It seems that cheaper tablets are indeed finding buyers. It all started with Amazon (NASDAQ:AMZN) selling the Kindle Fire for a modest $199. Now the heavy discounts offered on PlayBook have started to show results for Research in Motion (NASDAQ:RIMM). According to a new research, the PlayBook tablet’s share in the Canadian market has increased from 5% to 15% on substantial discounts, and has pulled the share of Apple’s (NASDAQ:AAPL) iPad down to 68% from about 86%. 
This is good news for RIM, which has been struggling to come to terms with the competition in the tablet and smartphone market. However, giving away huge discounts is bound to impact the company’s margins.
Our $16.50 price estimate for RIM stock is about 10% above the current market price.
RIM Attracting Developers Through Free PlayBook Offer
Not only is RIM attracting users by giving them huge discounts on PlayBook, but it’s also wooing developers by giving them free PlayBooks. Recently RIM announced that it is extending a promotion that awards a free 16 GB BlackBerry PlayBook tablet to developers who port their existing mobile applications to the new BlackBerry PlayBook OS 2.0. 
Last week at the DevCon Europe event hosted by the company, the company executives stated that contrary to the popular belief BlackBerry users have shown great interest in embracing smartphone apps.  According to the blog, there is overwhelming interest in the offer, and the company has seen 1,500 apps submissions as of last Friday and 6,600 new developers have registered at the BlackBerry app store. The PlayBook promotion is just one part of RIM’s ongoing effort to attract developers to its app store.
But Will Hurt RIM’s Margins
Whether the company offers deep discounts through promotions to retail users or gives away free PlayBooks to attract developers, the strategy is bound to hurt its margins.
We estimate that the PlayBook’s gross margins will decline from about 17% in 2011 to 10% in 2012, and that the trend will continue in the future. PlayBook accounts for less than 1% of our price estimate for the RIM stock, which means that PlayBook’s value to RIM is unlikely to improve if this strategy continues.Notes:
- PlayBook price cut results in increased market share, The Globe and Mail quoting SRG Research as the source, February 15th, 2012 [↩]
- We’re Extending the BlackBerry PlayBook Tablet Offer!, BlackBerry Developer’s Blog, February 13th, 2012 [↩]
- RIM: BlackBerry apps are more profitable than Android apps, BGR, February 7th, 2012 [↩]