Update: On January 22, Research In Motion announced that Mike Lazaridis and Jim Balsillie would step down as co-CEOs and co-chairmen of the board of directors. Lazaridis will now be vice chair of the board, and head up a new innovation committee. Balsillie will become a director. Their replacement as CEO is Thorsten Heins, formerly RIM’s chief operating officer for products and sales. Barbara Stymiest, who became a director in 2007, will now chair the board. Investors reacted negatively to the news, with RIM shares opening 5% lower on the NASDAQ on January 23.
Is it all falling apart? It seems an absurd question to be asking about a company like Research In Motion, Canada’s most successful and influential tech firm. Just how successful it would become was hard to imagine when Mike Lazaridis set up shop in a tiny office above a strip mall in Waterloo, Ont., in 1984. Jim Balsillie joined eight years later, bringing with him the sales and strategy muscle to take RIM’s products to the world. Together, they were unstoppable. They turned RIM into a global powerhouse that delivered mobile e-mail to the masses, sparking a revolution in mobile communication and defining the smartphone as we know it. Under their stewardship, RIM continues to rake in billions in revenue each month and attract new subscribers at a time of fierce competition.
But somehow, lately, something’s gone terribly wrong. A deep-rooted dysfunction seems to have overtaken the company. Balsillie and Lazaridis have so badly lost the confidence of the market that investors and analysts no longer seem to care about the billions in revenue or the 35% increase in subscribers over the past year. The highlights of 2011 are almost too painful to mention: the PlayBook, RIM’s first tablet, was a flop; its latest line of BlackBerry smartphones was delayed; weak sales forced the company to issue a profit warning in the spring; its network was hit by a massive service outage in the fall; and it suffered the largest wave of layoffs in its history. Once dominant in the smartphone industry, the company has lost significant ground to the competition: RIM’s chunk of the U.S. market dropped to just 12% by year-end from 44% in 2007, according to research firm Strategy Analytics. Its share price on the Toronto Stock Exchange has fallen even further—losing a full 75% of its value in 2011.
What isn’t fully understood is how RIM ended up going from the company that could do no wrong to the company that can’t seem to get anything right. RIM declined to make either Balsillie or Lazaridis available for interviews, but discussions with a number of high-level insiders who left RIM during the past year portray a company that has grown unwieldy and unorganized, and where conflicting opinions and a lack of clear direction compound an already difficult situation.
There’s no question that 2011 was a year to forget, but so far 2012 isn’t looking much better. On a conference call to discuss RIM’s fiscal third-quarter results in December, the co-CEOs revealed that their newest smartphone line, dubbed BlackBerry 10, will not be available until the latter part of the year. That means RIM will have no major new products in the North American market for months, and it is already behind the competition in many respects. Instead, it plans to spend upwards of US$100 million per quarter to market its existing smartphones in the U.S.
Balsillie and Lazaridis still enjoy support in some quarters, including from prominent investors such as Fairfax Financial Holdings CEO Prem Watsa. But others are calling for the co-CEOs to break RIM into pieces, sell it off or relinquish control entirely. For the two guys who essentially created the smartphone market and built a multi-billion-dollar company in the process, the calls to step down must seem outlandish. In December, the pair announced they would each take $1 in annual compensation as a sign of their commitment to RIM. Their commitment, however, was never really in question. Unless they change their ways, it may in fact be the problem.
Everyone—except maybe RIM—recognized competition would come to the smartphone market. Unfortunately, RIM reacted to Apple’s iPhone and Google’s Android operating system by ignoring them.
“How much presence does Apple have in business? It’s vanishingly small,” Lazaridis said in an interview with the Guardian newspaper when Apple revealed the iPhone in 2007. A week after it went on sale, Balsillie told a reporter he wasn’t sure if anyone at RIM had used it. “I haven’t seen one,” he said. “You watch these things, but you really have to just focus and do your job.” Neither of these statements is particularly surprising; bravado is necessary to avoid spooking investors. But inside RIM, they were just as dismissive, particularly of the iPhone’s short battery life. In RIM’s early days, Lazaridis obsessed with ensuring the company’s devices could operate for weeks without a change of batteries, believing longevity was important to business clientele on the move. A practical engineer, he couldn’t understand why anyone would use a device like the original iPhone, which died after a few hours.
