Losing the Signal: The Spectacular Rise and Fall of BlackBerry (31 page)

By mid-2011, RIM’s China strategy was taking shape. RIM allocated $30 million to build data centers in Beijing and Shanghai; CIC tentatively agreed to buy a controlling stake in a Chinese firm that would license BlackBerry 10 software to local phone makers. RIM would get $5 for the sale of each handset using its software—generous terms that Balsillie says would have generated $1 billion in annual profit. “RIM was being handed a lottery ticket,” he says. If the China plan succeeded, RIM could offer the same deal in India.

Some RIM colleagues were uneasy with the strategy and worried that copycats would cannibalize RIM’s handset sales, a fear Balsillie rejected. Under his plan, licenses would be limited to countries where BlackBerry was a marginal player. Others feared alienating the U.S. government. Would military and security forces continue to use BlackBerry if China was plugged into the same system? According to one senior RIM executive at the time, “Jim didn’t see the optical risks China posed for our U.S. market.”

The China strategy was one-half of a two-part licensing strategy that Balsillie was convinced could save RIM by making the company’s proprietary software and services available on rival handsets. After meeting with several carrier CEOs in February 2011, he came away with a view that the company had to undergo a brutal transformation to save itself—“strategic chemotherapy,” he called it. Daniel Hajj Aboumrad, CEO of the Mexico-based carrier América Móvil, delivered the grim prognosis that RIM would succumb if it didn’t pursue a radical course of attack. With cheap Androids flooding the market, he warned that his company, controlled by Aboumrad’s father-in-law, billionaire Carlos Slim Helú, would shift much of its business to the Google platform unless RIM slashed its prices.

Balsillie concluded that RIM’s hardware business would never recover. “When the game changes, if you’re not able to become what the game is now, you must pivot to another game,” he says. “I saw a tsunami of Androids coming and didn’t want to bet everything” on BlackBerry 10 smartphones. RIM, he says, had to offset the vulnerability of the hardware business with “a big, big shift.”

Balsillie’s pivot strategy originated with Aaron Brown, the RIM midlevel executive charged with collecting the monthly service access fees from carriers. By 2010, RIM was earning $800 million per quarter in revenue from these fees. Carriers were always pushing RIM to lower the fees, and Brown could
see it would be hard for RIM to hold them off much longer as its market position weakened. To protect those revenues, RIM had to find a new reason for carriers to keep paying. The answer, Brown thought, was to capitalize on one of RIM’s few remaining successes: BlackBerry Messenger. The mobile instant messaging service and upstart rivals, including WhatsApp and Kik, were starting to threaten a lucrative source of revenues for carriers: text messaging. In 2010, carriers globally earned over $100 billion in revenues annually from short message service, or SMS, sent between mobile phones. The service cost so little to run that the vast majority of sales flowed to the bottom line as profit. Carriers typically charged $10 to $20 per month for SMS plans in developed markets. BBM and its rivals, by contrast, did not require a separate monthly fee, so customers could send hundreds, even thousands, of messages per month at no cost provided they stayed within the limits of their data plans. The popularity of these and other messaging platforms such as Skype skyrocketed. In 2011, users sent 4.4 billion of these so-called over-the-top messages per day, just over a quarter the number of SMS texts sent. It was just a matter of time before instant messaging surpassed SMS text volumes.

Carriers were just starting to grasp the emerging challenge: their profitable SMS revenues would gradually erode as customers turned to BBM and its peers. If one of these instant messaging apps became the global standard for smartphones, SMS revenues could plummet. Worried carriers banded together to build their own instant messaging platform, called Joyn, but, as with past carrier-led initiatives, it gained little traction with consumers and few carriers adopted it. One commentator labeled Joyn “zombie technology.”
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The prospect for instant messaging becoming the defining killer app of mobile was exciting, but Brown was deeply troubled about how BBM fit into that evolving landscape. Competition among instant messaging apps was inevitable, but BBM was handicapped because the service only worked on BlackBerrys. If it stayed within the RIM ecosystem, BBM would lose its appeal in a world where consumers wanted the freedom to send instant messages to any friend, regardless of whether they were using Android, Apple, or BlackBerry phones.

