RIM Suffers ‘Awful’ Timing for Snag as IPhone 4S Makes Debut

By Hugo Miller - Oct 15, 2011 3:16 AM GMT+0700

Research In Motion Ltd. (RIMM), struggling to recover from one of its worst BlackBerry service disruptions, may see more defections as the snag gives users another reason to turn to Apple Inc. (AAPL)’s new iPhone, which hit stores today.

The disruptions will trigger some BlackBerry customers to switch to Apple, particularly as the Cupertino, California-based company begins cutting the price of older iPhone models, said Matt Thornton, an analyst at Avian Securities LLC in Boston.

“The timing is absolutely awful,” he said. “RIM is doing some of Apple’s work for them.”

The data failures come at an inopportune time for Waterloo, Ontario-based RIM. It is fending off investor demands for fresh management while trying to move the entire BlackBerry lineup onto a new operating system to stem market-share losses to Apple and devices that use Google Inc. (GOOG)’s Android software. RIM also said it will study compensation for the disruption after some wireless carriers offered refunds to BlackBerry users.

Three days after the smartphone’s data delivery first began failing in Europe and the Middle East, RIM co-Chief Executive Officer Mike Lazaridis apologized to customers in a video posted on the company’s website before joining co-CEO Jim Balsillie on a conference call to answer reporters’ questions.

“We’re very concerned,” Balsillie said when asked about the possible impact of the disruptions on phone sales and what RIM is doing to minimize it. “Nobody’s gone home since Monday.”

Credibility Lost

Apple and carriers AT&T Inc. (T), Verizon Wireless and Sprint Nextel Corp. started selling the iPhone in their stores today. Apple said this week that it received more than 1 million iPhone pre-orders on the first day, a record.

BlackBerry subscribers across most parts of the world, including U.S. and Canada, lost data services after a network failure in the U.K. halted messaging and Web browsing. Balsillie said yesterday service has been fully restored globally. Lazaridis apologized, saying the company has “let many people down.”

The disruptions resulted in an outrage by customers on online messaging boards and Twitter.

“When you hear people saying online they’re hating their BlackBerry device right now, that’s going to be top of mind to the consumer going into a store to buy a new phone,” said Neil Bearse, who teaches digital marketing at Queen’s School of Business in Kingston, Ontario.

Credibility

Patrick Spence, RIM’s head of global sales and regional marketing, said on a conference call that he understood customers were frustrated and that RIM needed to look at improving how it communicated the problem.

“We know we’ll have to work to do to build back that credibility,” he said.

RIM rose 1.5 percent to $23.97 at the close in New York. The stock has lost 59 percent this year.

RIM started selling new BlackBerry 7 phones in the U.S. last month, including a touch-screen version of the BlackBerry Bold, which costs $250 on a two-year contract. Balsillie said the phones had an “excellent reception” with consumers. William Power, an analyst at Robert W Baird & Co., suggested initial enthusiasm may have been limited to existing users looking to upgrade their phones, not new customers.

Apple Competition

The iPhone 4S went on sale in the U.S. for $199 for a 16- gigabyte model and $399 for a 64-gigabyte version with a two- year contract. The price on the iPhone 4 has been cut to $99. The new version also starts selling in Canada, Japan, Australia and parts of Europe.

The new iPhone has sold out for pre-order with Verizon, AT&T, and Sprint Nextel on the eve of its debut, those carriers said yesterday. The robust demand highlights how Apple is thriving while RIM is struggling, and threatens to hurt sales of RIM’s BlackBerry 7 phones, Thornton said.

“There’s going to be some defections,” said Thornton, who rates RIM “market perform.” “Their older phones are bleeding and they’re trying to get their new phones out there but the marketing is just starting.”

RIM’s share of the U.S. smartphone market fell to 20 percent in the quarter ended August from 25 percent three months earlier, according to ComScore Inc. Apple rose 0.7 percentage points to 27.3 percent while Google’s Android platform climbed to 44 percent from 38 percent.

Defections

There could be more defections, said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

“This network outage and how long it lasted could not have come at a worse time,” said Wu, who rates RIM a “buy.” “It didn’t hit as hard in the U.S. but in high-growth areas, lasted for two or three days -- that’s unacceptable.”

The disruptions began in Europe, the Middle East, Africa and India, areas that RIM is counting on for sales growth as revenue in North America declines. As RIM’s U.S. revenue dropped 50 percent last quarter to $1.11 billion, sales outside the U.S., U.K. and Canada jumped 38 percent to $2.33 billion.

“There is outrage on the BlackBerry outage,” said Kiran Mazumdar-Shaw, chairman of Biocon Ltd. (BIOS), India’s biggest biotechnology company. If the BlackBerry service continues to be problematic, she said she may be forced to give up her device. “This is terrible timing.”

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net