Research In Motion’s last chance at redemption is now imminent. On January 30, the company will unveil its new BlackBerry 10 operating system and smartphones. If it goes well, the launch will allow RIM to finally put the turmoil of the past few years—a plummeting market share and stock price, multiple product delays, and thousands of layoffs—behind it. The promo material around the launch emphasizes RIM’s desire to break with the past. The tag line: “Re-designed. Re-engineered. Re-invented.”
BlackBerry 10 is, by all appearances, a radically different operating system for RIM, and a big improvement over what came before. Even the company itself has undergone a reinvention of sorts since Thorsten Heins became CEO last January. He’s remade the executive ranks, eliminated layers of bureaucracy and instilled a new sense of purpose in a workforce battered by layoffs.
The sad part is that while Heins took all of the right steps to get BlackBerry 10 to market, it’s still likely too little, too late. RIM will have tremendous difficulty clawing back market share from Apple and Google’s Android software, and the switch to the new operating system puts a big money-maker for the company—the revenue earned by providing services like security for subscribers and traffic management for carriers—in danger. Subscribers will soon be able to pick and choose what they pay for; some won’t require any at all. Faced with these challenges, RIM is unlikely to return as a viable competitor to Apple and the army of Android handset providers. Android smartphones now dominate the market with a 68.3% share, while Apple controls 18.8%, according to research firm International Data Corp. RIM now accounts for just 4.7%.
Unless Heins has been hiding a new service or capability that is truly revolutionary, the new operating system is unlikely to pull RIM off the path toward drastic changes to its business, including a possible outright sale. At best, some analysts see BlackBerry 10 turning a modest profit for the company. Most are not banking on RIM’s second coming. “This is the last great chance that RIM has,” says Bill Kreher, a technology analyst with Edward Jones. “It may look like a totally different company if this does not work.”
Building the new phone
Historically, RIM never had to fret so much over what people wanted in a mobile device. The BlackBerry was the only true smartphone available for years—which bred an attitude at RIM that customers would be perfectly happy with whatever the company delivered. Recall RIM’s first touchscreen device in 2008, the BlackBerry Storm. Reviewers complained about the buggy interface, and questioned why the touchscreen would physically “click” when a user pressed on it, a feature that had little purpose. “How did this thing ever reach the market?” asked David Pogue, the New York Times tech columnist, in his review. The company’s first tablet, the PlayBook, also flopped when it debuted in 2011. It lacked the key features for which RIM is known: built-in e-mail and calendar capabilities.
RIM wants to avoid these mistakes with BlackBerry 10. Development was different from the very start. The operating system is based on completely different software, which RIM acquired in 2010 when it bought QNX Software Systems. For the user interface, RIM largely relied on the team from The Astonishing Tribe, a Swedish company purchased that same year.
Consumer research played an important role, too. RIM spent months soliciting feedback from customers through focus groups and surveys to develop a profile of its typical user, explains Jeff Gadway, senior manager of product marketing at RIM. (CEO Thorsten Heins was not made available for an interview.) These users are what he calls “hyper-connected,” meaning they e-mail, text and participate in social media constantly. They also employ their smartphones for productive purposes rather than just consuming content, and are always multi-tasking. “These characteristics extend to business professionals as well as teenagers,” Gadway says. “This is not a niche market.”
The company is confident the new operating system will appeal to more than existing subscribers. They think it will also lure BlackBerry defectors back into the fold, and even convince Apple and Android users to buy a BlackBerry for the first time. When RIM spoke with people using competing products, one of the biggest grievances was about fussy virtual keyboards. So RIM built what Gadway says is a far more accurate predictive keyboard. More significant, RIM developed something called Hub that pulls together a user’s communication applications (e-mail, BBM, Facebook notifications, etc.) in one place that can be checked without having to exit whatever application is open. That kind of multi-tasking is perhaps the biggest difference between BlackBerry 10 and other operating systems, notably the iPhone. Instead of hitting the home button to switch between applications, a user can swipe—or “flow”—through multiple apps running at the same time. Many of the reviews based on early prototypes have been largely positive. USA Today called BlackBerry 10 “nifty,” AllThingsD branded it as “slick,” and TechCrunch said the keyboard was “extremely impressive.”
