Shares of BlackBerry maker Research In Motion Ltd RIMM.O RIM.TO fell more than 16 percent on Friday on fears that a new fee structure for its high-margin services segment could put pressure on the business that set it apart from competitors.
The services segment has long been RIM's most profitable and accounts for about a third of total revenue. Some analysts said there was a danger that the Canadian company could become just another handset maker without a successful service ecosystem.
The fee changes, which RIM announced on Thursday, overshadowed stronger-than-expected quarterly results. The company said the new pricing structure would come with the introduction of its long-awaited BlackBerry 10 products, expected on January 30.
RIM said some subscribers would continue to pay for enhanced services like advanced security. But others will account for less service revenue, or even none at all.
Chief Executive Thorsten Heins tried to reassure investors in a television interview with CNBC on Friday, saying RIM's "service revenue isn't going away."
He added: "We're not stopping. We're not halting. We're transitioning."
Since taking over at RIM in January, Heins has focused on shrinking the company and getting it ready to introduce the new devices, which the company says will help it claw back ground it has lost to competitors such as Apple Inc (AAPL.O) and Samsung Electronics (005930.KS).
But the news of the new services pricing strategy came as a shock to markets, and some brokerages cut their price targets on RIM stock.
RIM will not be able to sustain profitability by relying on its hardware business alone, said National Bank Financial analyst Kris Thompson, whom Thomson Reuters StarMine rated the top analyst based on the accuracy of his estimates of the company's earnings.
Thompson downgraded RIM's stock to "underperform" from "sector perform" and cut his price target to $10 from $15.
RIM's Nasdaq-listed shares were down 16.7 percent at $11.76 late Friday morning. The stock fell 16.2 percent to C$11.69 on the Toronto Stock Exchange.
The shares kicked off a rally in early November, as some investors bet that BlackBerry 10 would turn the company around. Even after Friday morning's drop, the stock was still more than 90 percent higher than it was three months ago.
COUNTDOWN TO LAUNCH
The success of BlackBerry 10 will be crucial to the future of RIM, which on Thursday posted its first-ever decline in total subscribers.
Heins said on CNBC that the company expected to ship millions of the new devices.
He cautioned that this will require heavy investments, which will reduce RIM's cash position in the fourth and first quarters from $2.9 billion in the third quarter. However, he said it would not go below $2 billion.
Still, doubts remain about whether RIM can pull off its transformation. Needham analyst Charlie Wolf said the BlackBerry 10 would have to look meaningfully superior to its competitors for RIM to stage a comeback.
Canaccord Genuity analyst Michael Walkley said it was highly unlikely that the market would support RIM's new mobile computing ecosystem, and he remained skeptical about the company's ability to survive on its own.
"We believe RIM will eventually need to sell the company," said Walkley, who cut his price target on RIM shares to $9 from $10.
Baird Equity Research analysts said BlackBerry 10 faced a daunting uphill battle against products from Apple, as well as those using Google Inc's (GOOG.O) Android operating system and, increasingly, phones with Microsoft Corp's (MSFT.O) Windows 8 operating system.
Baird maintained its "underperform" rating on the stock, while Paradigm Capital downgraded the shares to "hold" from "buy" on uncertainty around the services revenue model.
"RIM has gone from having one major aspect of uncertainty - BlackBerry 10 adoption - to two, given an uncertain floor on services revenue," William Blair analyst Anil Doradla said.
RIM will have to discount BlackBerry 10 devices significantly to maintain demand, Bernstein analyst Pierre Ferragu said.
But the BlackBerry still offers security features that helped it build its reputation with big business and government, a selling point with some key customers.
Credit Suisse maintained its "neutral" rating on the stock, but not because it expected BlackBerry 10 to be a big success.
"Only the potential for an outright sale of the company or a breakup keeps us at a neutral," Credit Suisse analysts said.
Separately on Friday, ailing Finnish mobile phone maker Nokia NOK1V.HE said it had settled its patent dispute with RIM in return for payments. Nokia did not disclose detailed terms, but said the deal included a one-time payment to be booked in the fourth quarter, as well as ongoing fees, all to be paid by RIM.
(Reporting by Chandni Doulatramani in Bangalore and Allison Martell in Toronto. Additional reporting by Sinead Carew in New York; Editing by Ted Kerr, Dale Hudson, Janet Guttsman and Lisa Von Ahn)