Losing the Signal: The Spectacular Rise and Fall of BlackBerry (29 page)

Back at RIM, not everyone was enamored of the BBM trio spending so much time on a self-directed pursuit outside of their duties, known in industry parlance as a “skunkworks” project. Klassen’s boss would shoo Wormald away if he saw him in the building, scolding him for distracting Klassen from his duties; and he gave Klassen a bad performance review—for spending time creating BBM. “Getting something to happen often takes a certain amount of self-initiative,” says Klassen. “There was a lot of work done during evenings and weekends.”

Finally, the BBM group was ready for the big test: winning Lazaridis’s approval. Wormald’s boss had BBM secretly loaded onto the BlackBerrys used by the CEO and his family. Once they came upon the app, they tried it and were hooked. Lazaridis’s assistant, Abbey Gilhula, was one of the first heavy BBM users; to see Lazaridis, one had to go through Gilhula, “and the way you got to Abby was on BBM,” says Wormald. BBM was quickly adopted throughout RIM.

BBM was ready to take to market by 2005. At first the carriers didn’t want BBM on BlackBerrys: they were suspicious of any service that enabled users to communicate without paying them anything. For a while RIM hid the free BBM download in the BlackBerry help menu, but by 2006, as RIM prepared its big push into the consumer market, it convinced carriers to preload the app onto devices.

BBM became popular in North America and Britain when RIM cranked up consumer sales, but its reach was transformative as RIM expanded globally. Its popularity spread quickly: BBM messages used little data and arrived instantaneously, making the service a welcome alternative to costly voice calling and text messaging services, especially in poorer countries.

BBM was also private and discreet. Messages were encrypted and passed only through RIM’s Relay system, not through servers controlled by corporations or governments. Each user was identified by the unique but anonymous PIN number associated with his or her device, a randomly generated collection of eight alphanumeric characters. If users chose not to reveal their identity, it would be impossible to know who they were. It was an irresistible tool for teenagers in conservative countries to communicate with friends and romantic interests away from the prying eyes of parents. In Dubai, young women embroidered their PIN numbers on flaps inside their burqas, turning them out discreetly to encourage men they fancied to BBM them, according to a senior RIM executive.

Not everyone was so coy. Pizzerias and politicians in developing countries advertised their PINs on the sides of delivery trucks, on posters and bumper stickers. Venezuelan president Hugo Chavez called his BBM and Twitter account “my secret weapon.
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In the United Arab Emirates, sheiks paid upward of $10,000 for a phone with a “golden PIN,” a device that carried an auspicious series of numbers and letters, such as 777.
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BBM users ran businesses and news services through BBM; in Bahrain, journalist Muhannad Sulaiman Al Noaimi sent daily summaries of breaking news and press releases to about 40 percent of the country’s seventy-eight thousand BlackBerry customers.
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BBM was a powerful communications tool, even revolutionary, for millions of people. For some repressive and security-minded governments, it would prove too revolutionary.

BBM’s success was bound to spark competition, and in 2009 and 2010, a rash of rival mobile instant messaging services began appearing around the world, including WhatsApp, Line, WeChat, and KakaoTalk. Unlike BBM, they worked across multiple platforms other than BlackBerrys and drew millions of new users each month. The one that irked RIM the most was Kik Messenger. Kik was hatched by a University of Waterloo engineering and mechatronics student named Ted Livingston who had completed three co-op work terms at RIM, including time on BBM. In 2009 Livingston decided to forego his fourth year to develop his fledgling start-up. His initial plan was to develop a music-sharing service that worked with BBM, but after several months he decided to instead create a BBM-like chat application that worked on all smartphones. Livingston approached his former superiors in early 2010 and encouraged RIM to broaden BBM to work on non-BlackBerry devices. With its head start in mobile instant messaging, he believed RIM could crush any rivals if BBM was available on all platforms. He even told RIM in March 2010 he would stop developing Kik if BBM went “cross-platform.” But the company wasn’t interested.
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“They absolutely refused and they said, ‘No, we won’t do that,’ “ Livingston said in a 2013 interview.
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“To be fair, from their perspective, it was hard. They said, ‘People are buying BlackBerrys for BBM.’ That was a real risk.”