If RIM lost a BBM subscriber, it would also likely lose a handset sale and the associated service access fees. No other instant messaging service had that problem—they were software start-ups with a handful of employees, not hardware manufacturers. It was important to maintain and build BBM’s
popularity. The best way to do that, Brown felt, was to make it available on Apple and Android smartphones as a cross-platform application. This strategy presented a paradox: opening BBM to rival smartphones would eliminate one of RIM’s few distinctions and potentially prompt scores of customers to abandon BlackBerry. But they were already leaving. By opening up BBM to other platforms, RIM might still lose handset sales—but at least it would create new opportunities in a booming mobile service. While the idea sounded risky, Brown believed it was a better choice than the status quo, and just might save RIM.

Brown introduced his idea during a phone call with Balsillie on a Sunday in early 2011. RIM, Brown explained, could position BBM as a solution for carriers. They could preserve their SMS revenues by offering the instant messaging service as part of their basic monthly talk-and-text plans, no matter what brand of smartphone customers used. Brown called the plan “SMS 2.0.” With BBM’s enhanced features, SMS users would flock to using BBM instead and the user base of RIM’s instant messaging application would balloon. In exchange for embedding BBM in their basic plan to customers, RIM could agree to slash its service access fees to $1 from an average of about $4 per user.

It was a daring trade: if RIM was willing to sacrifice most of the service fee revenue and profit derived from its existing base of BlackBerry users, it could potentially more than make that up by expanding its BBM user base many times over among Apple and Android users. “This would have added $1 billion in service margin to the company annually and 100 million subscribers within a year, and built a new story for the BlackBerry brand, a new type of relationship with carriers,” says Brown.

Balsillie was intrigued but not immediately sold. The next day he floated the idea during a meeting with AT&T executives. They loved the concept of protecting their SMS business by harnessing the popularity of BBM. At that moment, Balsillie bit hard on SMS 2.0. It was as revolutionary as the first BlackBerry. “I thought, ‘Oh baby, it’s 1999 for us all over again if we pull this off,’ “ says Balsillie. He believed RIM could become bigger than Facebook by offering carriers a new offering built around BBM. But “we had to go fast,” he says. “If this didn’t happen, I had nothing else.”

Balsillie became so attached to the SMS 2.0 plan that he had RIM commit more than $125 million to buy a pair of companies to bring the strategy to life. New York–based Live Profile was a start-up instant messaging firm that gained 15 million active users within months of its April 2011 launch. Its
messaging software worked on Apple and Android platforms and its technology shared enough similarities to BBM that the two services could be easily stitched together, turning BBM into a cross-platform offering. Balsillie believed RIM had to offer other features as part of SMS 2.0, so his company also bought NewBay Software, a content storage firm that was already selling its services to carriers. With NewBay, RIM could sweeten the SMS 2.0 pitch by adding the ability for customers to store songs, pictures, and other digital content through their phones in an online “digital locker.”

Balsillie and Brown fleshed out several options. Carriers could offer an expensive plan that included BBM plus one gigabyte of cloud storage. Or, if carriers in developing nations committed to selling cheap BlackBerrys instead of Androids, RIM would waive the service access fee but still throw in BBM. That way, Balsillie figured, RIM could protect against declining handset sales while continuing to build the BBM network.

Lazaridis gave Balsillie his okay to pursue the strategy, but he had reservations: if BBM was available on rival smartphones, would people stop buying BlackBerrys? “I was making sure that whenever we figured out how to launch this thing it wouldn’t kill our [handset] business,” says Lazaridis. “It was up to Jim to convince the board that there was a strategy to actually get this into the market.”

Some carriers responded positively and by mid-2011, Balsillie was calling SMS 2.0 RIM’s top strategic priority. Balsillie thought he only needed a few carriers to sign on: a major player in the United States, one in Europe, and a global player such as Telefónica. If they joined, others would follow. But Balsillie didn’t have to just win over carriers. He faced a tougher challenge convincing RIM colleagues his plan wouldn’t kill the company.

