plunge of almost 10 percent on Friday, RIM's Nasdaq-listed shares traded 0.1 percent lower at $16.75 by mid-afternoon. Its Toronto-listed stock was flat at C$17.03. The stock has lost more than 70 percent of its value this year. ($1 = 1.0131 Canadian dollars) (Reporting By Alastair Sharp; Editing by Frank McGurty)