Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) shares have been downgraded from neutral to underperform by analyst Alexander Peterc at Exane BNP Paribas. He said the BlackBerry maker’s profit pools are starting to dry up, referring to its services gross profits.
Research In Motion Ltd (BBRY)’s Long-Term Profitability In Trouble
Peterc said Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s new BlackBerry 10 devices, including the Z10 and the Q10 with the popular BlackBerry keyboard, will continue to be the company’s top drivers of revenue. However, he believes that the company’s long-term profitability depends on its service revenues, which are drying up because of the migration from BlackBerry 7 to BlackBerry 10.
He points out that the BlackBerry maker’s software and services division carries an 85 percent gross margin. Therefore, as more and more users switch from BlackBerry 7 to BlackBerry 10, that revenue from software and services is going to come under pressure because BlackBerry 10 renders BlackBerry Internet Service obsolete.
His projections indicate that Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s software and services gross profits will fall from the almost $3 billion they are now to less than $1 billion within the next three years.
Mixed Messages From Research In Motion Ltd (BBRY)?
It’s interesting to note that the BlackBerry maker said at its conference last week that it was going to shift its emphasis away from its new Z10 and Q10 handsets and back toward services like BlackBerry Messaging. This would indicate that the company at least agrees with Peterc on some level when it comes to concerns about losing service revenue.
However, the company is going about this in a different way than what Peterc is implying. Instead of building revenue directly from services, the company is creating value in the BlackBerry 10 ecosystem that will be much longer lasting than direct service revenue because it creates stickiness.
Part of what we love about the smartphones we use is what they can do outside of being just a mobile phone. Each ecosystem has different areas of value, and Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) does have a long way to go in terms of rebuilding the value in its ecosystem so that its devices can have the unique stickiness that each of the other top brands do.