Their confidence stemmed from years of vanquishing competitors. Nearly every handset from established players like Motorola and Nokia was touted as a BlackBerry killer. They all failed. “We just kicked the shit out of Microsoft and Nokia,” says a former employee, “and there was this general sense that we didn’t need to do anything else besides focus on our core competencies.”
RIM’s dominance and financial success allowed the CEOs to engage in noble philanthropic pursuits, and each established a non-profit institution. Lazaridis created the Perimeter Institute for Theoretical Physics in the company’s hometown of Waterloo. Balsillie set up the Centre for International Governance Innovation practically across the street. He even found time to chase the purchase of an NHL franchise. To anyone concerned that he was distracted, Balsillie told The Globe and Mail in 2007 that he still spent 90% of his time on RIM.
Success also bred hubris about RIM’s position in the market. By late 2009, it was clear that the iPhone and Android had redefined the smartphone, and that RIM needed to adapt. The company had to target consumers more aggressively, not just business customers. It also had to drastically improve the BlackBerry’s user interface and web-browsing capabilities, not to mention attract developers to write more applications for the BlackBerry platform. Smartphones became less about communication—RIM’s biggest strength—and more about consuming media.
What’s more, the company itself was becoming increasingly complex. RIM produces multiple handsets, each with different screen sizes and internal hardware. RIM will even customize the same device to suit the needs of different carriers. Apple, in contrast, produces just one iPhone model per year. The product complexity at RIM takes a firm hand to manage, and that becomes more difficult when the entire organization is undergoing a seismic shift.
Around the time that Apple emerged as a serious competitor, RIM lost a crucial executive when chief operating officer Larry Conlee retired. He joined RIM in 2001 after 29 years at Motorola to oversee the crucial engineering and manufacturing functions. With the droopy countenance of a bulldog, Conlee was a pragmatic taskmaster, ensuring deadlines were met and that subordinates were held accountable for screw-ups. (Conlee has since worked with RIM in an advisory capacity at various times, including last summer when the company announced 2,000 job cuts.)
Before Conlee retired in late 2009, he brought up a new crop of people to replace him. But according to a former employee, the new operational staff members were never fully empowered to do their jobs. Instead, Balsillie and Lazaridis took a greater role in running the company. Lazaridis, for instance, started holding regular meetings with senior operations staff who previously reported to Conlee. This ultimately became problematic. Lazaridis believes RIM can pull off just about anything, and his enthusiasm led him to set overly aggressive deadlines. One of Conlee’s skills was managing his boss. Given his deeper insight into operations, Conlee knew better what was achievable and pushed back against Lazaridis to arrive at more realistic dates. He also had clout. Unlike many subordinates, he didn’t owe his career to RIM, and happened to be 13 years older than Lazaridis, giving him the confidence to tell the founder of the company that he was wrong. When Conlee left, there was no one with comparable experience and influence to disagree with Lazaridis. Deadlines were set, launch dates announced publicly, and then blew past.
One former employee says the situation got so bad that internal deadlines simply weren’t taken seriously. As a product launch date inched closer, it was common for a few teams working on the same project to realize they were unlikely to make the date, but no one spoke up, under the belief that another team was even farther behind. “Everybody just kept their mouths shut, waiting for somebody else to break,” says the former employee. Because the teams weren’t fully communicating, the executives overseeing them had little clue as to the source of the problems.
Adding to RIM’s difficulties is the co-CEOs’ preference for consensual decision-making. Former employees describe it as a process of bringing vice-presidents on board with a proposal, and things move ahead only when there is widespread agreement. Some see it as a relic from the co-CEOs’ days of running RIM when it was a startup. Building consensus may work well in small companies, but not in large enterprises when multiple vice-presidents are involved. “Gaining consensus to get something done was next to impossible,” says a former employee. “It just stalls all innovation.”
Balsillie and Lazaridis would push through ideas they felt strongly about, but the goal of achieving consensus nevertheless created confusion. No one would take responsibility if a concept failed, so it wasn’t clear who should be disciplined or fired. “You’d be in meetings where the question was ‘Who the hell is responsible for this, anyway?’ And nobody puts up their hand,” says the former employee. The duo prefers this model because it allows them to maintain control, according to this individual. Since senior executives knew consensus was necessary, and because accountability was often unclear, they were unlikely to make decisions without the consent of Balsillie and Lazaridis.
