Can RIM Recover?
At the sprawling Future Shop store in downtown Vancouver, anyone who wants to check out RESEARCH IN MOTION's BlackBerry PlayBook tablet must find it first. When the device debuted in April amid a glitzy ad campaign, it enjoyed front-and-centre billing at the store, but by last week only a single, neglected PlayBook sat collecting dust among the aging Bolds and Curves, two of RIM's geriatric smartphone models. Just steps away, throngs of customers crowded around displays of shiny iPhones and iPads.
The PlayBook was supposed to catapult RIM back to its dominant perch in the mobile technology sector. After steadily losing ground in the smartphone wars to rivals like Apple and Google, the company's co-CEOs Jim BALSILLIE and Mike LAZARIDIS promised the device would redefine the burgeoning tablet business and set the stage for a new generation of BlackBerry devices. Instead, since the PlayBook's launch, RIM has been plunged into the darkest period of its 27-year history. The past few months have been marred by an ugly string of profit warnings, product delays, recalls, and a host of nasty commentary from once boosterish analysts.
Patience is wearing thin. Consumers are increasingly gravitating toward RIM's rivals and investors are selling their shares, which traded as low as $25 in recent months (compared to a high of nearly $150 three years ago). Perhaps most ominously, for the first time there are rumblings that some of RIM's biggest customers--the wireless carriers that actually buy its devices and wireless email services and sell them to their subscribers--are losing faith.
As calls for a management shakeup grow louder, Balsillie and Lazaridis remain unfazed, stressing that a turnaround is well under way. They point to a new operating system that will underpin a new generation of BlackBerry "superphones" that is considered so robust that it has been used to power nuclear reactors. Still, skeptics abound. Billionaire investor Stephen Jarislowsky, the chairman of investment firm Jarislowsky Fraser Ltd., likens the challenges facing RIM to his print of the famous Japanese painting of a giant wave about to wash over several small boats: "If you're not on top of that wave, you're going to get swamped," he says. "These guys were resting on their laurels."
The question now is whether Balsillie and Lazaridis, widely regarded as two of the best entrepreneurs Canada has ever produced, can paddle their way back to the top of the industry.
Coming from any other investor, Jarislowsky's comments would merely be damning. But given that his firm was once RIM's sixth- largest shareholder, it's devastating. His firm has said it is selling half of its RIM shares and Jarislowsky has publicly accused Balsillie of being distracted by his pursuit of NHL hockey teams and political science think tanks.
And it's not just Jarislowsky complaining. Many Bay Street and Wall Street analysts have also turned decidedly sour on RIM's chances. The harshest criticism stems from RIM's apparent inability to keep pace with rivals in developing and delivering new devices for consumers to salivate over. Though RIM's current lineup of BlackBerries are the best it has ever built, none of them raise the bar the way Apple's iPhone did when it debuted in 2007. In fact, some would say RIM still doesn't have an equivalent touchscreen device in its lineup, four years after the fact. "We believe RIM has now squandered nearly every opportunity and competitive advantage it enjoyed through ineffective R&D resource management, delayed product launches and misreads of the competitive environment," Morgan Stanley analyst Ehud Gelblum wrote in a note to clients.
RIM's hopes are pinned on an operating system made by QNX Software Systems, an Ottawa-based company RIM scooped up last year. The software is already running the PlayBook and will eventually power every BlackBerry in RIM's lineup. But the PlayBook's troubled launch--reviewers have seized on a lack of key applications, like native email--has raised nagging questions about RIM's ability to execute its plan. Nor does it help that the updated BlackBerries that were supposed to whet consumer's appetites in the meantime using the new BlackBerry 7 operating system have been delayed--reportedly because RIM realized midway through their development that the phones would be outdated before they hit store shelves.
RIM may have an even bigger problem than unimpressed investors on its hands. Industry insiders who spoke to Maclean's suggest that RIM may also be on thin ice with several big wireless carriers, which it counts as key strategic partners. Not only do the carriers buy devices from RIM that they resell to customers, they pay RIM a sizable chunk of subscribers' monthly bills in exchange for handling email services. Some in the industry have taken to calling it the "RIM tax" and its been estimated by analysts to account for anywhere from 10 per cent to 40 per cent of the data charges customers pay carriers each month. When RIM dominated the smartphone market, carriers didn't have much choice but to make those payments. That's no longer the case. "I think carriers will be looking at RIM and saying, 'We can't keep paying this fee every month,' " says Scott Searls, a former senior vice-president of supply management for U.S. carrier T-Mobile, one of RIM's biggest U.S. customers. He adds that carriers now have a wide variety of Android-powered devices made by vendors such as Samsung, HTC and Motorola to choose from--most of which are hot sellers and come with more attractive profit margins. "I think that's an approach that won't be sustainable. One way or another, RIM will have to address that."
One only needs to peruse the websites of U.S. wireless providers to see the devices that are being highlighted for consumers. It's only after a page or two of scrolling that BlackBerries finally appear. In the case of the PlayBook, at least one carrier, the U.K.'s O2, has taken a pass altogether, citing "issues with the end-to-end customer experience." AT&T has refused to approve the PlayBook's critical Bridge application, which allows users to get email on the device (the current version of the PlayBook must be paired with a BlackBerry to use these features). Since RIM relies heavily on carriers to market and promote its devices, it's becoming increasingly clear that RIM's sales aren't going to improve until it delivers something for their subscribers to get excited about.
In a statement, a spokesperson for the company said RIM continues to work closely with carriers around the world to bring phones using its new BlackBerry 7 operating system to market, with the first phones expected to ship by the end of August. As for the agreements RIM has with carriers for ongoing services, the spokesperson said, "RIM operates one of the world's largest private networks and this global infrastructure enables high value, push-based services such as [BlackBerry Messenger] and offers many unique advantages for both carriers and customers in terms of enabling leading performance, network efficiency, battery life and security."
