RIM Appears Confused with its PlayBook Strategy

August 22nd, 2011 by Trefis Team
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Research In Motion

Sprint (NYSE:S) recently announced that it is scrapping plans to sell Research in Motion (NASDAQ:RIMM) PlayBook’s 4G WiMax version due to a lack of demand for the Wi-fi version. [1] RIM now plans to launch the 4G Long Term Evolution (LTE) version of PlayBook and hopes that the main carriers Verizon (NYSE:VZ) and AT&T (NYSE:T) will support this version. Although Verizon and AT&T are both moving towards building their networks on LTE technology, we believe RIM will need to first gain success with the basic Wi-fi model before jumping into next version of the PlayBook.

PlayBook has received a tepid response

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RIM could only ship 500,000 PlayBooks in the last quarter compared to 9.3 million iPads that Apple (NASDAQ:AAPL), which indicates that PlayBook has only a sliver of market share that accounts for less than 6% of our $43 price estimate for RIM stock. Our price estimate for RIM is about 60% above market price mainly because we are optimistic about RIM’s turnaround in 2012 when it plans to introduce QNX based smartphones, and we are encouraged by the cost cutting measures that it has started to implement through job cuts (see What Justifies Our $43 RIM Estimate).

Rim’s PlayBook strategy appears confused

RIM has tried and tested a number of combinations for PlayBook without any success. Its initial decision to go ahead with the WiMax version of PlayBook earlier this year did not seem right when the main telecom players Verizon and AT&T had started to embrace LTE technology, a rival technology to the WiMax camp. [1]

Then RIM possibly stopped production of its 10 inch PlayBook 2 tablet to avoid direct competition with Apple (see Why RIM Would Throw in the Towel on Playbook), and now it plans to come up with LTE version of PlayBook without first sorting out the issues with its Wi-fi version. Another risk that the LTE version carries is that the majority of the tablets are sold as Wi-fi version as otherwise consumers are forced to cough up additional costs in subscribing for the monthly data plans.

Possible implications on RIM’s stock

RIM is already struggling to control its operating expenses as the company’s SG&A and R&D expenses have increased at a more quickly in the last few quarters. If RIM continues to come up with a new version of PlayBook and then scrapping its production, its operating expenses will continue to climb.

The company needs to manage its expenses very carefully by choosing the right product portfolio otherwise its stock may have trouble finding some support. The company’s SG&A and R&D drivers are extremely sensitive and so any small increase in these values have large implications on its stock value.

You can try that yourself by tweaking the above chart.

See our complete analysis for RIM stock here

Notes:
  1. Sprint ditches 4G model of RIM PlayBook, Reuters, August 12th, 2011 [↩] [↩]