Concerns over the effectiveness of Research In Motion Ltd.’s distribution partners came to a head last week, as expectations of flat revenues in the face of increased spending forced the company’s stock down 44 percent, despite positive earnings and new product and partnership announcements.
The company’s fiscal 2000 fourth-quarter results remained within expected levels, with revenues of $25.8 million and net income of $3.2 million, or 5 cents a share. But shares fell $36.25 to $45.75 Wednesday after RIM said to expect little revenue improvement next quarter.
The stock drop followed several highly praised new products and technology enhancements from RIM, most significantly-a palm-sized wireless handheld device to compete with the Palm VII, called the RIM 957. The device features a display screen twice as big as existing RIM devices, a 32-bit Intel 386 processor, five megabytes of memory, Qwerty keyboard, integrated organizer software and support for its BlackBerry wireless e-mail solution.
Retailing for $500, the 957 won’t be sold until May, at which time RIM will launch an $8 million advertising campaign to support it. RIM also will begin selling a new version of the RIM 950 in May, retailing it for $400 and featuring double the memory power of its predecessor.
RIM also unveiled version 2.0 of its BlackBerry software, which includes support for Lotus Notes, as well as improved e-mail folder management, enhanced organizer features and upgraded BlackBerry Enterprise Server software. The software includes functions that allow desktop synchronization for personal organizer applications such as Outlook, Schedule+, Lotus, Symantec ACT!, GoldMine, Netscape and Outlook Express.
But it is the 957 that has gained the most attention. Many analysts favor it to the Palm VII for several reasons. First, the 957 is always open for wireless transmission, while the Palm VII requires the user to activate the wireless connection. Also, the 957 supports RIM’s BlackBerry service, which extends existing Microsoft Exchange e-mail accounts to the device, while Palm VII users require a separate Palm.net address.
However, the Palm platform is much more established and recognized, whereas RIM uses newer technology. Both devices have considerable personal information management functions, but more developers are aligned with the Palm platform.
Palm devices feature a pen-based user interface method while RIM sticks with the traditional Qwerty keyboard.
RIM hopes to increase its third-party application developer base when it adds support for Java this summer. In addition, RIM has added Wireless Application Protocol support to its devices through a deal with start-up WAP provider Neomar Inc. The deal allows RIM to add Neomar’s WAP browser to its devices and give users access to Neomar’s WAP-based wireless portal. Commercial availability is expected this summer.
Distribution dilemmas
Although analysts and industry insiders praise RIM’s technical prowess and innovative devices, concern remains over demand and distribution. RIM’s greatest weakness is its reliance on third-party distribution partners.
The need for a more robust distribution system arose when RIM’s primary customer, BellSouth Wireless Data L.P., didn’t immediately renew its supply contract last fall. BSWD’s inventory of RIM products had begun to swell in the face of lagging demand for the Inter@ctive Paging Service product.
One cause of this was RIM’s marketing of the BlackBerry solution, which while using BSWD airtime, was not compatible with the Inter@ctive service. BSWD has since evolved the Inter@ctive service to support BlackBerry, but it will take several months for the two services to become fully integrated.
“The irony in this situation is that BlackBerry was created as a result of BellSouth’s reluctance to evolve the Inter@ctive 950 product in mid-1998,” said Ray Sharma, analyst at Credit Suisse First Boston in a recent report on RIM. “We do believe a role exists for the Inter@ctive 950, however, the BlackBerry solution more accurately addresses the larger market opportunity.”
American Mobile Satellite Corp. also markets RIM products, in this case the 850, for its eLink service. However, neither AMSC nor BSWD are large distributors. Both have made their own distribution deals with large messaging firms-AMSC with SkyTel, now part of MCI/WorldCom, and most recently Metrocall Inc., while BSWD has deals with Paging Network Inc. and Arch Communications Group Inc.
But SkyTel was late to launch its marketing effort, and Metrocall was signed on only last week.
“The late start for SkyTel has resulted in a sales pause in this channel,” Sharma said. “Our discussions with IT managers suggest that AMSC is aggressively bidding accounts to deploy the Inter@ctive 850 product. Although we have diminished our expectations within this channel, we continue to believe that AMSC represents one of the brightest prospects for the company.”
RIM has distribution agreements for the BlackBerry solution with such notables as America Online Inc., Dell Computer Corp., Compaq Computer Corp. and Microsoft Corp., but sales are slow in coming and the BlackBerry channel is considered RIM’s slowest.
However, last week RIM added Aether Systems Inc. to the fold. Aether’s core competency is selling wireless extension services. Under the deal, Aether will license and host the BlackBerry wireless e-mail solution at its network operating center and sell the service and related devices to customers. Initial estimates have Aether selling more than 100,000 BlackBerry units in a three-year period. “This would represent one of RIM’s largest channel partnerships to date,” Sharma said.
But none of this is helping RIM’s short-term stock. Financial analysts bullish on the company, such as CSFB, believe the stock drop represents a good opportunity for investors and have a “buy” rating on the company. Last week’s stock drop, however, illustrates the extreme uncertainty that remains concerning this emerging field.
“A disconnect has occurred between the fundamental developments of enlisting these channels/partnerships and the visibility of demand for the nascent RIM product,” Sharma said.
