The end of RIM

It happened so quickly. How did Canada’s most successful technology company come to this?

 

(Photo: Hamin Lee)

Good friends defend us when we’re in trouble. Not just in our personal lives, but in the corporate world too. When a company is struggling, its business partners support it—or, at the very least, refrain from trashing it. Not so with Hugh Bradlow, chief technology officer for Australian telecom Telstra. At a speaking engagement in Hong Kong in June, Bradlow ruminated on the fate of Research In Motion, a key partner for his company. According to an industry trade publication, Bradlow told the crowd that if he were running RIM, he would “go to the 43rd floor and find a window.” He went on to say the most likely outcome for RIM is a sale.

A Telstra spokesperson told Canadian Business that Bradlow “immediately apologized unreservedly” for his remarks, but the damage was done. RIM has fallen so far that not even its carrier partners can resist making jokes at its expense. And RIM keeps giving its detractors more fodder. On June 28, the company announced an incredibly bleak set of earnings, including its first quarterly loss in more than seven years. BlackBerry shipments plunged 41% from the year before. Nearly one-third of its workforce—5,000 employees—will be laid off. CEO Thorsten Heins delivered one more bombshell, too: BlackBerry 10, the operating system that will supposedly revive the company, will be delayed yet again, until early 2013.

RIM has experienced an incredible and bewildering fall from grace. The company’s share price provides the most visceral evidence: it peaked in 2008 at $149.90, and has since crashed by 95%, dropping to less than $8 at press time. There is no doubt that a series of poor decisions and missed opportunities led RIM to this point. Former co-CEOs Mike Lazaridis and Jim Balsillie underestimated the significance of the iPhone when it debuted in 2007, maintaining a blinkered focus on the company’s corporate clients and touting its expertise in e-mail and network efficiency. RIM fell behind when it came to the features that mattered to the much larger consumer market, such as an elegant operating system and web-browsing capabilities, and ensuring BlackBerry users had a wide variety of applications to download. RIM took for granted that it had a stranglehold on the corporate market. As recently as last year, Balsillie denied there was any risk posed by the trend of companies allowing employees to bring their own smartphones to work, rather than forcing them to use a standard-issue BlackBerry. Every time RIM tried to move beyond its core strengths, it fell on its face. The PlayBook tablet, for instance, launched without important features in place, such as an e-mail client. The company has lost credibility after many months of failing to back up its grandiose claims that revolutionary products are just around the corner. RIM is now grappling with the fallout. The rest of Canada will have to, as well.

RIM as we’ve known it in the past—the company cranking out world-changing technology, making cutting-edge smartphones and leading the industry—is already gone. “As for this company remaining a viable, consequential player in the handset space, that battle is over,” says Anil Doradla, an analyst at William Blair & Co. in Chicago. RIM has already hired JPMorgan Chase & Co. and RBC Capital Markets to explore options, including a sale. RIM could shrink to a fraction of its current size, shed the majority of its employees, and service a smaller niche market. It may even lose the hardware business and stop manufacturing the iconic BlackBerry altogether.

When the company sat atop the world a few years ago, it raised hopes that Canada could develop a thriving tech sector, and move beyond its stubborn reliance on resources. RIM’s slide into irrelevancy inflames old doubts about our abilities, and could hamper Canada’s ability to build a meaningful tech sector. Joseph D’Cruz, a professor at the Rotman School of Management, has found a depressing lesson in RIM’s troubles. “What the Canadian tech industry has to learn,” he says, “is that you should not dance with giants.”

For all of the gloom around Research In Motion, the company’s executives display a profound sense of confidence publicly. “I certainly expect RIM to be an extremely active player in the global smartphone industry,” says Rick Costanzo, the company’s executive vice-president of global sales and regional marketing. His optimism stems from a few things, beyond the potential for BlackBerry 10: RIM continues to add subscribers, the BlackBerry remains the most popular smartphone in a number of big countries, such as Indonesia, and the company is still rolling out new BlackBerry 7 handsets across the globe. Costanzo estimates that less than 30% of mobile users around the world have switched from regular cellphones to smartphones, and certain inexpensive BlackBerry models provide an attractive option as these people upgrade. “The vast majority of the marketplace is still up for grabs,” he says, “so help me understand why our obituary is being written right now.”

