RIM Weighed Down by Tablet ‘Albatross’

By Hugo Miller - Dec 5, 2011 9:46 PM GMT+0700

Research In Motion Ltd. (RIM)’s commitment to keep battling Apple Inc. (AAPL)’s iPad even as demand for its BlackBerry PlayBook slumps means the company will likely have to sell the tablet at a loss. Its strategy depends on it.

The company said on Dec. 2 that it would book $485 million in pretax charges to write down the value of its PlayBook inventory and that it doesn’t expect to meet its full-year earnings target. Shipments have fallen for two consecutive quarters and are now about 1 percent of those of the iPad, forcing RIM to cut the price by $300, or more than half, making it unprofitable.

RIM will need to keep suffering the losses because the PlayBook is its sole product to run on software called BBX, an operating system the company is betting its future on, said Matt Thornton, an analyst at Avian Securities LLC. Abandoning the PlayBook may signal a lack of confidence in the system, alienating developers and leaving Apple’s iOS and Google Inc. (GOOG)’s Android mobile ecosystems with little competition, he said.

“You can’t kill it,” said Thornton. “The PlayBook is all they have to show developers, they don’t have a smartphone yet.”

The PlayBook writedown is the latest in a steady stream of bad news for Waterloo, Ontario-based RIM, whose BlackBerry is losing market share to the iPhone and Android devices. Apple and Google are attracting consumers with handsets that can run tens or hundreds of thousands of games, tools and other applications made by developers for those systems.

Dim Prospects

RIM said more promotions are needed to drive demand for the seven-inch PlayBook, shipments of which slumped to 150,000 units last quarter, down from 500,000 units in the quarter of their April debut. That may mean further price reductions for a product that costs $250 to $300 to make, according to Thornton.

“If they’re selling it at $199, they’re already in the red,” said Thornton, who is based in Boston and has a “neutral” rating (RIMM) on RIM shares. “For every one they sell, they’re losing money.”

Apple sold a record 11.12 million iPads in its most recent quarter and Amazon.com Inc. (AMZN)’s Kindle Fire tablet -- similar in size to the PlayBook -- may sell 3.9 million units in its first quarter on sale, according to researcher IHS iSuppli. Hewlett- Packard Co. (HPQ) scrapped its TouchPad tablet in August after failing to draw users away from the iPad.

Marisa Conway, a spokeswoman for RIM, referred queries about the company’s PlayBook strategy back to comments co-CEO Mike Lazaridis made in the Dec. 2 statement.

‘Positive Response’

Lazaridis said at the time the PlayBook was worth continuing because the tablet market is still “in its infancy and that “based on the positive response to the promotions that are underway in select markets, RIM believes this strategy will accelerate adoption” of its new operating system and help built the application ecosystem for devices planned for 2012.

“Whether you call the PlayBook an albatross or a yoke around the neck, management has not done a good job in bringing good products to the forefront and that’s why the share price is suffering,” said Bahl & Gaynor Investment Counsel’s Matt McCormick, whose firm oversees $4.1 billion and doesn’t own RIM shares. “I don’t see the prospects brightening anytime soon.”

RIM shares had dropped 71 percent this year before today, while Apple had climbed 21 percent. RIM slid 1.4 percent to $16.53 at 9:44 a.m. New York time.

‘Amazing’ Opportunity

RIM Co-Chief Executive Officer Jim Balsillie told analysts in March that the cost of developing the PlayBook and its new operating system would “impact our near-term earnings growth trajectory” but that it was worth it for a product with “amazing market opportunity.”

Weeks later after its April debut, the PlayBook was criticized for lacking a dedicated e-mail program. RIM promised it would fix that in a software upgrade that it now says won’t come until February. Moreover, the company says the first BlackBerrys built on BBX won’t come out until they’re ready, declining to reiterate an earlier goal of the first quarter of next year.

RIM fell 9.7 percent on the day it announced the PlayBook writedown, its biggest decline since its previous quarterly sales miss in September. Before today, the stock was 11 percent below its book value of $18.92, implying investors view RIM as worth less than the net value of its cash, inventories, real estate and intellectual property.

No Return?

“The BlackBerry is a bad product” and “the market is saying this is a broken company,” said Malcolm Polley, chairman of Stewart Capital Mutual Funds, who oversees $1 billion and is based in Indiana, Pennsylvania.

Compounding RIM’s problems is the slumping demand for its BlackBerry smartphones. Device shipments, made up mainly of BlackBerrys, will decline in the fourth quarter from the third quarter, RIM said Dec. 2.

“It’s not just PlayBook, this is more of a mix on the BlackBerry smartphone side coming in on the lower end,” said Jeff Fidacaro, an analyst with Susquehanna International Group LLP in New York.

The company’s U.S. market share sank to 9.2 percent in the third quarter from 24 percent a year earlier as consumers opted for the iPhone and phones from Samsung Electronics Co. (005930) and HTC Corp. (2498) that run Android, according to research firm Canalys.

“RIM needs compelling product lines,” said Ashok Kumar an analyst with Rodman Renshaw LLC New York. “They are losing market share and they have to stem that to recover, or they reach a point of no return.”

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