Research In Motion Can Face Damages Approaching Half a Billion Dollars
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Research In Motion, Ltd. (NASDAQ: BBRY), the Canadian-based pioneer in smartphone technology, suffered another blow recently when a San Francisco, California court ruled that the company infringed on two patents held by Mformation Technologies, Inc. (privately held).
Mformation, a developer and provider of mobile device management software for mobile providers and cloud-based mobile management software systems for end users, developed "BlackBerry Enterprise Server" (BES), a software package used in RIMM's support platform for BlackBerry mobile devices. BES connects collaboration software used on the BlackBerry — such as Microsoft Exchange, Lotus Domino, and Novell GroupWise — and redirects and synchronizes contact and calendar information between the servers used by desktop computers, laptops, tablets, and other mobile devices. BES also permits enterprises to remotely manage the BlackBerry mobile devices of their employees.
Mformation disclosed details of BES to RIMM approximately five years ago when both companies were negotiating a licensing agreement. In the case, originally filed in 2008, Mformation alleged that RIMM infringed on two of Mformation's patents covering BES by modifying RIMM's own software. A jury of the United States District Court for Northern California, based in San Francisco, held that RIMM's actions had, in fact, infringed upon Mformation's two patents. The court ordered RIMM to pay US$8.00 for each of the 14.8 million units of the software that were installed in BlackBerry devices for sale in the United States, resulting in a total of US$147.2 million to be paid by RIMM to Mformation.
However, the damages imposed upon RIMM cover only sales already made in the United States. The same court will determine later this year the damages to be paid by RIMM for past sales made outside of the United States and expected future worldwide sales for devices using BES. Additional damages for these sales could more than triple the total amount of damages to be paid by RIMM, resulting in a total hit against the company that could approach US$500 million. RIMM had unsuccessfully argued to the court that the two patents which Mformation claimed the company had infringed were invalid and, therefore, could not serve as the basis for any damage claim against RIMM. RIMM stated that it may appeal the decision, dependent upon the trial judges’ rulings on several issues related to the calculation of damages in the case. An appellate court would not be expected to issue a final decision in the case for several months, or even years, after an appeal is filed.
The court decision against RIMM comes as yet another setback for the company this year. RIMM has seen its share of the smartphone market quickly slip away this year despite efforts to introduce its new "BlackBerry 10" device to the market. RIMM started 2012 with almost 13% of the smartphone market, but that share fell by more than half to just 6.4% during the first quarter of this year. RIMM has delayed the production of "BlackBerry 10" twice this year, claiming that the various software packages used in the phone have not yet been melded into a "seamless environment.” RIMM now states that it intends to introduce the "BlackBerry 10" to the U.S. and Canadian markets in early 2013. These misfortunes have caused RIMM to eliminate the jobs of almost 5,000 employees — almost one-third of its work force — this year alone.
RIMM is also facing severe direct pressure on its gross revenue from competitors AT&T (NYSE: T) and Verizon (NYSE: VZ) in the form of reduced "user fees." RIMM charges user fees to these and other wireless carriers so that those carriers' users can access RIMM's subscriber network. These user fees represent approximately 36% of RIMM's annual gross income. Should AT&T, Verizon, and other wireless carriers be successful in negotiating a reduction in such fees, RIMM would be forced to dip into its US$2 billion cash reserve to maintain operations. RIMM suffered a loss of US$518 million during the first quarter of 2012.
RIMM's user fees are a major sticking point for other wireless carriers as RIMM is the only carrier to impose such fees on its competitors. The reduction, or even the elimination, of these fees would result in an increase in the bottom line of the other wireless carriers by a couple of percentage points, but it could send RIMM into a "death spiral" which many market analysts believe RIMM has already begun.
These problems have not gone unnoticed by other companies that have come to depend on RIMM for communications services. The Internet domain and hosting giant GoDaddy Group, Inc. (privately held), is reported to have developed contingency plans should RIMM not be able to maintain operations in the near future. RIMM provides all wireless services to GoDaddy's employees, as it does for many other major corporations. RIMM's largest market segment is corporate services for employees. Should RIMM fail, or be bought by another carrier, the primary beneficiaries are expected to be Apple (NASDAQ: AAPL) and Google, Inc. (NASDAQ: GOOG) because of their prominence in the smartphone market. While many analysts do not expect RIMM's network to simply be "turned off," they believe that any dissolution of RIMM would provide both Apple and Google with a great opportunity to further establish their dominance in the smartphone industry, or maybe even provide for one or both companies to operate the RIMM system in whole or in part.
I am very skeptical of RIMM's long-term future. The company has suffered a number of setbacks this year which has resulted in a loss of its stock's value by almost two-thirds this year — and this is merely part of a continuing trend over the past five years that has seen RIMM lose 80% of its value since 2007. RIMM is trying to assure investors that the situation is under control and everything will be fine with the company once again when it introduces the "BlackBerry 10" in early 2013. I'm not so sure about that. The BlackBerry product has fallen so much it seems almost impossible that RIMM will be able to make up those losses and return the product to its former dominance in the smartphone market based solely on the introduction of a revised product. I do not see holding onto or expanding a position in RIMM stock as being a financially wise strategy for the investor.
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