RIM PlayBook Discounts Will Dent Margins

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- It seems that cheaper tablets are indeed finding buyers. It all started with Amazon.com(AMZN) selling the Kindle Fire for a modest $199.

Now Research In Motion(RIMM) is starting to see results from the heavy discounts it has offered on its PlayBook tablet.

According to new research, the PlayBook tablet's share in the Canadian market has increased from 5% to 15% on substantial discounts and has pulled the share of Apple's(AAPL) iPad down to 68% from about 86%.

This is good news for RIM, which has been struggling to come to terms with the competition in the tablet and smartphone markets. However, giving away huge discounts is bound to affect the company's margins.

Our $16.50 price estimate for RIM stock is about 10% more than the current market price.

See our complete analysis for RIM here.

RIM Attracting Developers With Free PlayBook Offer ...

Not only is RIM attracting users by giving them huge discounts on PlayBook, but it's also wooing developers by giving them free PlayBooks.

Recently RIM announced that it is extending a promotion that awards a free 16 GB BlackBerry PlayBook tablet to developers who port their existing mobile applications to the new BlackBerry PlayBook OS 2.0.

Last week at the DevCon Europe event hosted by the company, RIM executives stated that contrary to popular belief, BlackBerry users have shown great interest in embracing smartphone apps.

According to their blog, there is overwhelming interest in the offer, and the company has seen 1,500 apps submissions as of last Friday and 6,600 new developers have registered at the BlackBerry app store. The PlayBook promotion is just one part of RIM's ongoing effort to attract developers to its app store.

... But This Will Hurt RIM's Margins

Whether the company offers deep discounts through promotions to retail users or gives away free PlayBooks to attract developers, the strategy is bound to hurt its margins.

We estimate that the PlayBook's gross margins will decline from about 17% in 2011 to 10% in 2012 and that the trend will continue in the future. PlayBook accounts for less than 1% of our price estimate for the RIM stock, which means that PlayBook's value to RIM is unlikely to improve if this strategy continues.

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