Many of you are waking up this morning, reading the results of the Q3 2012 earnings call and saying to yourself, “wow, RIM beat estimates again! but… why is the stock down 12% in pre-market trading!?!?” The answer SERVICE FEES.
Get ready as this is now going to be a huge topic of discussion moving into the launch of BB10 and for good reason. Service fees are the fees RIM charges carriers/enterprise companies to access their BIS and BES networks. It accounts for about 30% of their revenue which is around $1 billion per quarter. Estimates put about 60%-70% of all service revenue coming from BIS users, the rest from BES users. RIM is the only company that charges service fees as they are the only mobile company with their own network that carriers attach to.
In the earnings call yesterday Mr. Heins dropped a slight bomb by stating that basically all service fees will stop coming in from regular BIS consumers on BB10. Up front that is VERY scary as this would account for about 20% of their overall revenue. To come out and say that 20% of RIM’s revenue is going to go poof scared the poop out of investors to say the least!
As most investors were busy hitting the sell button, they neglected to hear Mr. Heins state that this drop would NOT happen overnight. Mr. Heins was on CNBC this morning and tried to clear up and clarify how this service fee situation will go down. He indicated the following things:
- BIS service fees will only cease to exist for BB10 customers, not BB7 customers
- They will continue to collect service fees on current and future BB7 customers
- The transition period between now and getting everyone to BB10 and off BBOS, globally, will take about 1.5 to 2 years, meaning, for the next 12-18 months, service fees will remain relatively strong
- Service fees will continue to be collected from BES users on BB10
- Significant sales of BBOS devices will continue in emerging markets for at least the next year, these sales will continue to bring in service revenues
- Given they anticipate a 1.5 to 2 year time frame for the BIS service fees to completely drop off, it means they have lots of time to initiate new programs to generate revenue
- The ACE card for Mr. Heins seems to be BBM as they have BIG plans for BBM that include finding ways to monetize it.
- Off the top of my head I can think of the following basic scenario. Think about having a BBM cross platform app that comes in a basic free version with just chat and a full paid version that has video chat and file sharing that costs ($1.99).
- Or have a BBM desktop suite software package that costs a nominal fee
- BBM Money transfers which we know is happening will help bring in fees as well
On the CNBC call Mr. Heins seems not worried at all about the service fee issue. I gather that he feels they have enough time to find new ways to generate service fees with products such as BBM. Also I believe they are confident that a 20% drop in revenue could easily be made up with solid sales of BB10 devices that will have a MUCH higher revenue per unit sold than the current BB7 crop. A 20% drop in revenues, even with solid BB10 sales, might have been horrible for the old RIM, but, with the new “lean and mean” RIM that Mr. Heins has created, they can absorb this loss and still make a profit.
Anyways, the consensus in the community seems to be that analysts are over reacting to the above issues and don’t full realize that it is not an issue that is going to affect RIM in the next 6-10 months, it will take 12-18 months to make a serious dent. Once the analysts process this I am sure the stock will go back up to where it should be given the fact that RIM has almost 3 Billion in the bank and 79 million users around the globe to sell BB10 to. Heins will likely be all over the media today trying to clear up the above issues as well.