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RIM Looks to Put Recent Hardships Behind It with BB10

Mon, 01/28/2013 - 9:29am
David Friend, The Canadian Press

Once a leader but now derided as a laggard, BlackBerry-maker Research In Motion hopes to regain the confidence of cynical smartphone users this week as the curtain is lifted on its much-anticipated new smartphones.

The stakes are high for the unveiling, which many observers say will determine whether RIM survives to see the launch of another BlackBerry smartphone.

It has been a steep decline for RIM, which less than five years ago was the most valuable company in Canada, above Royal Bank (TSX:RY). Affectionately called the "CrackBerry" maker, the mobile communications pioneer was Canada's crowning achievement of the technology sector.

Back in 1984, the year RIM was founded, it was practically unimaginable that a tiny startup based in Waterloo, Ont. would help change the way we communicate, but for fresh engineering graduates Mike Lazaridis and Douglas Fregin that was always the plan.

"Like so many of these guys Lazaridis was a Star Trek lunatic," said Alastair Sweeny, author of "BlackBerry Planet."

"He says it's almost like telepathy — humans have a yearning to communicate."

The beginnings were humble for the two founders, with the majority of their time dedicated to Budgie, an LED sign business that was contracted by General Motors to communicate messages to workers on its assembly lines. Despite early interest, the project was a sales flop and RIM's owners decided to sell the business and look at other ventures.

One of those projects put RIM squarely in the eyes of Hollywood. The DigiSync film reader caught on with movie editors because its synching technology shaved hours off the time it took to turn miles of film into useable content in post-production. While the technology went on to win RIM both an Emmy and a technical achievement from the Academy Awards, it was never a top priority for RIM's founders.

"Lazaridis was always into security," said Sweeny. "He realized that corporations needed secure communications because of industrial espionage, because of hacking."

Throughout the late 1980s, RIM was working alongside other industry players to develop technology that would eventually be used in pagers and wireless payment processing systems. By the start of the 1990s, the wheels were turning on the communication systems that would become the foundation of the BlackBerry.

An agreement with Ericcson's Mobitex wireless network allowed RIM to create pagers that operated as a two-way communicators, a revolutionary concept for data transfer.

Turning the idea into a marketable product was a bigger challenge. The world had yet to become accustomed to the Internet age and most people hadn't heard of email, nevermind used it. While the project was a bust with its first partner Cantel, RIM forged ahead.

The technology captured the attention and imaginations of an industry, and perhaps most importantly Jim Balsillie, an energetic Harvard graduate who, at the age of 33, invested $250,000 of his own money into the company by re-mortgaging his house.

In 1996, RIM launched its first sales success, a clamshell wireless handheld device called the RIM 900 Interactive Pager. It was a two-way communicator that also had the ability to send faxes, as well as link to the Internet and email.

But Lazaridis discovered that the email feature, which he believed was one of the strongest qualities of the device, wasn't being used by most customers. So he hired Lexicon Branding, based in California, to find a way to draw more attention to its keyboard, the main feature that differentiated it from other pagers.

Branding executives pondered the device, focusing mainly on its appearance, and when one of them pointed out the little keypad looked like similar to the seeds of a strawberry, the conversation zeroed in on the names of fruits and vegetables. Eventually, the group settled on "BlackBerry" because it was both punchy and remained true to the device's original black casing.

The company listed on the Toronto Stock Exchange in 1997, raising more than $115 million, and debuted the first BlackBerry the following year.

From there it seemed the sky was the limit.

Suddenly the BlackBerry was everywhere in the technology community, thrust into the spotlight by the enthusiastic co-CEO Balsillie who touted the device on Wall Street and handed it out for free at select technology conferences. Balsillie knew how to build buzz and proudly tapped away on the BlackBerry whenever he appeared before the media.

A demand had been created, and subscribers to the BlackBerry services continued to grow in leaps and bounds. In 1999, RIM listed on the Nasdaq, raising another US$250 million.