Still, if RIM is forced to retool its carrier business model to better reflect the BlackBerry's declining desirability, it will put a further squeeze on its already falling margins, potentially driving its stock price even lower. That is, unless Balsillie and Lazaridis manage to wow everyone with the next generation of BlackBerry models--which increasingly means not just closing the gap with the competition, but pulling ahead. "I think the true acid test will be this fall, when RIM comes out with a number of new devices around the world," Searls says. "They have to get a no s--t, dead-bang winner."
The stakes for RIM could not be higher. While the company is certainly not in financial trouble--RIM earned US$3.4 billion in its most recent fiscal year and has zero debt--it's the long-term outlook that has investors worried.
There are an estimated five billion cellphone subscriptions across the globe, and many of those users are expected to one day upgrade to the sort of multimedia-capable smartphones sold by RIM, Apple and others. The concern is that just as Microsoft came to dominate the market for desktop computers, just one or possibly two companies will eventually dominate the mobile space. There simply may not be room for a third player, which is likely why Finland's Nokia, which is set to be overtaken as the world's biggest handset manufacturer, recently shelved its efforts to build a new smartphone platform and is instead planning to use Microsoft's mobile operating system.
Former employees say RIM's troubles all started with the 2007 debut of the iPhone, a device that did for Web browsing what the BlackBerry did for messaging. It was a clear warning shot across the industry's bow, but one that apparently wasn't taken seriously enough on RIM's Waterloo campus. "It was like, 'Apple will have to do all this marketing and we're the leader in the smartphone segment, so they will just be paying all this money to push us to the top,' " said an executive of a rival company and a former RIM employee who asked that his name not be used. It didn't turn out that way. RIM's share of the U.S. smartphone market has been whittled to 25.7 per cent from 30 per cent at the beginning of the year and more than 40 per cent back in 2007. Meanwhile, Apple now owns 26 per cent of the market, while devices running Android have soared to 36.4 per cent, according to data from research firm ComScore. (In Canada, by contrast, RIM leads with 42 per cent of the market, followed by Apple at 31 per cent and Android at 12 per cent.)
Nick Bontis, a professor at McMaster University's DeGroote School of Business, says RIM's predicament isn't unusual in the fast-moving tech world. "There are plenty of examples of organizations that had competition come from nowhere," he says, from MySpace to Yahoo. At the same time, RIM is trying to fight off Silicon Valley rivals with a bloated corporate structure and young workforce, due to years of frenzied growth. (RIM has revealed plans to "streamline" its workforce after more than a dozen acquisitions.) "They accelerated growth so fantastically fast that the structures were lagging to keep up," Bontis says. "The journey of how they got here is not full of mistakes--there was no fatal flaw. The only thing you can criticize RIM for is that they were too slow to react."
Certainly, all is not yet lost. RIM still has time to mount a meaningful comeback. Several tech bloggers and analysts have expressed excitement about the possibilities of RIM's QNX platform. And, as many have pointed out over the years, the BlackBerry remains the go-to device for big business and government departments, many of which have already invested millions in buying BlackBerry Enterprise Servers (the hubs through which a company's email and communications traffic flows). They aren't jumping into the arms of Apple or Android just yet, although some studies suggest that as many as 70 per cent of iPhone users plan to use it as a business tool (whether their security-conscious corporate IT managers will play along is another question).
"The company has made mistakes, no question," says Anthony LeBlanc, former vice-president of global sales at RIM, a position he held for eight years until he left in 2008 (he still owns RIM shares). But he points out that RIM has faced tough times before, recalling the patent suit that at one point threatened to shut down the entire network and eventually cost US$612 million to settle. "Our future was considered in jeopardy, only to lead to the greatest growth period in the company's history." As for the calls to replace the co-CEO structure and a shareholder proposal to separate the CEO and chair roles, which will be voted on at RIM's annual meeting next month, LeBlanc defends Balsillie's and Lazaridis's leadership: "I can say that while I was a member of the team, they were the only two non-replaceable members."
Indeed, former employees argue that it's not that Balsillie and Lazaridis don't "get" the consumer market, but that they don't necessarily share everyone else's view of what's needed to be successful. Balsillie, for example, has tended to downplay the importance of apps, or applications, when it comes to smartphones, by arguing that many simply replicate material that's available for free on the Web. "I don't need a YouTube app to go to YouTube," he said during a conference in San Francisco last year (which may help explain why developers are increasingly taking a pass on building applications for the BlackBerry). And yet, apps remain a big selling point for Apple and Android, as the whole Angry Birds phenomenon attests. Lazaridis, meanwhile, has talked at length about the BlackBerry's ultra-efficient use of bandwidth, which hasn't necessarily resonated with consumers, but could help RIM justify its high fees charged to carriers as they struggle to support skyrocketing data loads on their networks.
Regardless, some aren't sticking around to find out how it all ends. Jarislowsky, for one, says he's seen hot new consumer items come and go over the decades, and they invariably follow the same pattern--after a period of feverish demand, rivals flood the market until the product becomes commoditized. It was the case with radios, TVs, microwaves, even the ballpoint pen, he says, and smartphones and tablets are no different. He predicts the same fate will eventually befall Apple, despite investor enthusiasm for all of its iProducts. "I've seen these patterns for 60 years, and yes, every once in a while I'm mistaken and a phoenix rises out of the ashes," he says. "But it's hard to make a soufflé rise twice."
Maclean's July 11, 2011