BlackBerry's Consumer Push Is Coming at a Price for RIM

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Despite a shrinking cellphone market, sales of BlackBerry devices are soaring. But concerns that a mass-market push is eroding profit margins have jostled the shares of Research In Motion Ltd., and investors are divided on the BlackBerry maker's prospects ahead of its earnings report Thursday.

RIM has been investing heavily to reach ordinary consumers, buying TV ads, developing new software, and rolling out more powerful devices with larger screens. The company, based in Waterloo, Ontario, is expected to unveil a host of new music, gaming and other consumer-oriented applications at this week's CTIA trade show in Las Vegas.

But these efforts eat into gross profit margins, which have fallen to 40% from about 50% in the last six months and have helped push RIM's stock to one-third its high of $147 in July.

Many investors are staying on the sidelines, awaiting for its quarterly earnings report this week for any signs of stabilization. Ken Smith, portfolio manager at Munder Capital Management in Birmingham, Mich., which held 111,000 RIM shares according to a December filing, said he's waiting until the "margin decline has bottomed out." He added, however, "I think it's a long-term winner."

RIM's share of smart phones -- the only part of the cellphone market expected to grow this year -- has been rising fast. In the last three months of 2008, it sold 7.4 million devices, or 19.5% of the total world-wide market, up from four million devices, or 10.9% of the total a year earlier, according to data from Gartner Inc. Apple Inc. had 10.7% of the total, while giant Nokia Corp. took a 40.8% share.

RIM declined to comment for this article.

Co-Chief Executive Jim Balsillie said in September that the company is making an aggressive push into the relatively nascent consumer smart-phone market by investing heavily in new products and advertising. "A land grab is not a bad metaphor for what's going on right now," he said in a call with investors. "So we could have a sweeter margin for a couple of quarters and we might not torque the growth quite as much and then we will rue that for the next 20 years, that we gave up the key land for a little bit of interim gratification."

BlackBerry faces significant competitive challenges, however, with new devices hitting the market and consumers proving more fickle than its traditional corporate users.

For example, Todd Newby, a high-school teacher in Peekskill, N.Y., is considering upgrading his Nokia camera phone to a BlackBerry or Google Inc.'s G1 smart phone that would let him send photos and check email and sports scores. "But I'm not sure it's worth $50 more per month to me," he said.

Kevin Landis, chief investment officer at FirstHand Capital Management Inc., said BlackBerry has "been a great success story in terms of getting a feverish niche to adopt it, but that's a different success story to Apple's, which has been a game changer." Mr. Landis sold his RIM shares years ago and now holds Apple.

RIM said in February it expected to add 3.5 million new subscribers in its fiscal fourth quarter, which ended Feb. 28, due in part to promotions such as the "Buy One, Get One Free" offer at Verizon Wireless. Carriers have been heavily subsidizing and promoting BlackBerry devices, whose email and messaging features are enticing consumers to sign up for lucrative monthly data plans that help counter stagnating voice revenue.

The company said last month it expects profit will come in at the low end of its estimates. RIM shares, which approached $60 before the February announcement, dropped to less than $40. Its shares closed Friday at $45.01 on the Nasdaq Stock Market.

"A little bit of disappointment goes a long way with the stock," said Mark Demos, portfolio manager with Fifth Third Quality Growth Fund. "They are growing share, so people want to make sure the profitability is hanging in there."

DeutscheBank analyst Brian Modoff has recommended selling the shares since September. "They have to keep running to keep up with changes in consumer tastes and risk missing numbers if their products do not hit," he said.

Write to Sara Silver at sara.silver@wsj.com