Livingston launched Kik Messenger in April 2010 and claimed in court documents he told RIM of his plans. He was even invited to speak at a BlackBerry developer conference that September. But relations changed after he
relaunched Kik in October. After fifteen days, Kik had signed up 1 million users. At that point, Kik alleged in court documents, senior RIM executives “embark[ed] on a campaign to destroy or seriously harm Kik.” RIM terminated its agreements with Kik, removed Kik from its app store, and sued Kik for infringing on its intellectual property.
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Livingston asked one of his investors to intervene: Jim Estill, RIM’s longest-standing outside director. Estill responded by pressing Don Morrison to meet Livingston. According to a December 2010 memo from RIM’s law firm Bennett Jones to the board’s audit and risk management committee, Estill did not disclose his personal interest in RIM’s newest rival to Morrison or the board. The relationship raised a potential conflict of interest, the legal memo warned. Estill resigned shortly after the conflict issue was raised. He concedes his involvement with Kik put him in potential conflict with his position as a RIM director. “I thought I disclosed it from the start, but I could be mistaken,” he says. “That’s why you resign, you do the right thing.”

The spat with Kik was a warning shot in a larger battle that would play out within RIM over the next year, opening the greatest rift within the wounded company. As it lost its lead in the smartphone race, some RIM executives realized that if they did nothing, BBM would be surpassed by more open mobile chat services. Within months, it would become the personal mission of Jim Balsillie to make sure that didn’t happen.

Lazaridis watched in horror as the cabin of RIM’s Falcon became a blood-soaked mess. As the jet touched down in San Francisco on December, 7, 2010, a RIM developer on board reached into his bag. The plane hit a bump on the runway, causing him to slice open his hand on a carpet knife inside. “I’ve never seen so much blood—it was everywhere,” says Lazaridis. The engineer tried to compress the wound “but it was just spurting out,” says Lazaridis. “We had to call an ambulance to come right to the plane. He was ready to pass out.”

It was an ominous start to the day. Lazaridis had flown in for an onstage interview at a conference with the tech industry’s best-known journalists: Walt Mossberg and Kara Swisher. Lazaridis brought a working prototype of the PlayBook and was keen to show it off, but after the bloody landing, he was rattled.

It had been a tough fall for the PlayBook. Dr. No had been right: the September deadline was impossible. Yach could see that QNX was overwhelmed
by the task of delivering the PlayBook operating system. He loaned about twenty engineers to help QNX develop PlayBook, but behind the scenes he asked hundreds more of his reports to help with an array of tasks so Dodge’s team could finish the project. Many had to be trained in C++ or Adobe AIR, adding further delays. Lazaridis’s plan for following
The Innovator’s Dilemma
strayed from the script: it was evident QNX couldn’t do the job on its own and needed the help of the very engineers Lazaridis was trying to separate them from. Accommodating the new reserves delayed work on the update of the legacy BlackBerry operating system and ratcheted up ill-will among Yach’s legacy developers. By September, Lazaridis was only ready to announce the PlayBook’s impending arrival. It would be seven more months before PlayBook launched. By then, the iPad 2 was out, and it had a camera.

As RIM executives discussed how to take the device to market, they realized that with no native e-mail, no accessibility to virtual private networks, and no ability to hook up to printers, they couldn’t market PlayBook as an “enterprise” device to their core business and government customers; it lacked too many features to be a must-have work tool. Instead, they settled on describing it benignly as “professional.” “It’s all we had,” says Jeff McDowell.

