Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)  

Research in Motion (RIMM), which operates the popular BlackBerry Messenger service, has been facing mounting pressure to open its secured data network for scrutiny by the governments of Saudi Arabia and the United Arab Emirates. Until last week the company had refused, maintaining that its business depends on maintaining the confidentiality of its data.

According to recent news reports, Saudi officials are now in talks with RIM to place BlackBerry servers inside Saudi Arabia that the government could monitor. RIM competes with Apple (NASDAQ:AAPL), Motorola (MOT) and Nokia (NYSE:NOK) in the mobile phone market. Several other countries, including India, Algeria and Lebanon, have recently pushed for access to BlackBerry data for law enforcement purposes.

If RIM denies their requests, its BlackBerry Messenger service and/or smartphones could be banned from these countries. On the other hand, some BlackBerry users might lose confidence in the service if they feel that their data is no longer confidential.

If the issue is not successfully resolved, there could be serious implications for RIM’s stock price. Our analysis follows below.

BlackBerry Messenger critical for RIM

Presently, RIM has about 46 million subscribers, of which 20 million subscribers (40%) use BlackBerry Messenger. The Messenger service is hugely popular among BlackBerry users, as RIM’s push service delivers messages instantly. Messenger is included in the BlackBerry subscription and works faster than “instant” messenging services on other smartphones. It can be used to send photos and videos between two BlackBerry phones in addition to messages.

We estimate that RIM’s BlackBerry market share will increase from 2.7% in 2009 to around 8% by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own BlackBerry market share forecast and see how it impacts RIM’s stock price.

If numerous governments were to ban BlackBerry Messenger, RIM would lose an important competitive advantage, prompting subscribers to buy other smartphones. But if RIM loses its reputation for protecting customer data as a result of a monitoring deal with Saudi authorities, subscribers might flee BlackBerry for privacy reasons.

In the extreme scenario where half of all BlackBerry Messenger subscribers migrate to other smartphones, RIM’s sales could decline by about 20% sales during the Trefis forecast period. As a result, RIM’s market share growth could slow, reaching 6.5% by 2016 instead of the 8% that we currently forecast. This scenario yields a potential 15% downside to the our price estimate for RIM’s stock.

Disclosure: No positions

Source: RIM's Stock and the Proposed BlackBerry Messenger Ban