Adam Belsher, who left his job in September as vice-president of the Verizon business unit at RIM after seven years with the company, says the lack of accountability is partly a result of the company’s rapid growth over the past decade. Because the popularity of the BlackBerry exploded, the company didn’t have the ability to set up a rigorous management structure in which everyone had clear responsibilities. RIM has tried to improve the situation in the past year or so, and announced a reshuffling of senior executive responsibilities in July. “If you miss schedules, people should lose their jobs,” Belsher says. “That’s a bit harsh, but based on the new structure they’ve put in place, there’s going to be more accountability and focus on execution.”
Whether Balsillie and Lazaridis will be able to enforce greater discipline is unclear. “Mike and Jim are very experienced running a startup, where we’re in this together. But when a company has 20,000 employees, it doesn’t work that way,” says a former employee. “Making the tough decision to let somebody go is just heart-wrenching for those two guys. This is just not something they do.” More accountability also means they will have to pull back and let the senior executives below them do their jobs, including allowing for more leeway to make decisions. “If they can’t, then those calling for a change of personnel may well be right.”
The development and launch of the PlayBook stands as an unfortunate example of how RIM’s internal problems result in poor execution. The irony is that RIM had an opportunity to be on the forefront of the tablet market. Years before Apple’s iPad debuted, RIM’s corporate customers were pushing it to scale the BlackBerry experience up to a larger device. RIM envisioned a digital picture frame that would mirror BlackBerry content on a bigger screen. Later, the company talked with bookseller Indigo about creating an e-reader, according to those familiar with the matter. But the massive success of the iPad in 2010 made it clear the company needed more than an e-reader.
Determining the intended audience for the tablet was an issue from the start. Typically, the co-CEO structure allows the two to focus intensely on their strengths and interests. Lazaridis can concentrate on technology while Balsillie can develop carrier relationships. But their interests sometimes overlap, such as with branding or marketing, and certainly when RIM develops a new product like the PlayBook. Former employees say the two present a united front on issues when together, but discrepancies can arise in their views when talking to executives separately. This, too, leads to confusion and undesirable outcomes. According to former employees, Lazaridis wanted to target a broad range of users with the PlayBook, including consumers; Balsillie saw it as a tool primarily for business clients. The conflicting views may have contributed to an unfocused product. The marketing campaign positioned the tablet as “professional grade” and yet the very name of the product suggests it’s all about fun. It ultimately hit the market without meeting the needs of either consumers or business users.
A change in strategy partway through development contributed to the problem. RIM initially intended to “port” its existing Java-based operating system onto QNX, a much more powerful operating system. In simple terms, porting meant that RIM wouldn’t have to build much of the underlying software from scratch. According to those familiar with the matter, RIM didn’t adequately determine whether porting was a viable option before it made the decision and set deadlines for various PlayBook elements. As RIM progressed, it became clear that porting would be problematic in the long run, and that many features would indeed have to be built from the ground up in QNX. This includes an e-mail program integrated with RIM’s famed security features, which will only be available for the PlayBook with a software upgrade to be released next month.
Meanwhile, the lack of clarity around the tablet’s intended audience, and the fact that many features were falling behind caused huge difficulties for those trying to create a coherent advertising campaign. RIM’s chief marketing officer at the time was Keith Pardy, who joined in 2009 after stints at Nokia and Coca-Cola. Pardy had been trying to shift RIM’s advertising away from highlighting specific features and create a more emotional attachment to the BlackBerry brand. Both Lazaridis and Balsillie, however, were unhappy with the PlayBook concepts. RIM parted ways with two ad agencies, Leo Burnett and Los Angeles–based boutique firm 72andSunny during the process. In one concept, 72andSunny pitched having Tom Cruise reprise his character from the 2008 comedy Tropic Thunder as a brash, cursing movie studio executive, and equip him with a PlayBook to run his corporate fiefdom. Balsillie and Lazaridis hated it. The company later ended its relationship with 72andSunny. Pardy, who did not respond to interview requests, left the company soon after.
