Consumer Focus Seen Weighing On RIM Shares, Results

(Dow Jones)- Research in Motion Ltd.'s (RIMM) warning Thursday that the costs from moving into the consumer arena will weigh on profits for the foreseeable future again raises questions about the company's decision to diversify its Blackberry line.

RIM is aggressively expanding beyond the corporate user at a time when consumers are tightening their purse strings, businesses are shrinking and the rapidly growing smartphone market may be decelerating. To get recognized in an increasingly crowded consumer smartphone market, RIM will need to spend more to attract consumers, cutting into margins and profits.

The extra spending is meant to raise the profile of RIM, which carries less brand recognition with consumers than high-profile players such as Apple Inc. ( AAPL) or even Samsung Electronics Co. (005930.SE). In the meantime, RIM faces increasing threats to its core enterprise market.

"If someone is thinking RIM's future is bright, they haven't seen the worst yet," said Trip Chowdhry, an analyst at Global Equities Research. "If RIM is smart, they have to make sure they don't lose their business customers."

To be sure, many believe RIM's strategy to broaden its market opportunity is sound, noting - among other things - that RIM already has had success in the consumer market with its slimmer Pearl.

RIM late Thursday reported fiscal second-quarter earnings largely in line with expectations. More glaring, however, was the disappointing third-quarter forecast for earnings, and the warning that gross margins may be troubled through fiscal 2010, which begins in March.

RIM shares have set a new 52-week low Friday, now trading around $72, down 26% on the day. Other handset makers also were feeling the impact, given the recent sensitivity over the weakening market. Nokia Corp. (NOK) fell 3.3% to $19.57; Motorola Inc. (MOT) was off 4.7% to $7.50; Palm Inc. (PALM) declined 3.5% to $ 6.66; and Apple gave back 4.7% to $125.78.

Losing Focus

RIM's warning of lower margins and earnings and potential delays in its products - while talking about its consumer focus - sounded a lot like another troubled smartphone vendor: Palm.

Palm is credited as a pioneer in the smartphone category. But the company lost its innovative edge, and let upstarts such as RIM dominate the market for corporate users. In the middle of a turnaround now, Palm's prospects are still up in the air.

No one is comparing RIM directly with Palm - as RIM plans to launch at least three new handsets with wildly different form factors by the end of the year. But it faces the same risk of losing share in the core segment it dominates.

The company already faces threats in the corporate world. The latest iPhone can connect with company IT systems, making it easier to use at work. Microsoft Corp.'s Windows Mobile is also making strides in getting into more smartphones, including buzz-worthy devices such as the HTC Corp. (2498.TW) Touch Diamond.

"I'm sensing an inflection point," Chowdhry said, adding that the iPhone is slowly making a dent with corporate workers.

Unclear is the fallout from the collapse of several companies on Wall Street. Blackberrys are ubiquitous with analysts, investors, traders and executives. The loss of tens of thousands of jobs in Manhattan alone could significantly cut into its user base.

Instead of focusing on the consumer, the company is better off defending its core business, Chowdhry said.

Consumer Problems

A lot of analysts believe RIM will be able to repeat the success of the Pearl. Next up for the company is a clam-shell version and a touchscreen iPhone-killer.

In the midst of Friday's share decline, Todd Rosenbluth, an analyst at Standard & Poor's, upgraded the stock on a valuation call and the belief that people will continue to buy Blackberrys.

"We think the market is overreacting to what we see as still strong fundamentals," he said.

The share decline is more the case of expectations that were out of sync with reality, Rosenbluth said, noting that lowered expectations on Wall Street will help deter future swings in the stock.

Rosenbluth is among the most bullish analysts right now. Others are more skeptical. UBS analyst Maynard Um downgraded the stock, noting that there were few positive catalysts in the near term.

Analysts may still be underestimating the difficulties RIM faces with the consumer. The company will need to expend a lot of time and resources building its brand to compensate for the headstart that players such as Apple have. Even Google Inc. (GOOG), which unveiled its G1 Android phone on Tuesday, brings a cachet that will appeal to consumers.

With the economy tightening up, people will likely keep their current phones, which lengthens the product replacement cycle and hurts RIM.

Overseas - an area of growth to which supporters point - the company has even less of a presence. Fewer Blackberrys for work are found in the international markets, so it's virtually unknown next to the likes of Samsung or Sony Ericsson.

"The whole initiative to get into the consumer market is flawed and also a distraction," Chowdhry said.