Did RIM trade fees for carrier support?
Research in Motion is confident, despite concerns that it won’t be able collect as much in monthly services fees as its BlackBerry 10 devices launch. Those fees, roughly $1 billion in revenue a quarter, are critical to keeping RIM’s balance sheet healthy.
In a nutshell, RIM collects enterprise fees for things like security and device management. On the consumer side, RIM collects a service revenue fee on BlackBerry subscribers because they use the company’s infrastructure.
According to analysts, RIM may have nixed fees in exchange for carrier support of BlackBerry 10. Simply put, BlackBerry 10 has to be a hit because there’s a weakened service revenue safety net.
Meanwhile, a new service tier for enterprises will lower margins. After all, smaller enterprises don’t need the buffet of services RIM brings to the party. To compensate, RIM may charge for services and develop new offerings.
Starting in the fourth quarter, we will begin seeing revenue from BlackBerry 10 devices. With the introduction of the BlackBerry 10 mobile computing platform, we will be transforming our service revenue model to reflect different usage levels of our network infrastructure, and different value-added software security and service packages, so we plan to offer a range of security, mobile device, and application management services, in addition to communication services.
We will position BlackBerry Enterprise Service as the leading cross-platform enterprise mobile device management service, and continue to invest and grow its capabilities. Subscribers that require enhanced services, including advanced security, mobile device management, and other services, are expected to continue to generate monthly service revenue. Other subscribers, who do not utilize such services, are expected to generate less or no service revenue. However, I want to be very clear on this. Service revenues are not going away, but our business model and service offerings are going to evolve. Our vision is to position BlackBerry as the clear leader in the enterprise mobility market.
Heins was then pelted with questions. He continued:
Instead of one service fits all, that security, mobile device management, is basically segmenting across various sizes of enterprises and various businesses get regulated or not. So there is not just one entity or question of what are the right pricing tiers. It depends on the industry, it depends on the set of services that are being subscribed, but it is variable additional services. It is a little bit of a menu thing that you can choose and pick.
The upshot is that RIM doesn’t know how it’s a la carte structure will hurt revenue, but there’s turbulence ahead.
Now none of this news should surprise anyone. As a result, it can’t command the fees it used to. Why would an enterprise pay up to RIM if it can get by with less. Heins realizes the new world order. He noted:
We have to realize that some of the smaller enterprises are actually good enough with just some e-mail Exchange product or connectivity to their main server or their Exchange server that they are running.
Analysts were a bit appalled by RIM’s honesty. But let’s get real: There is no way RIM’s fee structure was going to hold up. RIM is getting ahead of it, but realizes there’s a hit. RIM has to keep its subscriber base and sacrifice revenue.
William Blair analyst Anil Doradla said:
To us it is a clear indication that RIM was getting desperate in ensuring that its 79 million subscribers continue using its services and, going forward, enterprises/pro-sumers not using these features may not pay services fees. Bottom line, although the service ARPU has been in secular decline, RIM will increasingly sacrifice its ARPU (average revenue per user) to hold on to its subscriber base.
Jefferies analyst Peter Misek painted an all-or-nothing BlackBerry 10 picture:
We believe RIM may have traded consumer monthly service fees (or a vast reduction in fees) in exchange for volume commitments and high ASPs. Carrier support dramatically increases the chance of BB10′s success (we estimate an increased chance of success from 10% to 30%), but now RIM is playing without a safety net. If BB10 fails, it will likely be unable to stumble along and will either become a take under candidate or a niche business. If BB10 succeeds, its business model will more closely resemble other handset OEMs.
The wild card here is RIM’s international base—mostly BlackBerry 7 for the foreseeable future. Those international customers will still see the same fee structure. RIM’s service fee revenue will mostly take a hit in North America.
Macquarie analyst Kevin Smithen argued that the service fee changes may not hit RIM as hard as some expect. If the service revenue decline is gradual, RIM can manage it.