Still, will that be enough to convince people to switch? Analysts are pessimistic. “I’d be shocked if people started cutting away from Apple and Android to BlackBerry,” says Mark McKechnie, a managing director at Evercore Group in San Francisco. While RIM fumbled about for the past couple of years, consumers were developing brand loyalty to Apple and Samsung. They became entrenched in the services offered by those companies, with songs stored in iTunes, photos in iCloud, and so on. Switching to a new smartphone these days ultimately means uprooting one’s digital life. “It’s effort to switch platforms, so there would have to be a pretty compelling reason,” says Tom Astle of Byron Capital Management.
Any desire to switch will likely be muted by the lack of applications for the new phone.
The number of apps for BlackBerry has long trailed behind Apple and Android. Coding for the platform was more problematic, and RIM didn’t invest as heavily in courting developers. But starting in 2011, RIM took huge steps to retool its approach so that creating apps is less hassle than in the past. “Their development environment is light-years ahead,” compared to where it was, says Brian Hurley, president and CEO of Ottawa-based developer Purple Forge. “I don’t think it’s possible for a company to have done more for the developer community.”
RIM now promises around 70,000 apps will be available for BlackBerry 10 at launch. That still puts RIM behind Microsoft’s upstart Windows platform, which had approximately 150,000, which itself is significantly behind the 700,000 apps available for both the iPhone and Android devices. Increasing that number depends on how many people buy the new smartphones. Hurley, whose company created apps for clients ranging from municipal governments to the American Petroleum Institute, is not seeing any interest in BlackBerry 10 from his clients. “They don’t even ask,” he says. “It’s hard for them to justify investing in a platform that doesn’t really exist at the moment.”
It could be a dreadful situation for RIM: without users, there’s little demand for developers to create apps. But without apps, people are less likely to choose BlackBerry. Recent history illustrates how the head start enjoyed by Apple (and later, Android) makes it difficult for others to compete. Palm’s webOS software earned rave reviews when it debuted in 2009 (some considered it even better than Apple’s iOS), but the cash-strapped company couldn’t get any traction with it. Nokia, which partnered with Microsoft to produce handsets running Windows Mobile, debuted its Lumia line in late 2011 to laudatory reviews, but uptake is slow. Nokia has shipped approximately 10 million Lumia smartphones to date; Apple sold 26.9 million iPhones in its last quarter alone. RIM doesn’t have the marketing resources of Microsoft and Nokia. At the end of September, Microsoft had more than US$66 billion available to spend. RIM has only $2.9 billion.
The company will get marketing help from its carrier partners, at least. More than 150 telecom providers are testing the new smartphones, and Gadway says “they’re looking for alternatives to iPhone and Android.” Carriers may want a third mobile platform so that Apple and Google can’t wield too much power over the industry.
But if an alternative to Apple and Android is to succeed, some are betting it will be Windows, in part due to Microsoft’s size and the fact that it’s licensing the software to manufacturers. IDC, for instance, predicts that Microsoft’s share of the smartphone market will grow from 2.6% today to 11.4% in 2016. During the same period, RIM’s share could shrink from 4.7% to 4.1%. Indeed, the projections for BlackBerry 10 sales are fairly tame compared to the industry leaders. Astle at Byron Capital Markets predicts RIM could sell around 23 million BlackBerry 10 handsets in fiscal 2014, which would be enough to generate a “slight profit.” He’s more optimistic than others. Analysts at Cormark Securities project RIM will sell 15 million BlackBerry 10 devices at most, while McKechnie at Evercore is estimating just 9.2 million. RIM would lose money under those scenarios, eating into its cash pile and forcing it take more desperate measures for survival. But RIM’s future depends not only on handset sales, but also on how much extra revenue it generates through services. This is where RIM has made the bulk of its profits in the past; it’s now a business in jeopardy.
Can RIM win back its corporate clientele?
RIM has always been more than a hardware manufacturer. It spent a lot of money in its infancy to build its own network to help carriers manage traffic, compress data, and provide added security. RIM earns a recurring revenue stream for these services. In the past quarter, it raked in $972 million, equal to 36% of its total revenue.
Like most things that once made RIM unique, the services business as it exists today is headed for obsolescence. Analysts have suspected this for a while, based on a few trends. RIM’s power to negotiate fees with carriers is shrinking alongside its market share. Carriers are also investing in their own networks to handle more capacity, eliminating some of the need to rely on RIM. As for security, the company has said before that its business customers have asked for differing levels of service.