The company wasn’t faring better developing PlayBook’s consumer appeal. Jim Tobin was supposed to strike content deals to provide multimedia offerings on the PlayBook and kept confidently telling colleagues that Rupert Murdoch’s News Corp., Condé Nast, and online magazine provider
Next Issue
would be on board. But in the end they weren’t. Tobin says he was “bluntly blindsided by the lack of certain features in the final product” and that media companies were scared off when their own research suggested PlayBook wouldn’t do well. But Lazaridis felt misled and pressed Balsillie to let Tobin go. Meanwhile, with few mobile developers working on Adobe AIR, the PlayBook’s app deficiency was glaring.
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Steve Jobs added insult to injury in mid-October when he said during an Apple earnings call that he couldn’t foresee RIM catching up to Apple because it had to venture into the “unfamiliar territory of trying to become a software platform company. I think it’s going to be a challenge for them to create a competitive platform and to convince developers to create apps for yet a third software platform.”
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Balsillie was starting to worry that PlayBook was “half-baked,” but he did what he had always done: talked up the product like it was the best device ever made. In public, Balsillie went on about how great Flash was and dismissed the “appification” of the Web, suggesting Apple relied so heavily on
mobile apps because its browser wasn’t able to deliver an adequate Internet experience without Adobe.
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Some observers thought Balsillie was losing it, but he was just making the best of a bad hand, says Patrick Spence. “His way of dealing with those situations was to go even more extreme the other way…. I think he was trying to overcompensate for not being in that strong a position. If Mike said Adobe’s the thing and we’re betting on AIR, Jim’s like, ‘I’m going to sell the shit out of it.’ ”

Lazaridis appeared nervous and halting as he walked out to meet Mossberg and Swisher.
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He fumbled as he set up the PlayBook for a demonstration. Lazaridis had expected friendly questions, but the conversation took a sharp turn. After letting Lazaridis wax on about PlayBook’s technology, Mossberg cut in: “Look, I’ll just be blunt about it. There’s a growing consensus that your BlackBerry platform … [is] looking old.”

Lazaridis’s answer confounded them. “By focusing on the tablet market, we see an opportunity to free where the smartphone can go,” Lazaridis said, breaking into a visible sweat. “We free it to become … a much more focused communications tool.”

Swisher was perplexed. “So what you’re saying is the tablet is the phone?” she asked. Lazaridis tried to explain RIM was now able to “optimize both of those worlds,” but he made little sense, going on about multicore processing and pulling in random details about the company’s global success. A blog covering the event on Gizmodo was titled “Can You Figure Out WTF RIM’s CEO Is Talking About?”
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As Lazaridis talked about the BlackBerry of the future, he seemed to be dismissing the company’s current smartphones. His interviewers looked as uncomfortable as their guest. “It wasn’t my best day,” says Lazaridis.

Perhaps the most telling remark was when Lazaridis declared that the three “defining characteristics of the tablet market” would be security, reliability, and multitasking. Lazaridis had it wrong. What Apple was teaching the mobile market was that consumers cared about three different things: style, content, and easy use. Four months away from the launch of PlayBook, RIM was still struggling to define the market for its new product.

“Depart! Depart!” chanted thousands of protesters pushing past police barricades in Cairo’s Tahrir Square. The demonstration on January 25, 2011, was not violent. Instead of rocks and Molotov cocktails, these dissidents carried BlackBerrys and iPhones to post images on Facebook trumpeting President Hosni Mubarak’s faltering hold on Egypt. The country’s eighty-two-year-old leader would be safe that night once police reinforcements chased protestors from the square. But the fight was far from over. Arab Spring was gaining momentum and Mubarak’s thirty-year-old regime wouldn’t survive unless it found a way to quell the uprising.

Balsillie was in a Swiss mountain town when he learned what kind of retaliation Mubarak had in mind. RIM’s chief had flown to Davos to join his friend, Wall Street legend George Soros, for the annual gathering of business and political royalty at the World Economic Forum. Other visitors included Microsoft’s Bill Gates, China’s prime minister Wen Jiabao, and former U.S. president Bill Clinton. Balsillie and Soros had come to announce a $50 million joint investment in a new global economic think tank, the Institute for New Economic Thinking. Balsillie had been looking forward to the trip for weeks, a welcome breather from anxious days and sleepless nights worrying about BlackBerry’s precarious U.S. sales. He and Soros had finished announcing their pact and Balsillie was driving to a celebratory dinner at a downtown restaurant when his BlackBerry buzzed with a call pulling him back to Waterloo.

