On December 20, 2012, folks at Research in Motion (RIMM) reported results that beat analyst expectations on all fronts: they beat on earnings, they beat on revenue, their gross margins improved, and, most importantly, they increased their cash pile to $2.9 billion.
The reported numbers were surprisingly healthy for a company that was written off as "dead." There is no longer any question that RIM is well-positioned to finance the upcoming launch of BlackBerry 10 on January 30th - the next generation "mobile computing platform" that will make or break the company.
Investors took notice and bid up the shares initially to as high as $15.50 after hours on December 20th - a near 10% increase from that day's close. But then, shortly after on the same evening, CEO Thorsten Heins dropped a bombshell.
During the conference call, Thorsten all but confirmed that under BB10, consumers will no longer be required to purchase a special BlackBerry plan (known as BIS plan) to operate the BB10 phones. Investors quickly realized the huge implication this has on RIM's service revenue, so as soon as Thorsten's words hit the wire that evening, RIM shares plunged to as low as $12.36 - a swing of 20% within a couple hours.
As the time of writing, it has been about a month since the earnings release and the stock has recovered back to $15.84, which is above the after-hours high on December 20th. But nonetheless, investors' concern about the future of RIM's service revenue remains valid.
As of last quarter's report, service comprised of 36% of the total revenue, or close to $1 billion per quarter. Although RIM does not provide a breakdown of margins between hardware and service, it is estimated that services bring in close to 90% margins, which means every dollar of service revenue lost will hurt RIM's bottom line directly.
RIM's service revenue mainly comes from 2 sources - BES fees paid by corporate plans, and BIS fees charged by the carriers to regular consumers. Industry analysts estimate that BES accounts for roughly 40% of RIM's service segment and BIS accounts for 60%. Since the BIS fees are the most at risk, we have about $600 million per quarter, or $2.4 billion that is at risk per year. For a lack of more details from the company, we will accept this as a ballpark figure. Needless to say, BIS revenue is critical to the health of the company and deserves further attention.
In the grand scheme of things, a change in the business model was inevitable. Among RIM's main competitors in the smartphone platform space - Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) - none require their customers to pay a monthly subscription fee just to use their phones or their mobile operating systems. RIM's BIS fee was a relic from the pager days, when carrier networks were primitive, and RIM's proprietary network (the "NOC") added significant value by delivering e-mails and web when nobody else could.
Recent advances in carriers' networks to 3G/3G+/LTE etc. erased this advantage. As such, RIM's legacy service fee has to go, at least in the advanced economies. RIM's network still adds value in some developing countries with comparatively primitive infrastructure, but the NOC's value proposition there will also erode eventually as their infrastructure matures over time.
It's important to note that this removal of usage fee does not put RIM in any kind of competitive disadvantage. But rather, it will merely put RIM on equal footing as the other modern platforms going forward. If BB10 is successful, RIM will have to monetize the platform by providing modern services that add value to the end user, just like any competitor's platform.
The remainder of this article seeks to explore various options for monetizing BB10, most of which have already been hinted by RIM's existing initiatives.
(1) Apps, Music, and Movies in BlackBerry World
Under the razor/razor blades model, a popular mobile platform can drive digital content sales in the form of apps, music, and movies. One great example is Apple's (OTC:APPL) iTunes store which now drives $12 billion of sales a year, and it is one business model that Amazon (NASDAQ:AMZN) is trying to copy by selling the Kindle Fire tablets at a loss.
RIM's BlackBerry World is already a popular place for apps for BlackBerry users, and with the announcement of adding music and video, BlackBerry World is setting up to make a noticeable impact on RIM's revenue when BB10 becomes popular.
(2) Support for iOS/Android in Enterprise
Under BlackBerry Mobile Fusion (or later, "BES 10"), companies are able to securely manage their mobile assets from different manufacturers under a single solution. Currently, RIM's server supports the management of Apple's iOS and Google's Android, and RIM has stated that it will consider adding support for the Microsoft Windows Phone if it becomes popular.
Similar to existing BlackBerry users under corporate BES, companies under this model pay RIM a per-user subscription fee regardless of mobile OS. As mobile devices from various vendors penetrate into more companies and into deeper layers of employees, this will prove to be another growth opportunity for RIM's MDM solution - world renown for its manageability and security.
(3) BBM Money
RIM recently launched BBM Money in Indonesia, a peer-to-peer funds transfer solution based on the BlackBerry Messenger (BBM) platform. It has potential to turn into a significant revenue stream once this service becomes available in more places in the world.
(4) NFC Payments via RIM's Secure Element Manager (SEM)
Approaching commerce from another angle, RIM developed a proprietary solution for securely managing identities for NFC payments. This solution is already available in Canada from CIBC and Rogers, and it has also recently been approved for use by VISA. The mobile payment industry is still in its infancy and RIM is situated at its forefront.
(5) OS Licensing
BlackBerry 10's underlying RTOS (real-time operating system), QNX, is already being licensed within various vertical markets, including nuclear power plants, network switches, industrial machinery and about 60% of our cars. From here, RIM has a repository of experience and expertise on how to make a business model out of OS licensing.
In terms of the new BlackBerry 10 platform, RIM is building the first line-up of hardware themselves as "aspiration models." RIM hinted in the past that once the BB10 platform has proven itself, it may be open to licensing it at a fair price.
And licensing will not be limited to smartphones. As BlackBerry invades various other verticals such as PC, automotive, home appliances, medical devices and other M2M opportunities, we do not expect RIM to build all of the hardware themselves, which means licensing may be a big part of RIM's revenue in the future.
(6) Cross-platform BBM
There have been rumors about RIM creating a version of BBM for Android and iOS at various times in the past. It may make sense to do that at some point, but RIM isn't about to give away its crown jewel for nothing. Will there be a subscription model? Or may be an ad-supported version of BBM for other platforms (while the BB10 version remains ad-free)?
Regardless of how it plays out, it's no secret that monetization of BBM will be a big part of RIM's master plan.
The above initiatives are some of the more obvious paths RIM can take to replace, or even grow, its service revenue. There are probably other less obvious ways that we haven't thought of yet, but one thing is for sure - if BB10 gets the users, the money will follow.
Once again, everything is riding on a successful launch of BB10. This whole discussion is irrelevant otherwise because RIM is still collecting service fees on the old BB7 devices, albeit from a declining user base.
Ironically, this begs the question: Given how dramatically upset the investors were when they heard about the uncertainty around BB10's service revenue, does it mean the market is already expecting a successful BB10 launch that warrants this discussion in the first place? All will be revealed in a few more days.
Disclosure: I am long RIMM. 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.