The company is certainly not about to go bankrupt, at least. RIM is sitting on a US$2.2-billion pile of cash and has zero debt. Its cash position is nevertheless a growing worry as RIM races to develop BlackBerry 10, endures restructuring costs and potentially turns in profit losses in coming quarters. “If the sales of the smartphones fall off precipitously, they are going to start burning cash,” says Doradla, the analyst with William Blair. RIM expects to maintain its cash hoard this quarter, but on the most recent earnings call, CFO Brian Bidulka didn’t answer questions about where it would be beyond then. A cash crunch would severely limit RIM’s options, and potentially push it toward a sale. That’s the situation in which Palm Inc. found itself in 2010, as its smartphone sales bottomed out and it rapidly ate through its cash reserves, leaving no choice but to sell to Hewlett-Packard.

RIM is still a ways from that scenario, though all manner of buyers have already been touted for it. Amazon might want to scoop up RIM’s devices business as a way to expand its presence in hardware beyond Kindle tablets. Microsoft could be interested in RIM’s software and services business to further entrench itself with corporate clients. But any potential buyer would already have taken a look and passed on RIM at this point, according BGC Partners tech analyst Colin Gillis. “We see a strategic acquisition as an unlikely event this year,” he wrote in a recent report. Buyers could also be waiting for RIM to fall further, which would increase their bargaining power with the troubled company. With a sale off the table for now, RIM has no choice but to go it alone.

That’s the path RIM is publicly committed to, in any event. It insists new smartphones and tablets on the BlackBerry 10 platform will not only catch up to the competition’s products but surpass all of them. Heins, in a recent editorial for The Globe and Mail, wrote about the potential to extend BlackBerry 10 into automobiles, credit card machines and all manner of “embedded systems that run constantly in the background of everyday life.” It is a bold vision to be sure, but the company has revealed few details about its plans beyond smartphones and tablets. Pierre Ferragu, a technology analyst with Bernstein Research in London, has written that attempting a turnaround with BlackBerry 10 is “suicidal.”

Though RIM possesses 78 million subscribers today, growth is slowing significantly. Its user base grew by only one million last quarter, and it’s dangerously close to losing subscribers. Many analysts expect that to happen this year. Even growth outside of North America and the United Kingdom is slowing. International revenue, responsible for the bulk of the company’s growth lately, fell 37% last quarter compared to the year before. According to a survey conducted by Bernstein Research of consumers in the U.S., the U.K. and France, 66% of BlackBerry users plan to switch to a different operating system.

By the time BlackBerry 10 is released, the company could be working with a smaller subscriber base, and it will have suffered more reputational damage in the wake of bleak earnings reports, further souring consumers on its products. “RIM is intent on launching a ‘distinct’ smartphone platform. All we see at this point is an extinct platform,” wrote National Bank Financial analyst Kris Thompson in a recent note. He’s doubtful BlackBerry 10 will be released on time early next year—or at all. “At this point, there is a chance that we may never see a BB 10 handset given RIM’s track record.” As much as every Canadian would like to see RIM resurrect itself with blockbuster new technology, it’s difficult to see that happening right now.

What’s more likely is that RIM will waste away before finding a future as a niche player. Thompson estimates RIM’s size is equivalent to that of a company controlling 20% of the global market, but says RIM will be “lucky” to capture just 5%. Ehud Gelblum, an analyst with Morgan Stanley, recently published a report arguing much the same. Gelblum believes there is a contingent of users who will remain loyal to the BlackBerry—20 million at the most, down significantly from the 78 million today. That means shipping between five million and 10 million smartphones a year, earning approximately $500 million in revenue. In order to be profitable servicing such a small market, RIM would have to shed 90% of its employees, shrinking from 16,500 to just 2,000. It would likely revert back to a private company to manage such a transition.

