Agree it's not the carbon ring (although if you've been revving it out of water for long at all, you may need a new one). The carbon ring only gets cooled in the water, so high revs out of water will quickly overheat and damage it. Avoid revving for more than a couple seconds out of water, and limit out of water operation as much as possible if you have a carbon ring.
A failed carbon ring won't cause blue smoke. When the carbon ring fails, you get air into the water stream, exactly as tjones823 said, and the symptom is a loss of acceleration power. However, you will get high RPM's when this occurs--the air causes cavitation, which makes it *easier* for the engine to spin the pump. So high RPM accompanied by a loss of acceleration is a carbon ring or jet pump issue, whereas you said you were getting low RPM with a loss of acceleration, which is an engine/fuel system issue.
I'd also recommend checking the rectifier, although that doesn't explain the blue smoke. Here's a good video, even though you don't have a 787.
I agree that if you're getting blue smoke, something's may have gone wrong with the engine. Check compression and start looking at your engine.
Also, just because a sea-doo runs fine out of water doesn't mean you don't have a carb problem or something else with engine performance. It takes a *lot* less torque to run out of water than in. For instance, my 96 GTX is currently not revving above 2500 RPM in water, but easily hits 5500+ (haven't tried to go higher) out of water. I believe the rectifier has failed in mine. So only in-water tests really apply when checking engine performance.
