The BlackBerry Storm is causing

Research In Motion


to take on water.

The hottest phone in


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lineup is luring customers in for better-than-expected subscriber growth, but the sales seem to be cooling RIM's profits and evaporating its margins.


cut its earnings guidance

to around 83 cents a share, below the 87 cents previously forecast and under the 85 cent target held by analysts. The BlackBerry maker says sales for the quarter ending Feb. 28 will be about $3.4 billion, in line with expectations.

But the real shocker is that despite adding as many as 3.5 million new subscribers -- 20% more than expected in the quarter -- gross margins would narrow to 40%.

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In less than six months, RIM's gross margins have slimmed from 50.7% to well below the mid-40% range the company had been expecting. Thinner margins on steady sales means costs are rising, and in RIM's case, the costs are rising faster than the company predicted.

Fears that the warning Wednesday is a sign that RIM's once lucrative high-margin business user base is rapidly eroding as the company enters the consumer market helped send shares down 16% at midday.

Analysts were quick to blame the aptly named Storm for RIM's rocky ride. The new touchscreen phone, which was introduced Nov. 21, hit the 1 million-sold mark at the end of January as Verizon customers flocked to the


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iPhone challenger.

To keep supplies up with demand, RIM has had to strike deals with its manufacturing partners to insure quicker production. These high-priority requests are also higher-cost, according to one Wall Street analyst who is familiar with the production push. RIM has also had to pay for rush shipments of parts to keep production from slowing. These priority shipments also incur more costs, the analyst says.

As a device, the Storm has given loyal BlackBerry users and new BlackBerry subscribers a touchscreen phone -- the defining trend in smartphones.

The Storm, however, was plagued by software problems from the get-go, making for sluggish performance and disappointed customers. Updates helped improve the phone's operations, but users still struggled to adjust to typing on the unique clicking touchscreen. Returns


piled up, but Verizon insisted that it was nothing out of the ordinary for new phone introductions.

The rising BlackBerry subscriber numbers and falling profits suggest a mixed shift in RIM products, according to UBS analyst Maynard Um. People signing on to BlackBerry's email service with the purchase of the Storm seem to be returning the phone and opting for other BlackBerries like the Curve.

Investors aren't exactly feeling confident about the wireless sector at the moment, and RIM's lowered guidance added more concern to the overall anxiety. RIM's news comes as


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it was shutting down a production plant and cutting 320 jobs.