In December’s quarterly earnings call, Heins announced the company is moving to a new service fee model that allows BlackBerry users to essentially choose from a “menu” of services, and said that some subscribers who require nothing more beyond the handset will not pay anything under the new plan. He insisted that service revenue is “not going away,” but the shift almost certainly means revenue will drop as people move from older BlackBerry smartphones to the latest models. “The fact they would underscore something like that tells you there’s going to be a meaningful change,” says Richard Tse, a technology analyst at Cormark Securities. Puzzlingly, Heins said the company will actually grow service revenue, but he did not specify how, despite repeated questions from analysts. “They were pretty evasive,” Tse says.
Heins did mention looking at ways to earn money from RIM’s BlackBerry Messenger service. But again, he had no details. RIM considered licensing BBM to rival smartphone platforms in the past, according to a former employee. Jim Balsillie was much more in favour of the idea than his former co-CEO colleague Mike Lazaridis, but both eventually decided to put the idea on ice to focus on BlackBerry 10. “The consensus opinion was we had to keep our focus on making a great BlackBerry 10 experience,” says the former employee. “That didn’t really allow us to think about launching other initiatives.” The idea wasn’t resurrected in the months following Heins’s appointment, either. Instead, the company became even more focused on BlackBerry 10. That was the right decision at the time, but RIM has to address the pending decay in its services business soon.
The problem is all the more dire given that RIM’s stronghold with corporate subscribers is no longer a sure thing. IT departments have been allowing employees to use non-BlackBerry devices for years. There is a suite of companies, such as Good Technology and MobileIron, helping to facilitate this trend by providing what’s called mobile device management, a service that allows IT departments to manage multiple smartphone and tablet platforms, be they Android, BlackBerry or iOS, from a single console. RIM says it’s well-positioned to take advantage of this trend, too, given that it offers the same management services and has a long history with corporations.
Jeff Holleran, RIM’s senior director of enterprise product management, says RIM is currently working closely with 120 companies who are in the process of making the transition to BlackBerry 10. The feature that will really appeal to RIM’s corporate base, Holleran argues, is called Balance, which allows personal and professional information to exist in completely separate realms on a single device. “From the IT perspective, they’re protecting all of that corporate data,” Holleran says. “And for the individual, they’re able to protect all of their personal information from the organization.” One of the major concerns RIM heard from its corporate customers was about the potential for social-media screw-ups. There are now countless examples of careless social-media reps erroneously tweeting from corporate accounts instead of personal ones. With Balance, a BlackBerry can run two completely different Twitter apps—one personal and one corporate—to prevent such embarrassing mishaps.
But, as RIM knows, it’s becoming more common for individuals, not their employers, to choose their smartphones, which is why targeting consumers is now more important than targeting IT departments. And RIM will have to do this around the globe. Though the company is particularly strong in some countries, including Indonesia and Nigeria, there are signs RIM is losing heft even outside of North America. RIM’s share of Europe, the Middle East and Africa peaked at 20.7% in 2011, according to Needham & Co, falling to 9.9% today. The first two BlackBerry 10 devices are premium smartphones for the developed world, although RIM will eventually roll out new devices for emerging markets. But it’s harder to make a profit in those regions because smartphone prices is generally lower than in North America. Android hardware manufacturers, such as Huawei and ZTE, are better able to fight on price than RIM in those markets.
It all adds up to the biggest challenge facing any major company today. RIM is preparing for the possibility that BlackBerry 10 does not significantly grow its subscriber base and return it to profitability. That’s partly the reason for its ongoing “strategic review,” which is exploring licensing, partnerships and even a sale. Theoretically, there are many possibilities. The company could license its operating system to hardware manufacturers to rake in more revenue, but RIM would have to see some success with BlackBerry 10 first for handset providers to sign on. No one will want to push an unpopular platform. In a more radical scenario, RIM could ditch its money-losing hardware business entirely to focus on software and services, or put itself up for sale to an acquirer eager to enter the mobile market, such as IBM. The worst-case scenario is that RIM is scavenged for its intellectual property.
That would be a tragic end for the company once synonymous with the smartphone, especially after all of the work that has gone into BlackBerry 10. The week after next, it will be up to RIM to prove its efforts haven’t been for nothing—and that it’s not already too late.