It was RIM’s Vancouver-based chief legal counsel, Karima Bawa. A senior official from Egypt’s telecommunications regulator had just called to deliver an ultimatum, she said. State-owned Telecom Egypt had yanked the plug on BlackBerry service in the country, and it would stay off-line until RIM handed over encryption keys for coded e-mails and messages traveling through Egypt over RIM’s secure network. As his car moved through the snow-quilted streets of Davos, RIM’s boss struggled to make sense of what was happening. What did a phone maker from Waterloo know about tyrants and revolutions? “I’m shitting my pants,” Balsillie says, shaking his head, remembering the stress that night. “I didn’t take this course in business school.”

Balsillie did, however, understand that by allowing Egypt to decode encrypted BlackBerry messages he could be giving up protestors who relied on BBM messages to coordinate covert activities. “I didn’t start a tech company to help totalitarian governments kill protestors,” Balsillie told Bawa. Government prying was old ground for RIM’s chief and his legal counsel. BlackBerry’s protected network had been a magnet for prosecutors and governments for years. If police wanted access to e-mails, they needed a warrant. The same went for foreign governments; they had to demonstrate a legal right before RIM granted any access. By 2011 this last legal boundary was becoming tenuous, as India, Russia, and Arab governments pushed carriers and network operators such as RIM for access to encrypted wireless messages. In reality, RIM had no ability to help these regimes crack business e-mails, the bulk of its traffic, because corporate customers own a unique set of encryption keys inaccessible even to RIM. The company could, however, decode consumer messages relayed over its BBM service and BlackBerry Internet Service, a situation that left subscribers in the crosshairs of angry security agencies. The Egyptian ultimatum capped off weeks of difficult and still unresolved discussions with Indian security agencies demanding access to BlackBerry messages.

Balsillie would spend little of his long anticipated celebration dinner with Soros and friends. For most of the night he was outside the restaurant, working his BlackBerry, talking to Bawa and other RIM officials, weighing a response to Egypt’s ultimatum. Saying no to the Arab nation meant kissing good-bye to one of RIM’s fastest-growing markets, a loss it could ill afford as American customers retreated from BlackBerrys. But the financial hit and shareholder anger couldn’t be as bad as aiding and abetting execution squads. After several back-and-forth calls, Balsillie arrived at a decision. “We’re out
of Egypt now; we’re not doing it,” he instructed Bawa. As it turned out, Balsillie would never have to explain his decision publicly. The next afternoon, the desperate Mubarak government ordered Egyptian carriers to shut down, blocking everyone except the country’s stock exchange from Internet access. “We dodged a bullet. BlackBerry was no longer singled out,” Balsillie remembers. The Egyptian outage only bought Mubarak some time. Two weeks later, on February 11, the Egyptian leader resigned. By then Balsillie was back at RIM with Lazaridis confronting their own insurgency.

Waterloo Spring began early 2011, weeks after RIM’s directors appointed Balsillie and Lazaridis cochairs of the board. The decision to promote CEOs who had been sanctioned by regulators became a lightning rod for shareholder frustration. The two had paid huge regulatory penalties for an improper scheme that directors had missed for years. Now the same men were going to oversee the board? Frustrated with RIM’s deteriorating competitive position, shareholders pushed back. Privately, some urged company directors to reverse the controversial appointments and instead appoint an independent chair. The dissent put Balsillie and Lazaridis, RIM’s eternally confident leaders, on the defensive. The pair had been driven for years by the conviction that aggressive tactics would prevail in the ferocious smartphone race. Anyone who questioned them didn’t understand the rough-and-tumble wireless industry. Faced with rebellious investors, RIM’s bosses did not respond with grace or introspection. Their standard defense was to fix bayonets and charge.