RIM’s directors were running out of time. They had faithfully backed Balsillie and Lazaridis through so many storms: regulatory sanctions, product disappointments, and growing evidence, as one person close to the board puts it, that the CEOs were no longer “acting like a partnership.” The board’s loyalty endured because they believed the founders, fathers of an improbable global technology success, had the talent to pull RIM out of its tailspin. “We were reluctant to get tough with them; they were successful executives,” one director explained. Another factor was the absence of successors. Directors had to be careful about alienating Balsillie and Lazaridis because there were no experienced understudies. Thorsten Heins, a Lazaridis lieutenant, and Patrick Spence, Balsillie’s candidate, were identified internally as potential CEO material, but the board had limited contact with them and neither had the kind of broad executive training needed to run a struggling global company. With no stand-ins in the wings the CEOs had the upper hand. “If we were to say to Jim and Mike, ‘Well we’re the board and you should go away now,’ they would have laughed at us,” RIM director Roger Martin later told the
Globe and Mail.
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By mid-2011 there was no more time for excuses. The board was under too much pressure from shareholders to shake up the executive suite.

What started as quiet objections by a handful of shareholders was shaping into a full-blown revolt. Northwest & Ethical Investments, a small Toronto fund manager, pushed RIM’s directors into a corner by threatening to call a shareholder vote if the company did not appoint an independent chair. It’s not
uncommon for shareholders to push for a nonexecutive chairman to strengthen board independence. But few motions succeed because investors are loath to destabilize companies with boardroom coups. Initially a committee of independent RIM directors urged Northwest in private discussions to back away from its request. The directors lost their pull, however, when the company released first-quarter results.

On June 16, 2011, RIM announced that its financial condition was much worse than feared. For the fiscal first quarter ended May 28, RIM reported a 12 percent drop in sales from the previous quarter, to $4.9 billion, while profits plunged 26 percent to $695 million as its U.S. subscriber base deteriorated. In response, RIM began layoffs, the first in nearly a decade, trimming its workforce by 10 percent, including, for the first time, senior executives such as David Neale and Jim Tobin. Others, including some old-timers who had grown weary of the infighting and product failures, put up their hands and asked for buyout packages. RIM could no longer deny its condition. The small technology company that had sidelined so many larger players as it established the global smartphone market was now succumbing to its savvier rivals Apple and Google. By the end of the week its stock price dropped below $28, erasing more than 50 percent, or $20 billion, from its peak 2011 market value. The nosedive prompted some major shareholders to publicly call for Lazaridis and Balsillie to step down as board chairs. Rather than listen to their shareholders, the embattled chiefs dug in.

In a conference call with financial analysts on the day of the grim earnings report, Balsillie and Lazaridis presented a resolute and united public front to their fractured partnership. To their critics and disappointed shareholders they had a simple message: Trust us and us
alone.

Appointing an outsider to run the board, Balsillie warned, would damage a company that he and Lazaridis were repositioning. “Taking the company to the next level of success and growth is also something neither of us can do alone. It’s something that would be incredibly challenging for someone from outside the company to manage successfully at this critical time in RIM’s development,” he said. Lazaridis reinforced the happy marriage narrative. “Jim and I recognize each other’s strengths and regularly discuss and work together to determine the best way to execute on the incredible market opportunity ahead of us,” he said. “While I can’t promise that there won’t be bumps in the road ahead, I can assure you that Jim and I have never been more committed to the business and that our interests remain closely
aligned with those of our shareholders.” With no new product details or delivery schedule to reassure investors, Lazaridis resorted to a moth-eaten mantra: “The BlackBerry platform provides the best balance in terms of cost, battery life, performance, and network efficiency.”