Only a few weeks remained before PlayBook launched, and the campaign was still not finalized. A mad scramble ensued between RIM and its remaining ad agency, AMV BBDO, to put something together. Eventually, Balsillie laid out a new vision for a campaign that focused on the features that differentiated the PlayBook from its competitors, namely Flash capability (which the iPad didn’t have), multi-tasking and portability. BBDO quickly produced the commercials. The ads were a return to RIM’s traditional marketing strategy, which narrowly focuses on technology and eschews an emotional connection.
While the PlayBook was crippled by its deficiencies, one feature that it did include further hurt its chances of success. RIM developed an app called Bridge that, among other things, allows the PlayBook to connect to a BlackBerry and browse the Internet without the need to purchase a separate data plan. Some inside RIM warned that carriers wouldn’t be receptive to this feature since it’s essentially a lost revenue opportunity for them. Balsillie, according to those familiar with the events, pushed it ahead. It was an unusual move for a company that has always promoted itself as a faithful companion to carriers. “Enthusiasm took over,” says a person familiar with the situation, “and that resulted in trouble.”
Out of a desire to differentiate the PlayBook from the competition, particularly because it lacked many of the features of other tablets, RIM may have ended up disturbing its relationship with U.S. carriers. In a press release issued one month before the PlayBook launched, RIM included Verizon, AT&T and Sprint on a list of retailers it expected to carry the PlayBook. None of those carriers did so for its April launch. The Bridge app wasn’t even available for AT&T BlackBerry subscribers until June, as the carrier said it needed time to test the function. In the crucially important U.S. market, RIM sold the tablet primarily through big-box retailers such as Best Buy and Staples. Unfortunately, the company neglected to include an interactive demo to run on devices that were on display in stores. In some cases, mischievous shoppers dove into the security settings, set passwords and walked away, rendering PlayBooks unusable for others (RIM says the issue was not widespread).
In late 2010, with PlayBook development in full swing, some executives worried that RIM was neglecting its core enterprise market—industry jargon for business users. The enterprise sales and marketing division bulked up with new employees to push more BlackBerry devices into the corporate world. The PlayBook, however, dominated internally. “Everybody that had access to clients was being asked to focus all dialogue around the tablet,” says a former employee. “It was a distraction, and it took away from the overall message that we also have a very, very attractive smartphone.” Last summer, the enterprise sales and marketing division was among those downsized. The result is that RIM may have taken its eye off the BlackBerry to rush a tablet to market that wasn’t yet ready. Ultimately, 500,000 PlayBook tablets were shipped during its first quarter on sale. Only 150,000 were shipped during the latest quarter, and sold at deep discounts. The PlayBook makes up just 1.1% of the tablet market, according to research firm IDC Corp.
Despite all of the problems the PlayBook caused, RIM can’t ditch it, even after the company took a US$485-million pre-tax charge in the last quarter to write down the value of its inventory. The tablet is the only product running the QNX operating system until the new BlackBerry handsets are released, and RIM needs developers writing applications for the platform to counteract the perception that BlackBerry devices suffer from a dearth of apps. Both CEOs are committed to seeing it succeed. “While we would have preferred the initial launch to have been smoother,” Lazaridis said in December’s conference call, “I firmly believe that the BlackBerry PlayBook tablet remains the most secure and most advanced tablet platform on the market today.”
As RIM’s stock price plummeted last year, one of Canada’s savviest investors began buying in massive quantities. Prem Watsa, known as Canada’s Warren Buffett, is now the company’s fifth-largest shareholder through Fairfax Financial Holdings, the $9-billion insurance and investment firm that he founded in Toronto. Watsa held a small stake in 2010, increasing it as others fled. As of last September, he held 2.25% of the company. The value of his investment, then worth $252-million, has shrunk by more than $50-million.
He’s unconcerned. “That’s never bothered me because we take a three- to five-year view,” he says. Watsa’s contrarian bets, such as getting out of stocks before the markets crashed in 2008, have proved remarkably successful over the years, and he’s now betting on a turnaround at RIM. At current prices, RIM is a bargain. It is trading for less than the total value of its assets. In Watsa’s view, this is an irrational market reaction, given that RIM is a debt-free company which earned $19.9-billion in its last fiscal year. Investors are also discounting RIM’s international growth. In the past year, RIM actually boosted its subscriber base by 35% to 75 million.