Balsillie learned about shareholder complaints upon returning from Davos. An early challenger was the Ontario Teachers’ Pension Plan Board, one of Canada’s largest retirement savings reservoirs and a vocal enemy of poor corporate governance. Although the pension fund held a modest amount of stock, one portfolio manager was so alarmed by what he saw at RIM that he contacted a company director about his concerns. Upon learning that a shareholder had gone over his head to a director, Balsillie was furious. “Don’t your people realize how I’m working for shareholders?” Balsillie complained to Teachers’ CEO, Jim Leech, over the phone. Leech heard Balsillie out and then offered him a chance to tell his side of the story in a meeting with Teachers’ portfolio analysts and governance experts.

The meeting, which took place in Teachers’ offices in Toronto’s north end, did not go well. Basillie angrily chastised the portfolio manager who had approached Martin. While a half dozen Teachers’ representatives looked on,
horrified, Leech cut him off. “Stop! If you’re coming in to berate Teachers’ employees, this meeting is over now,” Leech said. Recalling the incident, Balsillie argues that
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was the one who was under attack. “It was an intense exchange where they were trying to intimidate me,” he says. The temperature of the meeting room dropped when Balsillie, recovering his upbeat bluster, predicted a rosy future for PlayBook and forthcoming new BlackBerry phones. When Balsillie left, the fund managers turned to Leech, mouths agape. Balsillie’s optimism was stunning. As part of standard market research they’d recently called a variety of market experts about distressing signs about RIM’s core U.S. market. Demand for BlackBerrys was withering, they learned. Didn’t Balsillie understand how serious the company’s troubles were?

The answer to that question came a week later, March 24, 2011, in the form of a purposely understated press release that would be received by investors as a flare from a sinking ship. At the close of stock market trading that Thursday afternoon, RIM announced a much weaker outlook for fiscal first quarter profits than financial analysts were expecting. The shortfall was not huge, no more than 11 percent. Publicly traded companies often issue profit guidance that disappoints investors. But it was a rarity for RIM; its sales and profits had grown steadily for a decade. That was part of its mystique: Lazaridis’s and Balsillie’s company was the arrow shot straight up in the air that never came down. Any bad news was extraordinary. Making matters worse, RIM tried to soft-pedal the unhappy report. Investors never like unpleasant surprises. Weak excuses, though, they really hate. On a conference call that day with analysts, RIM trotted out the oldest business excuse in the book: bad weather. In RIM’s case the adverse climactic event was a devastating tsunami in Japan. While the Asian country was indeed home to some of RIM’s parts suppliers, investors didn’t buy what sounded like a schoolboy’s dog-ate-my-homework excuse.

During the call, Balsillie explained the company was undergoing a transition as it waited for the imminent PlayBook launch. The coming tablet, Balsillie enthused, “may well be the most significant development for RIM” since BlackBerry launched in 1999. The promise was not reassuring. PlayBook was late and it would take more than a tablet to reverse RIM’s sinking stock price, which had started to slide in recent weeks. The extent of the company’s U.S. troubles had been masked for months because BlackBerry sales were rocketing in emerging markets such as Indonesia and the Middle East. The latest quarterly results confirmed what smart investors already suspected: RIM
was in trouble. A day after the somber quarterly report, RIM’s stock fell 11 percent, to $57.

RIM rattled its investors a month later by lowering its already weak outlook for the first quarter, forecasting it would earn no more than $1.37 per share, 11 percent below the previous target. It’s rare for companies to reduce expectations twice for the same quarter, and this time out RIM’s vague explanation—lower shipments and weaker selling prices—was the last straw for increasingly skeptical investors. RBC Dominion Securities financial analyst and long-time RIM cheerleader Mike Abramsky advised investors that the company had “little or no credibility” after the unexpected reversal.
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The business media were harsher. “A corporate tragedy is under way at the proud Canadian firm Research In Motion,” reported the
Wall Street Journal.
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The next day, RIM’s stock fell below $49 a share, a sickening tumble that was far from over.