RIM could even abandon its signature product, the BlackBerry handset. Profit margins on the devices unit are shrinking as RIM sells fewer higher-priced smartphones. In fact, many analysts calculate the hardware business alone was responsible for the loss last quarter. Fortunately, the company also charges carriers a fee for services such as encryption and data compression, which it provides through its private network, giving it a cushion against losses in hardware. Some analysts believe the software and services side of the company is where RIM’s potential resides, which is why there are calls to split RIM in two. That part of the business accounts for a growing part of RIM’s revenue: 41% in the last quarter, a huge jump compared to three years ago, when it totalled only 15%.

But software and services can’t prop up hardware forever. “Longer term, they won’t sell hardware,” says Michael Genovese, a technology analyst with MKM Partners in New York. RIM’s expertise in push e-mail, security and network efficiency still sets the company apart, and should continue appealing to some corporate and government clients. One option is for RIM to extend these features to non-BlackBerry devices by allowing access to its proprietary network, in essence becoming a back-end services provider. But Genovese would like to see RIM release BlackBerry 10 and license the platform to other handset manufacturers such as Samsung and HTC. RIM would then have a shot at being the third platform—albeit a weak one—after Android and Apple’s iOS. Hardware vendors should be receptive to the idea, Genovese says. Samsung and its ilk do not want to be dependent on Google for its Android operating system, since they are essentially at Google’s mercy. Diversifying into another platform is almost a form of insurance. “BlackBerry 10 is absolutely vital to the future of the company,” Genovese says. “The ecosystem isn’t healthy, but it doesn’t have to go away.”

In a few years’ time, the best-case scenario is that RIM reinvents itself as a niche mobile player, either with hardware, or as a pure software and services company. It would be a drastic change for the company that comfortably ruled an empire for years. Its home country won’t escape the impact, either.

The Canadian tech landscape without Research In Motion—or with a drastically scaled-down version of the company—is a fairly sparse place. In a ranking of the top 300 Canadian tech firms by revenue conducted by consultancy Branham Group, RIM currently dwarfs the rest of the group with $20 billion in sales, twice as much as the No. 2 company, BCE. The country’s three major telecom firms follow RIM, which shouldn’t exactly inspire confidence in Canada’s ability to build multinational tech firms. The telcos are protected from global competition by the federal government’s ownership restrictions, after all. But does Canada even need a tech sector? Our standard of living is high by global standards, so it’s tempting to conclude we haven’t suffered unduly thus far through our heavy reliance on the natural resources industry to drive our economy. That kind of complacency is dangerous. Depending on mining, forestry, and oil and gas leaves the country vulnerable to swings in commodity prices and the health of our export partners. (China, for instance, is increasingly shaky these days.) A strong tech sector would diversify the economy, provide more high-paying jobs, allow some of the brightest minds to remain in Canada and attract others from around the world. “If what we as a nation are going to focus on is pulling stuff out of the ground, selling it to the world and then buying back the finished goods, I can tell you from a prosperity perspective which way we’re going, and it’s not up,” says John Ruffolo, head of the venture capital arm of OMERS.

To be fair, there is a considerable amount of technology and expertise involved in the resources industry. But RIM is the largest corporate spender on research and development in Canada by far. In 2010, the company spent nearly $1.4 billion on R&D, according to the Impact Group, a consulting firm. A big reduction in this area decreases the chances that Canadians will create and commercialize technology at home. “What concerns me is that people start to come to the conclusion that we cannot support a global technology player, so let’s not bother anymore,” Ruffolo says.

If RIM doesn’t rebound, the talent the company has attracted to Canada could scatter. “Business talent is very impatient,” says Adam Chowaniec, an Ottawa tech industry veteran who most recently served as chairman at BelAir Networks. “You’ll have a huge glut of people, and they’ll fan out right across the States. They won’t all stay here.” RIM has also recruited a huge number of co-op students from the University of Waterloo, and retained many of them as employees. Some of the best engineering and computer science talent coming out of the university could be more inclined to look outside of Canada for work.

