Pre-BlackBerry 10 Jitters

NEW YORK (TheStreet) -- In case you didn't follow the stock drama during the Research In Motion (RIMM) earnings callThursday night, here is a one-sentence summary:

The stock initially tradedsharply up because most of the metrics were less catastrophic thanexpected, then it fell sharply when RIM disclosed that high-marginservice revenue might decline sharply in the coming years.

This discussion is meaningless unless you understand what this servicerevenue is. Unlike, say, Samsung and HTC, RIM actuallyoperates a network. It has invested billions of dollars in thisnetwork over the last 15 or so years, plus or minus.

Why did the company launch this network? There were primarily three reasons:

1. Back in the day, there just weren't any good data networks. MikeLazaridis had a vision of providing great mobile email. Without greatmobile networks, you couldn't do it.

No, BlackBerry does not own spectrum. It's not that kind of network.It's a behind-the-scenes control data network that inspects andcompresses every packet. It works with the level of thenetwork that's the radio spectrum and the protocols that touch thelower-level network elements: GPRS, EDGE, HSPA, LTE, etc.

2. These networks were, and in some cases still are today,capacity-constrained. Basically, RIM addressed this issue bycompressing the data. When you receive an email on your BlackBerry,many fewer bits have been required to make this happen than, say, onan iPhone or Android.

3. Enterprises in particular need their messages to be encrypted.RIM provides servers for the enterprises to encrypt/decrypt, in orderto talk to the handsets.

In the last couple of years, this service stream has started to lookshakier than before -- I'll get into that in a moment -- but somemoney managers who don't quite understand the technology were of thebelief that with BB 10 just around the corner, this servicerevenue would provide renewed hot air under the RIM revenue balloon,in a linear fashion to the handset revival.

This is the balloon RIM punctured last night, and which set thestock down almost 15% after having been up 6% only minutesbefore.

So what's the problem with this BlackBerry service revenue, evenbefore BB 10 is launched next quarter?

1. Data compression fading in importance:

RIM's problem with data compression is the same problem as sellingelectric cars when gasoline is falling from $4 per gallon to $3 pergallon and the next stop may sell for $2 per gallon. Just as anelectric car might have saved on your gasoline bill, it'spointless if gasoline is plentiful and getting cheaper.

This is not the case everywhere in the world, but it is in the U.S.,Korea, Japan and increasingly in more countries. As a result,BlackBerry's market share in the U.S. has plummeted. However, in muchof Africa, Latin America and South Asia, data remains relativelyscarce, and this data compression gives RIM a strong pricingadvantage there.

RIM has 79 million subscribers, slightly above where it was a yearago. This is despite the number of subscribers in the U.S. and a couple of similarlydata-abundant countries plummeting. That's becausedata remains scarce, and hence RIM's data compression advantageremains strong in many parts of the world.

2. Security and encryption:

There are two kinds of markets here: consumer and enterprise. Let'stake these in turn:

A. Consumers

I'm sorry, but the typical consumer cares absolutely nothing aboutsecurity to a degree. We are talking about people who areposting photos of themselves on the Internet here, folks. The conceptof privacy is generally distinctly different for a 20-year-old thanfor a 60-year-old these days.

You can call this RIM's "47% problem." Mitt Romney said talking about tax cuts to people who don't pay taxes doesn't govery far. This is exactly RIM's issue about talking about securityand encryption to people who have been smitten by an exhibitionistculture and think the world is dying to see pictures of theirfood, cats and Lord knows what else.

In this sense, RIM faces a demographic and socio-economic problem notakin to the Republican party, or at least so the story goes.

B. Enterprise

Here, the story is different -- but still a little problematic. Iwill divide the enterprises into two groups:

(1) Some, mostly smaller, enterprises just don't care as much aboutsecurity/encryption. These are companies that were founded, for the most part, inthe BYOD (bring your own device) world, where every new employeewalked in the door with an iPhone and there was never any corporatedevice (BlackBerry) program.

These are the kinds of companies that are in your mental picture of atypical 2009 or newer Silicon Valley startup. They don't even bothersecuring much. Workers may spend more time at Philz Coffee around thecorner than in the office upstairs. It's one big college dorm.

(2) Larger and older organizations, such as the proverbial WallStreet bank and the Department of Defense, still care as much aboutsecurity as ever. Their new challenge is that some peoplewanted to use iPhone and iPad. A market grew up in the last fewyears offering alternative security and encryption to theseorganizations.

RIM will argue until it's blue in the face that it remains better thanall of these new alternative security and encryption approaches.Fine. It is most likely right about this, but the cracks in theHoover Dam have already spread. Where iPhone and iPad tookroot, they aren't ceding that back to BlackBerry.

So now we are on the cusp of BlackBerry 10, launching on Jan. 30and with devices available for purchase within a couple of months orso after that. Now what?

One thing I pointed out in my recent article is that a problem with BlackBerry in the market is it requires aseparate kind of data plan. This reduces competition for BlackBerrydata service pricing and complicates life for the end user.

To the extent that BlackBerry 10 isn't going to generate this legacykind of service revenue, it would be a reflection of the lack of needto have such a separate data service plan. This would be a good thingfor the end user!

Of course, it's also bad for RIM's service revenue -- at least in thisone step -- but my point here is that it is so because RIM's productsare now more attractive than before. RIM can then augment its legacy service revenue by breaking out new revenue opportunities with otheradvantages that build on its network compression and encryption.

For example, RIM could sell separate security, encryption andmessaging services to the end-user (individual and enterprise alike)without getting the carriers involved. This has multiple benefits:
  • No splitting the revenue with the carrier.
  • Swifter roll-outs. No need for a carrier to approve.
  • Direct consumer contact. Swift feedback.
  • Granular ability for the user to pick-and-choose what to buy.

This last point is important. Instead of the end-user having to buy a"BlackBerry bundle" of services, it could be an a la carte menu. Thisallows the end user to not pay for unnecessary stuff, but to see whatis actually beneficial.

I could go on but here is the bottom line: RIM will be eithera $5 or a $30 stock depending on whether BlackBerry 10 turns out to bea great product or not. We will not know this until we have had sometime with the final product in our hands, using it for perhaps amatter of weeks.

In this larger context, the manner in which RIM slices and prices itsnetwork compression and encryption security services is not going tobe deterministic. It is also not a linear expression of the servicesbundle offered for all the BlackBerry (7.1 and older) devices sold todate.

At the time of publication the author had positions in GOOG and AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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