Pre-BlackBerry 10 Jitters
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.