Those looking for a silver lining in RIM’s decline say that former employees could work at any of the Waterloo region’s 300 tech startups, or found their own. It’s already happening, particularly after the company axed 2,000 workers last year. Mike Kirkup, who left his post as RIM’s senior director of developer relations last year, now serves as director of startup incubator VeloCity at the University of Waterloo. Tyler Lessard also quit last year as RIM’s vice-president of BlackBerry Global Alliances and is now the chief marketing officer at Fixmo Inc. in Toronto, a mobile risk management company that attracted more than $23 million in funding last year.

The demise of Nortel Networks in Ottawa provides some idea of what the Waterloo region and the tech sector as a whole can expect if RIM doesn’t rebound. When Nortel began its long descent after the tech bust, there were similar hopes of a surge in startups. Tony Bailetti, an associate professor at the Sprott School of Business, even started a program called Lead To Win that trained former Nortel employees to become entrepreneurs. Four companies emerged from the first sessions in 2002, ultimately creating 300 jobs.

But Ottawa’s so-called Silicon Valley North never really recovered. In 2007, the number of high-tech employees in the region totalled more than 70,000, according to Statistics Canada. As of last year, it had fallen to 44,000. “It’s a shadow of what it was,” says Brian Hurley, a former Nortel employee who founded an app development company called Purple Forge in Ottawa. The city isn’t exactly on the map for international venture capitalists either. “The volume of opportunities we see is dramatically larger in Toronto and Vancouver than in Ottawa,” says Rob Chaplinsky, a University of Waterloo grad and now co-managing director of VC firm Bridgescale Partners in the real Silicon Valley.

Without a prosperous RIM in the picture, new companies will have to grow without the halo the inventor of the BlackBerry gave to the entire Canadian tech sector. “Certainly we lose that connotation,” says Chaplinsky. “My only hope is that RIM has a graceful exit instead of death by a thousand cuts. That will have less brand damage for the Canadian technology industry.”

Some already have a dim view of Canada’s future as a technology player. “Canada may not be an appropriate home base for a high-tech product that is aimed at a mass market,” says Rotman’s Joseph D’Cruz. Because Canada’s population is nine times smaller than the U.S., our startups have to be ready to go global at the outset if they’re to grow. But that’s a risky, expensive and difficult thing to do for a company that’s just getting off the ground. RIM grew to be so successful because its product was absolutely unique, and it took time for others to catch up. But when the likes of Apple, Google and Samsung ultimately did catch up, they could outspend RIM in every way. “The tech industry in Canada does need to rethink whether it wants to compete head-to-head with companies based in the U.S., China or Japan,” D’Cruz says. He’s not ruling out the Canadian tech sector, but believes it will most likely be relegated to servicing niche markets, not dominating the world.

Right now, most Canadian tech companies are snapped up by foreign firms before they have a chance to grow. A study by Byron Capital Markets in February found that mid-sized tech firms in Canada are valued at a discount between 23% and 34% compared to their U.S. peers, which makes them easy targets. Acquisition has its benefits, but there is concern that Canada can’t develop a thriving tech sector without large anchor companies such as RIM. “We’re hollowing out the whole high-tech sector right now,” says Chowaniec, who also serves as chairman of Startup Canada, which bills itself as a “national movement” to enhance entrepreneurship. Without RIM, Canada will have lost its biggest training ground for tech talent, particularly those suited to the C-suite.

As depressing as the implications appear, it’s important to remember RIM’s decline will not stop Canadians from trying to build and sustain multinational tech companies. But RIM’s downfall is the result of very human mistakes—complacency, hubris, arrogance—that the current crop of startups needs to avoid repeating in order to succeed. It’s hard to see another potential giant on the horizon right now, but remember that RIM was around for 12 years before it launched its first wireless messaging device, the Inter@ctive pager. It took another three years to become the BlackBerry. In time, the country will produce another RIM. Keeping it alive and independent is another matter.

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