Investors had to wait until mid-June for a fuller explanation in RIM’s quarterly report. It made public what company executives had known for months: in the U.S., carriers were staging a headlong retreat from BlackBerrys, shifting their support to iPhones and a new generation of Android phones. Revenue from the U.S. market was down 36 percent to $1.3 billion from the same period a year earlier. The full extent of the reversal was not revealed in the quarterly statement but rather explained in internal documents for the board. RIM’s biggest U.S. customer, Verizon, had slammed the brakes on BlackBerry. In the last three months of 2010, Verizon sold 800,000 BlackBerrys, a jarring 60 percent decline from the final quarter of 2009. The number would drop to 400,000 during the next quarter. In the space of less than two years Verizon went from buying more than 95 percent of its smartphones from RIM to 5 percent. The news was no better at Sprint, T-Mobile, or AT&T. Sales to the three carriers were down more than 50 percent in less than two years. In total, the company shed 1.3 million U.S. subscribers in the quarter, more than double the number lost one quarter earlier. RIM, the first-place innovator of the North American smartphone market, was on the verge of becoming a distant third in a market dominated by Apple and Google.

One of the key explanations for the implosion was that RIM didn’t have a fourth-generation phone. Samsung had already launched a 4G phone and iPhone was months away from the upgrade. Lazaridis’s prophecy that 4G phones would quickly drain batteries was technically correct. But nobody seemed to care. Carriers and consumers weren’t put off by the inconvenience.
Carriers had invested in new network technology to build more bandwidth capacity and stoke more traffic and fees from customers clamoring to download movies, sports broadcasts, and online games onto phones. Marketing budgets previously allocated by carriers for BlackBerry promotions were redirected to their competitors’ new 4G phones. RIM had once again misjudged the consumer market. This time, however, there was little air cover to regroup and fight. When the ill-fated Storm arrived in 2008, RIM was rolling out its new line of BlackBerry Bolds, one of the company’s most technically and commercially successful phone series. In 2011, the only RIM product slated for release was an updated version of the Bold.

Without a 4G phone to compete against a new generation of Android phones, RIM’s management had to confront a stark truth: for ten years RIM had prospered as a smartphone maker by constantly innovating and rolling out enhanced devices, software, and network upgrades. As long as it held the lead with pioneering smartphone technology, RIM prevailed against bigger competitors with deeper pockets and more diversified product portfolios. If Apple or Google stumbled with a product, they could recover with sales from other divisions. In Apple’s case it was computers, iPods, iPads, and online app and music sales; Google had search engine advertising revenues. That wasn’t the case in Waterloo. RIM was a one-product company struggling with a damaged brand image and an outdated product. Years of strategic confusion and poor product execution had caught up to the BlackBerry maker.

In a way, Lazaridis was right about drained batteries being a problem—only it was he and Balsillie who were running out of power. Battered by the patent wars, the product failures, and their bitter falling out over the securities scandal, RIM’s bosses had lost their mastery of a smartphone market that had exploded after the 2006 launch of its first full consumer smartphone, the Pearl, into a global market with sales that would top 1 billion handsets annually in 2013. Product mistakes in this environment of hypergrowth and constant innovation could be fatal, leaving once dominant players so far behind industry leaders they could never catch up. RIM had thrived in the high-stakes wireless market in its early days because it was more innovative and nimbler than industry leaders such as Motorola, Nokia, and Palm. Now two of Silicon Valley’s most visionary powerhouses, Apple and Google, had moved onto the field. They had shifted the smartphone market away from Lazaridis’s vision of a simple mobile e-mail device to a handheld mini-computer that was loaded like a modern Swiss Army knife with practical and whimsical add-ons. For
years Lazaridis and Balsillie had bravely battled everyone from the Topper to Steve Jobs. Now, it seemed, all they had left to fight was each other.