RIM's Injunction Malfunction

Even if the BlackBerry maker escapes a shutdown, the scare may linger even longer.
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Even if

Research In Motion

(RIMM)

manages to escape a potential injunction against its popular BlackBerry email system, the coinciding scare to both users and shareholders could linger even longer.

RIM's BlackBerry service is largely proprietary; no other companies offer the software or service, and only a handful of handsets offer BlackBerry connections. The mere threat of the ban -- an outgrowth of the ongoing patent dispute with

NTP

-- has spotlighted the danger for customers in an overreliance on just one company for a critical application like email.

As a result, some existing and potential customers are likely to hedge their bets in the future, looking at rival -- and more open -- systems from companies such as

Microsoft

(MSFT) - Get Report

or

Good Technologies

, analysts say.

Indeed, unless RIM somehow transforms its proprietary system into an open one based on industry standards, it risks becoming a niche player. "Potential customers are realizing that there are plenty of standards-based solutions out there right now," says Kevin Burden, who covers the market for mobile devices as an analyst at industry research firm IDC. "Standards-based is always the way to go when they exist."

RIM officials have already acknowledged that the patent dispute is weighing on its effort to recruit new subscribers. Second-quarter subscriber growth came in

lower than expected, and in both

September and

December, the company cut forecasts for subscriber growth in future periods. RIM CFO Dennis Kavelman chalked up the latest of those revisions to the widespread publicity surrounding the dispute and the possibility of a shutdown.

Shares of RIM were recently down $1.56, or 2.2%, to $68.51.

A federal judge will hold a hearing later this month -- and will likely rule within a few weeks thereafter -- on whether to issue an injunction against RIM's BlackBerry service. A federal jury has already found that RIM violated patents owned by holding company NTP, a decision largely affirmed by an appeals court.

RIM is arguing that the court shouldn't issue an injunction and is still hoping to settle the case out of court to preempt such an outcome. Last week, the company also announced a so-called workaround meant to limit the effects of any injunction. The workaround involves changes to the way email is queued and delivered to mobile devices in an effort to design around NTP's patent claims.

Although RIM likely intended to assuage customer fears about an injunction, the workaround itself will likely to do little to calm customers, analysts say. RIM apparently hasn't done any kind of live testing with actual customers, they note. That could delay its implementation because of potential bugs in the service -- or fear of them.

Regardless, the workaround still doesn't solve the underlying problem of the BlackBerry Service being a proprietary system.

Analysts compare RIM with

Apple Computer

(AAPL) - Get Report

in the 1980s and early 1990s. Apple's Macintosh operating system famously lost out to Microsoft's DOS and then Windows platform, a fact that analysts have blamed largely on the relative openness of Microsoft's software. Customers had their choice of Windows computer makers; except for a brief period in the mid-1990s, they could only buy a Macintosh from Apple.

"RIM is a modern-day Macintosh," says Ken Dulaney, a mobile computing analyst with Gartner. "If there's a problem with that, there's absolutely no other place to go."

To be sure, RIM has tried to open up its system. Its BlackBerry Connect and BlackBerry Built-In services allow competing handset makers to connect to and retrieve email from BlackBerry servers. But those programs have resulted in only a small number of non-RIM BlackBerry devices so far, and have been meaningless to the company's financial reports to date.

The effort "has had essentially no impact," notes John Jackson, an analyst with the Yankee Group.

And RIM has a big incentive to prevent an open system from really taking off. Some 70% of the company's revenue comes from selling handsets, meaning that if it ever had any real competition for handset customers, its sales could take a huge hit.

But if customers have few options inside RIM's system, they certainly have a growing number of options outside of it. Microsoft, Good and

Seven

are among those competing against RIM on the software and service side, while

Nokia

(NOK) - Get Report

,

Motorola

(MOT)

,

Palm

(PALM)

, and

Hewlett-Packard

(HPQ) - Get Report

are offering rival handsets.

Ultimately, businesses are likely to turn to Microsoft, analysts predict. The company has linked its mobile email service to its popular Exchange server and has teamed up with a range of handset providers to allow users to access the system. Both the client and server aspects have provided a somewhat disappointing experience thus far, says Dulaney. But the Redmond, Wash., giant and its partners are likely to do what they have typically done -- "plod along" until they get it right, he says.

"I believe long-term that Microsoft is the big winner here," he says.

How long-term?

Dulaney says that within four months, current and potential RIM customers could start abandoning the BlackBerry service if RIM doesn't settle the patent dispute. Assuming that RIM escapes the potential injunction, Jackson thinks a big competitive threat to RIM won't develop for at least a year or two.

To avoid that threat, the company faces some hard choices on whether -- and how -- to truly open up its BlackBerry service to competitors, analysts say. The problem, as Burden puts it, is that RIM has no roadmap for how to do it. "Its future is in limbo," he says.