At CES RIM demonstrated Playbook 2.0 software and revealed that email (even consumer email) will be handled via ActiveSync, which is a Microsoft technology. By adopting ActiveSync to send email to the Playbook (and presumably all upcoming BlackBerry 10 devices), it sounds like the NOC isn't being used for email transport anymore.
This change is causing some people to wonder if RIM's service revenue may be at risk. The stock market has long loved the fact that RIM can collect service fees from carriers on a recurring basis. Every BlackBerry subscriber has traditionally generated a few bucks per month of service revenue for RIM. Users don't pay this to RIM directly. They just pay their bill, and RIM collects the fees from the carriers.
As you may or may not realize, RIM generates over $1 billion in service revenue per quarter, which is about 20% of their +$5 billion in quarterly revenue. It may only be 20% of revenue, but it's by far the most profitable revenue for RIM since service margins are huge. Hardware margins aren't so huge. If RIM lost these service revenues, the company would be unprofitable by most analyst estimates.
A big part of the reason that RIM stock is trading at near-record lows is driven by Wall Street's belief that this service revenue is not sustainable. After all, no other mobile platform has been able to duplicate these service fees, and given the competitive environment it's fair to ask what value-added extras RIM is bringing to the table. Something's gotta give, right?
When the BlackBerry solution first hit the market, email was THE killer app. Specifically, push email. RIM built its own relay as part of the NOC so that it could speedily give us our email fix. Where did you think the name CrackBerry came from anyway?
Because of this unique differentiation, RIM was able to convince carriers to pay for BlackBerry. We don't really know what the fee is today, but in the past RIM was able to get $7-9 per enterprise subscriber per month. For BIS users, I believe the fee drops to as low as $2 per month. But still, this $2 is hard for carriers to pass on to customers. So it hurts carrier profitability unless it also brings with it some hidden savings (which I'll touch on below).
And now, if RIM is switching to ActiveSync, what makes them different? Google licensed ActiveSync as the technology inside of Google Sync, which pushes Gmail to mobile devices. Microsoft uses it for Hotmail (and obviously Exchange Server). Is RIM just becoming a me too player on email? If so, why should carriers keep paying? At least that's the question I want to try to answer.
I haven't been able to get a clear answer out of RIM on this yet, but my assumption is that they are deploying ActiveSync on their own servers within the BlackBerry infrastructure. So the way I see it, they're just swapping out their own relay for a better technology.
Yes, you heard me right. I consider ActiveSync to be superior. For example, it supports proper two-way synchronization to Gmail accounts, something that the current BIS solution does not. And we shouldn't have to worry about the RIM relay failing anymore either. All they need to do is maintain a connection to the public Internet and Crackberry users get their email fix. I see this change as a good thing.
There are a ton of other questions left to be answered also. Will web traffic stop moving through RIM's relay too? What about Facebook traffic? Surely RIM will still need its own relay for PIN to PIN messaging, right?
The switch to ActiveSync, then, doesn't necessarily mean RIM is cutting costs in its NOC. And from what we've been told in Kevin's follow-up interview with Michael at RIM (video at top of story), the NOC is still essential in delivering many BlackBerry services, including BBM and Video Chat and will still play a role in email, taking care of account configuration. And for enterprise PlayBooks, and presumably BlackBerry 10 phones, BlackBerry devices managed by BlackBerry Fusion will receive an added layer of security for enterprise users above what ActiveSync provides. This sounds like something worth paying for.
RIM has always differentiated between service fees charged to enterprise customers versus regular consumers. I can see how they'll be able to continue collecting fees from enterprise users, but what about consumers? After all, the vast majority of BlackBerry subscribers are non-enterprise. Some rough math implies that RIM gets most of its service revenue from consumers, not enterprise accounts.
Can they keep collecting these fees?
We have to remember that part of the fee covers customer support. When your Verizon iPhone gives you a problem, Verizon handles the problem, not Apple. When your Android phone isn't connecting to AT&T, you can't get help from Google. It's the carrier's problem. With BlackBerry, carriers can escalate problems to RIM. This doesn't change and there is no reason RIM should offer this service for free.
Another aspect that helps RIM is the company's view towards partnering with carriers. We believe RIM pays carriers 10% of all app sales, which explains why they cut the share that vendors get from 80% down to 70% back in 2010. Apple doesn't pay carriers anything. Some industry pundits think that Google shares app revenue with carriers, but it's not clear.
I think it's fair for RIM to expect a monthly fee for their service if they are sharing revenue with carriers. But right now, given app sales volume and pricing, I cant' see the carrier commissions coming anywhere close to the fees they pay RIM to manage the BlackBerry service. So I can see how carriers would continue to pressure RIM down on pricing.
My guess is that the service fees RIM gets for providing the core BlackBerry services will continue to shrink. I don't think it will shrink particularly quickly, but RIM will need to make up for the difference through volume or alternative fees.
The move from RIM's own relay to ActiveSync, in my mind, really doesn't change anything. But it may give carriers one more reason to open the doors on this discussion.