Some shareholders responded by unloading tens of millions of shares within days of the news. Others talked of insurrection. In June, Northwest went public with its call for a vote on an independent chair at RIM’s July annual meeting. The stand attracted immediate support. A few days prior to the annual meeting, a confidential report prepared by RIM’s proxy adviser suggested that 47 percent of votes cast would back the Northwest rebellion. Not a majority, not yet, but too close for comfort. To avoid a possible humiliation, RIM’s independent directors made peace with Northwest. The fund manager agreed to withdraw its motion in exchange for a commitment from an independent committee of RIM directors to decide within seven months whether to appoint an independent chair. The deal bought time for RIM’s board, while sending a strong signal to Balsillie and Lazaridis that they were under scrutiny. But two months later a small Toronto merchant bank, Jaguar Financial Corp., urged the board in a public statement “to seize the reins … before more market value is lost.” The message from investors was clear. Unless the CEOs delivered a huge win with BlackBerry 10, their tenure was in jeopardy.

Adding more stress, Lazaridis and Balsillie had to make room for some backseat drivers. In early October, RIM’s board pushed for an outside consulting agency, Monitor Group, to help reverse sagging U.S. sales. Boards seldom second-guess executives by calling for outside consultants. It’s even rarer to recommend a consulting firm with ties to company directors. RIM director Claudia Kotchka, a former Procter & Gamble executive who had previously tapped Monitor for consulting projects, proposed hiring the consulting firm. Director Roger Martin said he “heartily endorsed and supported” Kotcha’s recommendation. Martin founded Monitor’s Canadian branch and spent thirteen years with the firm as a consultant until 1998. Lazaridis and Balsillie, still bruised by Protiviti’s damning board report, viewed consultants as overpaid nuisances. They would have to tolerate them now.

While the board asserted itself, Lazaridis and Balsillie moved into higher gear. They had overcome so many daunting challenges before; they could do it again. The CEOs had been so young and inexperienced when they defied the limits of wireless technology, outsmarted much larger adversaries, and danced around domineering carriers. Their triumphs changed how the world
communicated and levitated a technology baby into a $20 billion global titan in just over a decade. It had all happened so fast. A torrent of demand meant RIM had to grow almost overmight from a young business into a global force with the kind of leadership and expertise to confront bigger and more ruthless Silicon Valley adversaries. For most of its history RIM had prevailed because its two CEOs acted as one: different men united by a vision of how to develop their business. As the company began to break apart under the pressure of legal, regulatory, and competitive pressures, so too did their partnership. At the very moment a unified executive front was most needed, Lazaridis and Balsillie pulled the company in different directions with opposing strategic ambitions.

Lazaridis staked the company’s future on hardware. Working with QNX’s Dan Dodge he oversaw teams of engineers designing new hardware and software for BlackBerry 10 phones. The team worked around the clock. “We had to change,” says Lazaridis. “We retrenched. We studied. We worked hard. It’s almost like everything else took a backseat. Our families took a backseat, our personal lives took a backseat … to make sure that we were making the right decisions.” Still, setbacks were frequent, supplier issues delayed chipsets designed for BlackBerry 10, and Ottawa-based QNX once again needed help from RIM’s veteran BlackBerry engineers in Waterloo.

Balsillie, meanwhile, saw a brighter future in software. He spent much of 2011 in company jets, visiting carriers and other potential partners with his SMS 2.0 plan for a new BBM instant messaging–based offering. The concept was radical and required face time with prospective partners. RIM’s lead salesman knew he would need big-name partners to impress a board he felt had grown “twitchy” from shareholder pressure. There were also challenges at home. His marriage with Heidi had ended and he had moved to a converted mill east of Waterloo to start a new life with Neve Peric, an executive at the Waterloo governance think tank Balsillie founded. Alone and restless on overnight flights, he took to writing a novel, pouring a version of his life into a manuscript in hopes of making some sense of his complex personal narrative. He describes the novel’s protagonist as a “neurotic WASP with a Métis background” who challenged boundaries. Writing was a small escape from the pounding RIM and its leaders were taking. “I was scared sleepless,” is how Balsillie remembers the long fall months of 2011.

When a business declines it begins gradually, almost imperceptibly, until so many failures pile up that the unraveling arrives with unnerving speed.

