RIM: Don't Get Your Hopes Up For Service Revenue

| About: BlackBerry Ltd. (BBRY)

Research In Motion (RIMM) makes a sizable amount of its revenue from service fees. Last quarter, service fees were $974 million or 36% of sales. Even though sales of handsets may be declining, the company has been able to rely on this stream of sales to keep investors happy. However, that is about to change very quickly.

RIM used to have a packaged enterprise pricing model, where enterprise users would just pay one price for a package. However, in order to please its consumers, RIM has switched to a tiered pricing model. Think about it as going from an expensive buffet to simply going to a restaurant and purchasing whatever meal you desire. While a buffet may sound great, half the time the consumer doesn't really need all the options. While BlackBerry's new pricing strategy will certainly help keep subscribers, it will come at a huge cost. Kevin Stadtler of Stadtler Capital Management believes that the company could lose a third of its service revenue with its new pricing.

We will see pressure on pricing for BB OS-based services in order to make sure we stay relevant in our markets and we manage through the transition phase.

- Thorsten Heins, CEO of RIM

Sometimes lowering service fees could be a good sign as it would allow RIM to take market share away from competitors. However, that is simply not the case with RIM's pricing strategy. Heins and his management team have no intention of taking market share rather they are concerned about subscribers leaving. The pricing strategy is designed to keep subscribers as loyal BB users, but this is simply not a good idea.

The majority of consumers do not have a need for most of the services offered by RIM. BBM is probably the most commonly used service by the average consumer and the fees for it are nothing significant. RIM already knows this, too.

So again, it is a segment of service packages that we're going to offer and we have to realize that some of the smaller enterprises -- they're actually good enough with just some e-mail exchange protocol connectivity to their main server or their exchange server that they're running. So there's very little value add in this.

- Thorsten Heins, CEO of RIM

RIM is no longer looking at growth, but rather it is looking to stop the bleeding. This strategy might help stop the bleeding of its subscriber base, but how much is RIM willing to pay to do so?

Service revenue has already fallen by $19 million due to fee reductions, but the new pricing strategy will be much more aggressive. Stadtler's comments about RIM losing a third of its revenue are fairly reasonable. Given that service revenue has great margins, it will materially impact the company's bottom line.

While Heins and his management team understand that they must keep customers, there are better ways of going about this. Lowering hardware prices is a better solution as current subscribers would be more willing to upgrade to a newer model. This could also help attract more subscribers going forward. Investors that have looked to RIM's service revenue as a positive for the stock will be disappointed in the future.

If the cost of trying to retain a subscriber is more than the revenue they generate, then what is the point? Does this strategy seem logical?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.