Cell Phone: Heavy Discounting Of New BlackBerry Weighing On RIM
The wave of cell phone price cuts already has hit Research in Motion’s (RIMM) newest BlackBerry model, the Pearl.
T-Mobile USA slashed its Pearl price from $199 to $149 this month. The move matches recent Pearl price cuts from Verizon Wireless and RadioShack. (RSH)
The price cuts are stirring questions over how RIM will maintain its profit margin as increasing competition threatens to undermine prices even in the high end of the cell phone industry.
Investors have been on edge since Motorola, (MOT) the world’s No. 2 seller of mobile phones, warned earlier this month that fourth-quarter earnings would miss analyst estimates and its own guidance. On Friday, Motorola released final results and said it would cut 3,500 jobs, or 5% of its work force. Its profit fell 24% to 26 cents a share, excluding one-time items, despite cell phone sales that exceeded forecasts. Analysts in part attributed the profit fall to heavy discounting of its high-end Razr phones.
RIM’s Pearl, which debuted in September, has many consumer-oriented features. The company wanted to appeal to users beyond the business types who rely on the BlackBerry’s fast e-mail service. The Pearl includes an MP3 music player, camera and other features that earlier models lack, though it has a smaller keyboard.
Price competition, always strong on the low end, is bleeding into the market for smart phones such as the Pearl. Palm’s (PALM) Treo, Nokia’s (NOK) E62 and Motorola’s Q have come down sharply in price.
Meanwhile, some new rival products are coming out. Samsung has reported strong shipments of its new BlackJack smart phone. Nokia, the No. 1 cell phone seller, and Motorola are rolling out new phones with fast e-mail service to rival BlackBerrys. And this month, Apple (AAPL) unveiled a stylish cell phone/iPod music player/PDA that it calls the iPhone.
Market tracker IDC says RIM’s market share fell last year.
Still, for now, it seems the price cuts on Pearl won’t hurt RIM. T-Mobile is making up the difference, according to a source knowledgeable about deal terms. Subsidizing handset price cuts is common between carriers and makers, but eventually handset makers get smaller or no subsidies for a given model.
Wireless carriers must sell lucrative cell phone plans — which include data services as well as voice — in order to recoup their investment in faster data networks, says analyst Jack Gold of market research firm J. Gold Associates. To get users to sign up for these plans, they often offer the phones at steep discounts, he says.
“I doubt that RIM’s overall (profit) margins will be affected by this (latest) pricing action,” Gold said. He expects further price cuts. “This is just the tip of the iceberg,” he said.
Investors, though, fear that price cuts will hurt profit for smart phone makers, says Lawrence Harris, an Oppenheimer analyst.
“There’s the perception that the value of the Pearl has fallen,” Harris said, especially since the price cuts came only four months after the Pearl’s debut.
RIM shares tumbled nearly 4% on Tuesday, the first day of trading after T-Mobile’s announcement. The stock fell nearly 8% after Apple unveiled its iPhone, slated to hit the market in June.
RIM has an ace up its sleeve with new BlackBerry models, Crimson and Indigo, expected in the next month or two. Analysts say this will spur business users to upgrade their phones. Business users, RIM’s main market, are generally less price sensitive than consumers.
“That will certainly help RIM’s ASP (average selling price),” Harris said, referring to a measurement that investors follow closely. “And it can potentially help margins.”
Consumer-oriented BlackBerrys will feel competition from Apple’s iPhone, says Jonathan Hoopes of equity research firm ThinkEquity Partners. But Hoopes expects RIM to protect its market share among businesses by enabling BlackBerrys to handle business software.