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RIM Fee Change Makes BlackBerry 10 Do or Die

Stocks in this article: RIMM AAPL GOOG MSFT

NEW YORK ( TheStreet) - Research In Motion's (RIMM) third quarter earnings were expected to be of secondary importance to management commentary and the company's forecasts headed into a pivotal quarter that will see the launch of the much-anticipated BlackBerry 10.

Still, Research In Motion was able to throw a big curveball to investors and analysts on Thursday after beating third quarter earnings forecasts.

The Waterloo, Ontario-based BlackBerry maker announced a change in the way it will charge users service fees, putting a putting a key source of revenue - that drove over 36% of the company's $2.7 billion in sales -- at risk. The announcement and a lack of specifics on how the change will impact earnings precipitated a 20% reversal in RIM's shares in after-hours trading.

Initial Thursday aftermarket share gains in excess of 10% now stand as 20%-plus losses in Friday afternoon trading.

Analysts reacted negatively to the policy change and raised new risks for the struggling mobile handset maker, as it tries to compete against Apple (AAPL), GOOG (GOOG) and Microsoft (MSFT)-powered smartphone and tablet devices.

"RIMM reported better revenue and a smaller than expected operating loss amid low expectations. Its cash balance again grew through smart working capital management," wrote Sterne Agee analyst Shaw Wu, in reaction to RIM's earnings figures. Still, the numbers were overshadowed by the pricing strategy shift, which CEO Thorstein Heins unveiled on the company's earnings call.

" There were two negative surprises related to the pending launch of BB10 in late-January: (1) its favorable working capital trends will likely reverse due to higher expenses meaning cash usage and (2) its high-margin services business will likely see pressure as it transitions to new terms and pricing," wrote Wu, in a note to clients released on Friday.

"RIM will offer tiered services, with enterprises who only need basic email connectivity paying a lower monthly average revenue per user ," wrote Jefferies analyst Peter Misek, in a Friday note to clients. While RIM will continue to charge businesses fees on services such as email security, Misek added, " Management would not comment on the consumer side, but we believe their statement refers to some BB10 consumer subscribers no longer generating service revenues."

Misek questioned whether the pricing change is a "Grand Bargain or Faustian Bargain," noting that the pricing change may make its relationship with carriers and businesses similar to more consumer-oriented competitors like Apple and Google, while it also could undercut a ballast to earnings.

"We believe RIM may have traded consumer monthly service fees (or a vast reduction in fees) in exchange for volume commitments and high average selling prices ," wrote Misek. "Carrier support dramatically increases the chance of BB10's success (we estimate an increased chance of success from 10% to 30%), but now RIM is playing without a safety net," he added.

In third quarter earnings, RIM reported revenue of $2.7 billion and a net loss of 22 cents a share. That beat Wall Street expectations of $2.6 billion in revenue or an adjusted loss of 35 cents a share, according to analyst estimates compiled by Bloomberg.

Crucially, cash at the handset maker came in at $2.9 billion, an increase of $600 million in the quarter. Research In Motion also posted $950 million in cash from operations.

RIM sold fewer handsets than expected but saw stronger than expected gross margins of 30.4%. RIM shipped 6.9 million BlackBerry smartphones and roughly 255,000 BlackBerry PlayBook tablets, according to a press release. The company also saw its subscriber base shrink to 79 million users, its first ever user decline.

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