RIM Lowering Gross Margins with Consumer Smartphones

Implications: RIM’s consumer smartphones are well-timed with the enterprise spending slowdown, but the forecast of lower gross margins show the dependence on carrier’s marketing and subsidized pricing.

Analysis:

Despite reporting a second quarter of significant revenue and earning growth, RIM faces the industry-wide problem of holding gross margins in the consumer market.  RIM’s strength is its wide portfolio of carrier relationships for consumer expansion.  Its second quarter shows the diversification with 42% non-enterprise and 34% of the base being consumer.  RIM is ready to compete with the Bold having music, the Pearl re-designed to be flip, and the Storm featuring a touchscreen.  RIM is keeping up with the trends, as the CEO commented about the rationale for the Pearl Flip was that about 75% of the US handsets sold are flip form factors.

RIM is facing the costs of a diverse product line to compete for presence with carriers.  RIM’s new models with exclusive designs for carriers have higher manufacturing costs, and the marketing expenses of  advertising co-op and product training.  The iPhone had the advantage of the strong brand attracting Apple loyalists to AT&T.  And smartphones have a short shelf life and high price elasticity.  For instance, Sprint Nextel gave Best Buy an exclusive for the Samsung Instinct at $139.  A few months later, Radio Shack had the Instinct priced at $99.  Verizon has a Blackberry Curve model at $99 while Best Buy has an earlier version at $49, and AT&T just announced a free Blackberry Curve 8310 with a U-verse installation in the home.

From a second quarter gross margin of 50.7%, RIM is forecasting 47% for next quarter and the mid-forties for the long term.  RIM is similar to other specialized OEMs such as Garmin that had a 45.8% gross margin last quarter but expects lower margins with prices falling about 20% during the last year.  Sony Ericsson only had a 23.1% gross margin for the second quarter compared to 29.2% the previous quarter and 29.6% a year ago.  Nokia showed an average selling price of $120 but reported that half of the 122 million sold were low-end phones at $80 or less.  AT&T launched the 3G iPhone claiming that $200 was the consumer benchmark for smartphones.  The Google HTC Android handset has been showcased at a lower price of $179.  RIM will face challenges for pricing and margins in launching consumer smartphones.