[rdkempt]

BlackBerry mess could cost RIM up to $100 million

QUOTE:

The most severe Black-Berry service disruption in the history of Research In Motion Ltd. could cost the Canadian mobile device maker more than $100 million U.S. in lost revenues.

As some argue the damage to RIM's future ability to brand its smartphones as immensely reliable is near total, Wall St. is focusing more specifically on the financial impact from the three-day outage. RIM charges wireless carriers a monthly fee for each active Black-Berry user, Rod Hall of JPMorgan Chase and Co. reminded clients on Friday.

While acknowledging a large margin of error in his estimates as the specifics of carrier agreements are private, the analyst is nonetheless convinced RIM will have to give at least some of those fees back. Expecting a little over $1 billion U.S. in service-fee revenues for the company's third quarter, set to end in November, Hall estimates five cents in lost earnings per share is possible.

"We calculate that each one per cent lost at the top line represents about a penny of lost EPS," he said.

"Given a large portion of global traffic looks potentially affected we believe that a five-per-cent impact to service-fee revenue is plausible though likely (the) worst case."

Wireless carriers around the world on Thursday promised to compensate their BlackBerry-using customers for the days they spent without access to email, BlackBerry Messenger (BBM) and other core RIM services. The suggestion that cellular service providers would pass on the cost of that compensation to Waterloo was quick to follow.

During a conference call with reporters on Thursday morning, RIM executives said the company had yet to discuss the compensation issue with their carrier partners around the world.

A malfunctioning data centre in the United Kingdom was the culprit behind the outage, chief technology officer David Yach explained. Problems first arose in Europe, the Middle East and Asia early Monday morning, spreading to the Americas the following day before getting resolved early Thursday morning.

RIM has compensated its carrier partners for network outages in the past, Gus Papageorgiou of Scotia Capital told clients on Friday. But those were all too small to warrant a separate disclosure, the analyst said.

"This is the worst outage the company has experienced, so we believe there is a decent chance the compensation will be larger," said Papageorgiou.

"We estimate the worst-case scenario is that RIM refunds a month's worth of BlackBerry fees to its carrier partners for half of its subscriber base."

With the global BlackBerry nation currently topping 70 million people, about 35 million refunds would be the high end of his estimate. Taking average user fees, gross margins and corporate tax rates into account, Papageorgiou arrives at an estimate of $117.7 million U.S. or roughly 22 cents in losses per share for RIM shareholders.

"We believe the company will have the situation under control before the weekend and that, as a result, it should not sustain any serious long-term damage to its brand or service," he said.

Investors heeded that advice, as RIM shares inched up 11 cents to close at $24.23 Friday, although the company could still be forced to give up even more cash to its carrier partners than current estimates predict.

"Typical telecom network (service-level agreements) include penalty fees in addition to lost direct revenue, which act to increase losses," explained Hall.

"If this same system is used for RIM's own services then we believe a financial impact greater than the simple days of outage is possible."

[tchocky77]

That's grim.

I had no idea BB had the extra charges attached. Funny cos I read alot of posts saying RIM wouldn't "owe" anyone refunds.

[rdkempt]

I have also read that a lot of the people from the networking department were cut a few months ago when RIM cut all those jobs - the guys responsible for keeping their network up, etc... who knows if this would have been as big of an issue had RIM not cut their jobs.

[tatame]

well, how often do we the consumer, get charged for being late or not upholding our end of the deal. its only fair that turn-about is applicable here. we promise to pay xx amount of $ per month for usage of a service. We are fined if we dont uphold our end of the agreement. It's only fair that they should have to pay some kind of fine to us for not upholding their end of the deal as well. thats why people are occupying wall-street......nothing is ever done fair from both ends

[laurah2215]

Wow. That's pretty hefty. I'm sure they'll find a way to get the costs back.

[EchoTango]

I have no doubt Carriers will be looking for compensation and of course previous agreements will need to be satisfied. What will be interesting is how much of that will flow down to the users.

If RIM was smart, it would offer compensation in the form of free software as it has no incremental cost and would promote more product usage.

[brucep1]

[Tre Lawrence]

I have no doubt Carriers will be looking for compensation and of course previous agreements will need to be satisfied. What will be interesting is how much of that will flow down to the users.

If RIM was smart, it would offer compensation in the form of free software as it has no incremental cost and would promote more product usage.

Pretty good prediction!

[BBMINI]

Now that they're offering the free "Apology" apps, which I think is a very good move on RIM's part, I might look at it as $100 Million worth of advertising they should have spent anyway over the last few years while trying to stave off competitors. Hopefully they can somehow turn the outage into a marketing opportunity by getting some good apps into peoples hands (BBs?) and helping to confirm that RIM is serious about remaining a strong competitor and viable company in the smartphone world. Will keep my fingers crossed for them.