“There’s a huge opportunity for smartphones,” Watsa says. “BlackBerry is an established brand, and we think BlackBerry will get its share.” He dismisses the unfortunate events of last year as the kind of short-term problems that any business undergoes during a transition. As for RIM’s delays and profit warnings, he says he simply doesn’t pay attention to company guidance.
It’s tempting to assume Watsa is betting on a sale or a breakup of the company. He denies this, adding that he also does not want either Balsillie or Lazaridis to be replaced. Doing so would throw the company into worse peril. The pair’s accomplishments, building RIM from scratch into a multinational powerhouse, is proof they can manage through the current malaise. “It’s one of the most outstanding track records we have in Canada,” Watsa says.
But the market at large no longer seems to care about that record, nor about the company’s success outside of North America. Patrick Spence, RIM’s senior vice-president and managing director of global sales and regional marketing, concedes some of the perception problems are of the company’s own making. “We haven’t communicated as effectively as we should,” he says. There are a number of issues the company would like the media and the financial community to better understand, such as that the BlackBerry is still the bestselling smartphone in Latin America, and that it recently became the No. 1 device in Nigeria, Africa’s most populous country. RIM is also gaining market share in parts of western Europe, the Middle East and Asia. And that growth is coming from consumers.
The idea that the BlackBerry is predominantly a device for the office, which RIM has struggled to shake in North America, isn’t nearly as strong abroad, according to Spence. The BlackBerry had been entrenched in the corporate world in North America for years before the company actively courted consumers, whereas it was already equipped with consumer-oriented features such as music and social networking capabilities when it entered new markets more recently.
“In the U.S., what we need to do is show people that we are a great choice for a consumer smartphone as well,” Spence says. RIM is making a renewed—and expensive—marketing push in the U.S. to promote the latest line of BlackBerry 7 devices, which debuted last year. It’s unclear whether additional marketing will help when American consumers haven’t been enthusiastic about the new line so far. RIM expects to ship 12 million smartphones at most this quarter, down from 14.1 million in the last one.
Another complication is just how many U.S. citizens will purchase an existing BlackBerry when RIM has promised an even better one is right around the corner. RIM is slated to launch the BlackBerry 10 line in the latter part of this year, which will run a version of the QNX operating system currently powering the PlayBook. In 2010, RIM purchased QNX Software Systems, the Ottawa-based company that created the operating system. For a while, the work of developing QNX for RIM’s products was done in isolation. Lazaridis may have been applying the lessons of a book called The Innovator’s Dilemma, published in 1997 by Harvard Business School professor Clayton Christensen. (Lazaridis has talked about the book frequently at RIM town hall meetings.) Christensen argues that innovative companies lose their way because they become encumbered by their existing customers. They need to devote so much time to servicing these clients that they’re unable to focus on the next big innovation.
Lazaridis, according to former employees, believes this is essentially what happened to RIM. To help solve the problem, Christensen recommends carving out a team to work on whatever the next innovation will be so it’s not beholden to the same rules and thinking as the rest of the organization. It’s not surprising, then, that the QNX team was a separate entity. But theory and reality are two different things. As pressure mounted and workloads grew, RIM began moving more employees over to QNX. Last year, the software development teams were officially split between those working on QNX and those servicing the existing BlackBerry operating system. Everyone knew the latter system was headed for obsolescence, to be replaced with whatever the QNX team developed. Those working on it wondered why they were wasting time on a dying platform. When some of the developers started leaving the company, Lazaridis put the teams back together in one department, overseen by a single vice-president. It was an unfortunate miscalculation that cost time and resources during a crucial period for RIM.
The question now is how many more blunders shareholders will tolerate. Some are already seeking to loosen the influence of Balsillie and Lazaridis. Northwest and Ethical Investments, a Toronto firm, may seek a proxy vote to prevent the co-CEOs from also serving as co-chairmen of the board of directors if RIM’s board can’t provide adequate justification for the governance structure by the end of January. The Financial Post recently cited unnamed sources saying the board is considering appointing Barbara Stymiest, former COO at Royal Bank of Canada, as an independent chair to replace the duo.