The success grabbed the attention of Virginia-based NTP Inc. which filed a lawsuit claiming that RIM's network infringed on its patents. While NTP won the case, and the courts ordered RIM to pay US$23.1 million, the battle continued in appeals courts for years before a settlement was reached for a much heftier $612.5 million.

Outside the courtrooms the BlackBerry was a massive success, garnering headlines when its enterprise network remained intact after the terrorist attacks on Sept. 11 when other wireless phone systems broke down.

The BlackBerry's reputation was growing at a steady clip, helped by the introduction of cellphone service in 2002 on what had been a text-only device. Within two years, BlackBerry reached more than 1 million subscribers.

The smartphone was in demand at corporate offices around the world, and soon the more casual consumer began to take notice, helping to boost its subscribers to nine million by 2007. RIM also secured a distribution deal in China, driving its stock to a level that made it the most valuable Canadian company.

But amid all of the success a storm of competition was brewing in the tech industry.

In June 2007, Apple unleashed the first iPhone touchscreen device onto the U.S. market, garnering widespread praise from critics and consumers, but hardly rattling its competitors.

Microsoft's chief executive Steve Ballmer famously dismissed the touchscreen device that year, saying "there's no chance that the iPhone is going to get any significant market share."

Whether it was a strategic decision or simply coincidence, Apple kept its iPhone far away from the Canadian marketplace for nearly a year, choosing to launch in six other countries first.

The lower profile with Canadian consumers also seemed to minimize the concern from RIM's executives, who publicly downplayed the influence of the iPhone in an already crowded mobile phone market.

"They just missed it," said Carl Howe, vice-president of consumer research at Yankee Group.

"They missed the idea that you could create a really good experience without having a keyboard. They gave Apple a two-year head start."

By the time the iPhone hit Canadian shelves, RIM was facing scrutiny from analysts who worried that the growing number competitors, which now also included Google's Android system, would devour marketshare.

RIM went on the defensive in 2008, releasing a combination keypad and touchscreen device it called the Storm, but the phone was swept up in a flurry of other BlackBerry releases that year. Much of the marketing clout was put behind the debut of a high-end BlackBerry Bold, which wasn't a touchscreen.

"A lot of tech companies have their heads in the sand," said Howe of the co-CEOs.

"It's not that they're stupid, and I think that's an important point. People who get hit by 'innovator's dilemma' are not stupid ... I think when you create something from scratch and turn it into a multi-billion dollar business you're very reluctant to say 'I'm now going to throw away everything I've learned and do something different.' "

At the height of its hype, the BlackBerry device was splashed across television shows and movies, while then-presidential candidate Barack Obama proclaimed he was a BlackBerry faithful during his campaign.

As competition heated up with Apple, investors became concerned that RIM's co-CEOs, in particular Balsillie, were distracted by the possibilities that success brought them, rather than focused on revamping the BlackBerry for a new era.

In 2009, Balsillie launched his third, and most aggressive, attempt to buy an National Hockey League team, with hopes that he could convince the NHL to move the Phoenix Coyotes to Hamilton. The battle dragged on for months before Balsillie abandoned his dream once again.

Back in Waterloo a storm was brewing as technical problems began to wreak havoc on the company's network infrastructure.

There were two network outages in less than a year that left BlackBerry users temporarily without their services. Some industry observers suggested the company could buckle under its own success. BlackBerry sales were soaring, even with the technical problems, with subscriber growth up 70 per cent to 36 million by the end of 2009. RIM's leaders reassured users that the outages were a fluke and wouldn't be a reoccurring problem.

Despite the setbacks, the BlackBerry image appeared to emerge unscathed. In April 2010 it cracked the Top Five mobile phone carriers worldwide and soon afterwards Queen Elizabeth made a visit to RIM's headquarters in Waterloo.

Behind the scenes there was unrest among the company's board of directors as the leaders clashed over where the BlackBerry brand should go next. Rumours swirled around the industry that trouble was afoot.

