Pre-BlackBerry 10 Jitters

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

The stock initially traded sharply up because most of the metrics were less catastrophic than expected, then it fell sharply when RIM disclosed that high-margin service revenue might decline sharply in the coming years.

This discussion is meaningless unless you understand what this service revenue is. Unlike, say, Samsung and HTC, RIM actually operates a network. It has invested billions of dollars in this network 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. Mike Lazaridis had a vision of providing great mobile email. Without great mobile 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 and compresses every packet. It works with the level of the network that's the radio spectrum and the protocols that touch the lower-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 by compressing the data. When you receive an email on your BlackBerry, many fewer bits have been required to make this happen than, say, on an iPhone or Android.

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

In the last couple of years, this service stream has started to look shakier than before -- I'll get into that in a moment -- but some money managers who don't quite understand the technology were of the belief that with BB 10 just around the corner, this service revenue 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 the stock down almost 15% after having been up 6% only minutes before.

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

1. Data compression fading in importance:

RIM's problem with data compression is the same problem as selling electric cars when gasoline is falling from $4 per gallon to $3 per gallon and the next stop may sell for $2 per gallon. Just as an electric car might have saved on your gasoline bill, it's pointless 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 much of Africa, Latin America and South Asia, data remains relatively scarce, and this data compression gives RIM a strong pricing advantage there.

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

2. Security and encryption:

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

A. Consumers

I'm sorry, but the typical consumer cares absolutely nothing about security to a degree. We are talking about people who are posting photos of themselves on the Internet here, folks. The concept of privacy is generally distinctly different for a 20-year-old than for 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 go very far. This is exactly RIM's issue about talking about security and encryption to people who have been smitten by an exhibitionist culture and think the world is dying to see pictures of their food, cats and Lord knows what else.

In this sense, RIM faces a demographic and socio-economic problem not akin to the Republican party, or at least so the story goes.

B. Enterprise

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

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

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

(2) Larger and older organizations, such as the proverbial Wall Street bank and the Department of Defense, still care as much about security as ever. Their new challenge is that some people wanted to use iPhone and iPad. A market grew up in the last few years offering alternative security and encryption to these organizations.

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

So now we are on the cusp of BlackBerry 10, launching on Jan. 30 and with devices available for purchase within a couple of months or so 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 a separate kind of data plan. This reduces competition for BlackBerry data service pricing and complicates life for the end user.

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

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

For example, RIM could sell separate security, encryption and messaging 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. This allows the end user to not pay for unnecessary stuff, but to see what is actually beneficial.

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

In this larger context, the manner in which RIM slices and prices its network compression and encryption security services is not going to be deterministic. It is also not a linear expression of the services bundle offered for all the BlackBerry (7.1 and older) devices sold to date.

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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