Meanwhile, Toronto-based institutional investor Jaguar Financial Corp. claims to represent a consortium of investors who want leadership changes and a sale or breakup of RIM. After the company’s dismal third-quarter results in December, Jaguar issued a press release specifically calling for Stymiest and fellow board member Roger Martin, dean of the Rotman School of Management, to fulfil their duties and seek to restore shareholder value. “Jaguar considers it highly unlikely that the Board will cause a change in leadership or a change in strategic focus, unless Ms. Stymiest and Mr. Martin push for dramatic change,” the release stated. A Wall Street Journal report later quoted an anonymous source claiming that independent directors on RIM’s board have long deferred to Balsillie, “the most forceful presence in the room by far.” The insinuation is that Balsillie, along with Lazaridis, dominate a weak and ineffectual board, thereby preventing it from tossing them out.
Another possibility is the board doesn’t consider dramatic change necessary. A clue to Martin’s thinking, for instance, can be found in his latest book, Fixing the Game. Martin lambastes the philosophy that a company’s primary purpose is to maximize shareholder value. Executives spend too much time dealing with investors and analysts, trying to meet or exceed earnings expectations every quarter, and end up seeking short-term gains at the expense of the company. “We must shift the focus of companies back to the customer and away from shareholder value,” Martin writes.
The investors clamouring for change at RIM are most dismayed by the 75% drop in its share price. But while both revenue and net income are slipping, there is debate over how much panic is appropriate. The investors and analysts who support RIM argue the extreme market reaction is unwarranted. “Stock prices in the short-term have nothing to do with intrinsic value,” Prem Watsa says. “They reflect emotion.” (Years ago, Balsillie even implemented a rule at RIM that anybody caught talking about its share price would have to buy doughnuts for everyone on staff.) The board might have the same opinion, particularly when Martin argues focusing on quarterly earnings and expectations instead of customers is misguided.
Balsillie himself is guilty of inflating expectations. All year he has claimed the BlackBerry 10 devices will “leap-frog” the competition. In October, he told The Globe and Mail, “It is really, really powerful how we’ve intercepted the future.” He can also be hard to understand. In response to a question in March about why RIM expects gross margins to increase, Balsillie said: “I’ll just be blunt. I mean, we have just really an outstanding set of new product introduction, which is cutting over new architectures. And the capability of these, we haven’t talked about, but it’s a major, major step-up.…So quite frankly, it’s a time of cutting over and it’s a heavy cutting-over time.”
His off-the-cuff remarks sometimes catch his own employees by surprise. During a presentation to financial analysts in May, Balsillie started discussing the PlayBook, which had only recently launched. The ad campaign was taking some heat for its lacklustre nature, and some in the media speculated it had to do with the departure of Keith Pardy shortly before the tablet debuted. “I’m just gonna go through some of the ad campaign,” he told the audience. “I’ve taken over the CMO reports, and feel very, very good in the ad strategies.” Balsillie ostensibly assuming chief marketing officer duties was news to some employees covering for Pardy after he left, as well as their subordinates. One employee sitting in the audience recalls turning to a co-working and exclaiming, “What the fuck?”
Some executives within RIM have encouraged Balsillie to rein in his bombastic tendencies in the past. “He’s a very proud guy. It’s pretty hard to tell him he needs training in anything,” says a former employee. But Balsillie may have relented somewhat. His tone on December’s earnings call was subdued, even contrite. There were no bold proclamations.
At this point, what Balsillie and Lazaridis say matters little. The most important task is to release the BlackBerry 10 smartphones. If the devices fail to reignite the U.S. market, the pressure to remove Balsillie and Lazaridis from their roles as co-CEOs will become more intense. It is a scenario neither of them seems willing to consider. After everything they have achieved, their pride is understandable. The unshakable level of confidence has been with them from the beginning of their working relationship. In 1993, shortly after joining RIM, Balsillie spoke to The Kitchener-Waterloo Record. “It’s a bit conceited,” he said, “but Mike believes there isn’t a technology issue he can’t solve, and I believe there isn’t a business issue I can’t stick-handle my way through.” They’ll keep trying as long as they can, but they’re running out of time.
Note: This story was updated on January 23, 2012, to reflect breaking news regarding leadership changes at RIM.