Fanfare eventually gave way to the realities of competition, with the first major blow coming from the failed launch of the PlayBook, RIM's answer to Apple's iPad. In September 2010, the co-CEOs showcased the new product for the public but waited another six months before unleashing it to stores.

By then it was too late, the tablet market had already been cornered by Apple and reviews of the PlayBook harshly criticized its lack of connectivity to popular BlackBerry functions like email and instant messenger.

Within months the foundation of RIM started to crumble as it repeatedly missed its own revenue and earnings targets. In June 2011, the company slashed 11 per cent of its workforce, or 2,000 jobs, to keep its cost in line.

A stark reminder of its fragility came in October 2011 when a worldwide four-day outage left BlackBerry users again without the use of the device they had come to rely on. The smartphones wouldn't connect to the Internet, email or its messaging services.

The anger from its loyal users was heard loud and clear, and Lazaridis emerged from days of silence to apologize and tell users the company had let them down.

In an earnings call several weeks later, Lazaridis urged investor "patience and confidence" as the executives tried to improve performance. Both he and Balsillie, two of the company's biggest shareholders, reduced their salaries to $1.

Again, it was a decision made too late — the outage had cost RIM more than $50 million in revenue and tarnished its reputation. In December 2011, the company reported that profits tumbled more than 70 per cent, affected by a big charge from sales discounts it was forced make on PlayBook tablets.

Perhaps an even bigger blow to RIM's reputation was the delay of its next-generation BlackBerrys, pushing the planned release into 2012. The phones — which were delayed again throughout last year and will be unveiled this Wednesday — were seen as the company's best hope to maintain market share against Apple and Android devices.

The company stock had tumbled from its lofty height of $137.41 on the Toronto Stock Exchange in mid-2008 to $14.80 at the end of 2011.

RIM, once a symbol of Canadian success and innovation, had become awash in its own troubles. Apple's iPhone had cornered the rapidly developing apps market while RIM sat on the sidelines with developers.

Sweeny recalls visiting a group of developers, who he considered BlackBerry fanatics, while doing research for his book in 2008.

"They were writing great games and programs for the BlackBerry and they couldn't get the latest hardware from RIM to test them on," he said.

"I called them a couple years later and they weren't writing for BlackBerry at all. They were writing programs for Apple and starting to write for Android."

From an outsider's perspective, it's often suggested that the co-CEOs lost control of their empire, but some industry watchers say that RIM saw the troubles several years earlier.

"In this market you can't admit that you're behind," said Tim Long, an analyst at BMO Capital Markets.

"You have to put on the face because once you start to lose momentum that can shift the buying patterns."

Numerous acquisitions were made by RIM throughout 2010 and 2011 to beef up its stable of technology, Long said. That included Ottawa-based QNX Software Systems, whose technology became the basis of the new operating system, and Astonishing Tribe, the Swedish company that helped develop an early user interface of the Android operating system.

But the acquisitions came too late, and by late 2011 some investors were calling for its leaders to resign.

Bowing to pressure, Balsillie and Lazaridis stepped down from their co-CEO positions in January 2012, pocketing a combined $12 million in the process. The duo were replaced by Thorsten Heins, RIM's former chief operating officer, and hardly two months later Balsillie had left the company entirely.

Almost immediately, Heins launched a major revamp of RIM's operations, hiring several new executives with experience at other major tech companies. The approach was a last-ditch effort to revive the company, but it has also thrown the BlackBerry maker into the most uncertain period in its history.

With nearly $2 billion in its coffers Heins had options, but the clock was ticking to get a new smartphone on the market.

"Nobody is delusional here," Rick Costanzo, the company's new executive vice-president of global sales, said last summer.

"We get it. That's why we're building BlackBerry 10 and man are we committed."

A new chapter in RIM's history begins this week as the BlackBerry 10 smartphones and operating system are showcased to the world.

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