The Palm plague hits RIM: Greater sales, lower margins
The problem that Palm has been perennially facing is that it now has a very popular phone, the Centro, whose price point is so low that the company can't sustain its margins. Yesterday, we learned that RIM is no longer immune.
Until recently, analysts have been divided on the impact the ongoing financial services upheaval will have on Research in Motion and its BlackBerry line of smartphones. Yesterday, RIM announced it doesn't think the future looks quite as wonderful as it once did, and lowered its outlook for the next quarter. Stock value subsequently plummeted.
Research in Motion stock dropped in value almost 35% in one day, and is currently trading at three-quarters of its value just one week ago. Stocks took such a hit because RIM announced that its gross margin would soon shrink, putting the company in a position similar to the beleaguered Palm, where it would have to radically boost its sales just to maintain the same revenue.
RIM said its gross margin was lowered because of the higher cost of its new platforms -- including, presumably, the upcoming Blackberry Storm -- and the weakening US dollar and "tightness in certain segments of our supply chain."
Even though the company will be releasing new higher-end devices, which will produce lower margins, it also looks like it will be following Palm's lead -- if it could be called that -- with the Centro, and increase reliance upon its devices that are less enterprise-oriented and more designed for everyday usage.
"This is a sharp departure from the way BlackBerry devices have historically been positioned," said RIM's CEO Jim Balsilie, "As we head into this year's holiday selling season, both Pearl and Curve will be available at most of the major retail plans in North America."
By pushing the lower-end units, Palm was able to increase its customer base by magnitudes, subsequently increasing the size of the domestic smartphone market. Balsilie gave something of a nod to that fact.
"Overall growth in the traditional phone market has stagnated for the past five years, while the combined annual growth rate of the smartphone market in the US over the same period is 58%," Balsilie said. "Given this trend, we believe that one day all mobile phones will be smartphones. This is a segment that BlackBerry handsets target and we currently [are] the number one smartphone vendor in the US with a 54% market share in Q2, according to IDEC. We believe that now is the time to aggressively pursue adoption."