RIM had been in a slow descent ever since the Storm debacle in 2008. It waited too long to recognize the need for a new operating system to compete with Apple and Google, and when it finally jumped by acquiring QNX, internal disarray slowed its delivery. RIM’s decline gathered speed in the early hours of October 10, 2011, when Lazaridis was woken by a phone call. The company’s data center in the British city of Slough was knocked out. When he arrived several minutes later at RIM’s Waterloo campus, the scale of the crisis was projected on large digital screens in the control room of the network operating center. Many of the screens, once alive with blinking lights signifying traffic volumes, were now blank. All of Slough’s servers were down, and the onslaught of rerouted overseas BlackBerry messages had overwhelmed RIM’s mother ship. The Waterloo network operating center was lifeless within hours of Slough’s collapse. The only place messages were still moving was South America. BlackBerry messages circulated for another day until a flood of BBM messages hailing a key goal at a Buenos Aires soccer match toppled RIM’s last standing data center.

Hours turned into days, and still no BlackBerry service. RIM offered few explanations and no reassurances to more than 70 million customers stuck with dead BlackBerrys. “People across Dubai will start committing suicide soon if BBM doesn’t come back on. The whole city is addicted,” wrote one online commentator in a story about BlackBerry’s troubles in the
Guardian.
So addicted that police in the United Arab Emirates attributed a steep decline in traffic accidents to the outage.
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Finally, early on October 13, RIM released a short video statement from Lazaridis that was more alarming than reassuring. Dressed in a black BlackBerry polo shirt, appearing exhausted and puffy after seventy-two mostly sleepless hours of work, Lazaridis read stiffly from a teleprompter. “I’d like to give you an estimated time of full recovery around the world, but I cannot do this with certainty at this time,” he almost sighed. “We’re working tirelessly to restore your trust in us.” Media critics were unforgiving. “It is time to hang up on the stock,” railed the
Wall Street Journal
’s influential Heard on the Street column.
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“It doesn’t rain, it pours. Or in RIM’s case, it Hurricane Katrinas,” said the
Sunday Times
of London.
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“BlackBerry sorry, but is it too late?” asked the
Chicago Tribune
.
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After three days, the backlog of BlackBerry messages began slowly coursing through RIM’s network. It would take much longer to restore the
company’s reputation with customers. RIM quietly paid more than $50 million to compensate carriers for lost wireless data income. Once RIM learned that the root cause of the server breakdown in Slough was a defective Cisco router, Balsillie demanded compensation from the California network equipment maker. After weeks of discussions with senior Cisco officials, the California firm agreed to provide about $30 million in cash and other compensation to RIM.

The outage, the largest in RIM’s history, was a damaging blow to the company’s vulnerable CEOs. Their handling of the crisis set off a fresh round of questions about management practices. When he was marooned in Dubai, Balsillie’s once seemingly endless reservoir of energy began to evaporate. He was the company’s front man with carriers, which, after the network failure and his unfulfilled promises of a quick recovery, made him an industry punching bag. “It knocked the wind out of my sails,” he says. So much so, that in phone calls home to Peric he began to question his future at RIM. For Lazaridis, the failure of a network he had conceived and developed shook his faith in BlackBerry’s infallibility. “It was brutal on Mike—it was part of his anatomy” says RIM’s Don Morrison.

There would be no relief for RIM’s embattled CEOs. RIM again grabbed international headlines a month later, on November 25, as Jakarta shoppers suffered broken bones and other injuries when they were knocked down as hoards of customers flocked to a one-day half-price BlackBerry sale. RIM’s local manager was threatened with criminal negligence charges for failing to properly control crowds. Three days later, more police trouble: an Air Canada flight from Toronto to Beijing was forced to make an unscheduled landing in Vancouver after two RIM managers became rowdy. The men were on their way to China to inspect a PlayBook manufacturing facility, when, according to a lawsuit filed by Air Canada, they became so drunk and abusive they had to be restrained. Agitated and angry, the men chewed through plastic restraints, requiring attendants and nearby passengers to physically subdue them until the plane made an emergency stop in Vancouver. Days later, the managers pled guilty to charges of mischief, resulting in more bad press.