RIMMjob

Last night’s earnings release from RIMM was interesting, to put it mildly.  So was the dump-and-recovery in the stock.

There’s an interesting pattern in RIMM that has been seen before with various announcements.  Check this chart out:

This is a stock I steadfastly refuse to trade because of the appearance, to this technician’s and analyst’s eye, of impropriety.

Notice how in the day or two before each of those gaps the price is moving in the same direction as the gap?  This happens from time to time, but when it happens virtually every single time there is a gap in the chart, and the chart is full of gaps like this, you’re playing with a jar of nitroglycerin – and, in my opinion, there are too many leaks in the information stream.

You are always trading against other people in the markets, but when it looks like you’re also trading against leaks of material information to certain selected people on a consistent basis I want no part of it.  Analysis goes right out the window in such a circumstance – while it would appear that you simply "follow the herd" when the gaps are 10% or more moves you’re asking to get your head blown off.

Last night the original response to the earnings release was pretty awful with the stock initially trading down to $71.19 on the earnings release.  Then the stock started a relentless climb back to essentially unchanged from the close, with many analysts crediting the conference call, and of course this morning there are the expected set of analyst upgrades.

Let’s leave aside the usual "herd mentality" games in the analyst community ala 2000-2003, which by the way led people over the cliff.  If you’re a believer in the meme that the recession is essentially over and that we will return to economic growth (leading to massive unit growth for both consumer and business sales as pent-up demand is released) then you’re one of those who thinks that debt doesn’t matter and the common law of business balance has been repealed.  I wish you the best of luck with that premise; I disagree as my underlying thesis is that irrespective of the attempts of The Fed and others to paper over the bad debt in the system we’ve reached the limit of being able to play "bubblenomics" for any material amount of time, and that gravity will assert itself sooner rather than later.

No, I want to focus on this article from the WSJ last night:

WASHINGTON — Exclusive deals that allow wireless phone companies to lock up the hottest cellphones for their customers are coming under review by the Federal Communications Commission.

Julius Genachowski, the Obama administration’s nominee to head the FCC, said he would order a review of complaints about exclusive phone deals, according to his written response to questions submitted by Sen. John Kerry (D., Mass.), after a confirmation hearing earlier this week.

In the United States these sort of "exclusive deals" are part and parcel of the wireless phone landscape.  They provide the basis for the phone subsidy that allows you to get a $99 iPhone or similar deal on the new Palm Pre.  These sorts of deals are inherently vertical restraints of trade but whether they are improper is a matter of market control. 

To the extent they drive competition, as the carriers and vendors claim, they’re positive for the marketplace.  But to the extent they, along with contract-break penalties restrain movement of customers from one carrier to another in search of the best deal, they are both market negative and potentially unlawful.

We have lived in a world for the last thirty years in which various anti-trust measures have become little more than a bad joke.  This is tolerated by the public mostly due to the perception that "it doesn’t hurt me", but in fact it does.

Let’s look for example at T-Mobile’s current data and voice plans for unlimited service.  If you’re a "loyal customer" with T-Mobile you can get single-line unlimited minute voice service for $50 with another $30 for unlimited data and messages (any sort, text or multimedia.) 

What does AT&T sell this plan for?

$100 – double the price.

And AT&T’s data and messaging for PDAs (of which the iPhone is)?

$50 – nearly double the price.

So to get the iPhone I must buy a service plan that costs $150/month.

Now to be fair, if I’m a "new" T-Mobile customer, that $50 voice plan is not available to me at the outset.  But the messaging + data price is.

So where’s the "benefit" to me as a customer?

Clearly, AT&T believes they can drive customers to their network and sustain a higher price as a consequence of the exclusivity of their offering of the iPhone – a second company’s product.

We are supposed to have laws that make deals like this subject to a balance-of-benefits test.  To the extent that they promote competition they’re lawful.  To the extent that they restrain trade they’re not.

The problem is figuring out which is happening here.

Oh, and this works in reverse too – T-Mobile has the "exclusive" on the G1, and for that phone they require a "special" data plan that you cannot remove – even if you don’t want wireless data (you intend to only use data over WiFi, which the phone supports.)

Why the "required" plan?  Is it, once again, because of the "stranglehold" on the exclusive deal?

Maybe.

Is this beneficial to consumers?  I don’t see how demanding that someone buy a service feature they don’t want in order to own a given device is "beneficial."  In fact that’s pretty much the definition of an improper tied sale under anti-trust law.  Anyone remember IBM and their "forced" tied sales in the mainframe business – a practice that got them sued back in the day by the government?

That the FCC (and the FTC) have refused to step in and stop this nonsense is an outrage.  We as consumers have seen companies become more and more bold in their "tied sale" arrangements over the last few years, especially in the wireless industry, in an attempt to lock people up and force them to pay what amounts to a fine to cancel service.

The one year contract was the original standard.  Now "the standard" is two years.  Cell providers say that reducing churn is beneficial to everyone.  But the truth is that the two year contract allows them to curtail or even destroy your service quality and leave you with no recourse.  While they obviously can’t do it to everyone and remain in business for you the customer whether 98% of their customers have service doesn’t matter.  All that matters is if YOUR phone has service where you live and work.

In addition the 2-year contact puts you at quite a bit of risk since many of these devices are effectively obsolete within 12 months, and if used frequently their service life is often not much longer than one year.  This is particularly true for devices such as the iPhone which does not have a user-replaceable battery!

So you have a 2-year contract but a 1-year device; many people have had the unpleasant experience of being effectively forced to buy a replacement phone at full price due to forced 2-year agreements.

That the FCC is willing to start looking into this, and might actually apply a harms-and-benefits test, is long overdue.  And should that test curtail some of these "deals" RIMM is a likely beneficiary, since for the most part Blackberries are available across all providers – even though some, such as the Storm, are at present carrier-specific.

Bottom line: If there is a real change in heart a pair trade – short Apple, long RIMM – would appear to be warranted.  Both have similar P/Es and a pair trade negates the risk of macro economic changes in either direction.  On the other hand if you believe that the current "trust-like" structures will be maintained then RIMM, given its far less carrier-specific view of the world, would be the loser to both Apple and Palm, and being long Apple (I exclude Palm here due to its stretched valuation) while short RIMM would be the correct position.  I happen to believe in free(er) markets but in terms of handicapping actual meaningful trust-busting activity, in this day and age, is difficult, so I am holding off on both until the FCC’s direction is more clear.

Disclosure: No position in any cellular-related firms.