Inside the fall of BlackBerry: How the smartphone inventor failed to adapt

The Globe and Mail

Former BlackBerry co-CEOs Jim Balsillie and Mike Lazaridis, and current CEO Thorsten Heins in a photo collage.

(Globe and Mail photo illustration)

This investigative report reveals that:

  • Shortly after the release of the first iPhone, Verizon asked BlackBerry to create a touchscreen “iPhone killer.” But the result was a flop, so Verizon turned to Motorola and Google instead.
  • In 2012, one-time co-CEO Jim Balsillie quit the board and cut all ties to BlackBerry in protest after his plan to shift focus to instant-messaging software, which had been opposed by founder Mike Lazaridis, was killed by current CEO Thorsten Heins.
  • Mr. Lazaridis opposed the launch plan for the BlackBerry 10 phones and argued strongly in favour of emphasizing keyboard devices. But Mr. Heins and his executives did not take the advice and launched the touchscreen Z10, with disastrous results

Late last year, Research In Motion Ltd. chief executive officer Thorsten Heins sat down with the board of directors at the company’s Waterloo, Ont., headquarters to review plans for the launch of a new phone designed to turn around the company’s fortunes.

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His weapon was the BlackBerry Z10, a slim device with the kind of glass touchscreen that had made Apple Inc. and Samsung Electronics Co. Ltd. the dominant names in the global smartphone market.

But one of RIM’s directors was frustrated by what he saw, and spoke out, according to one person who was in the room. There is a cultural problem at RIM, he told the group, and the Z10 was a glaring manifestation of it.

The speaker was none other than Michael Lazaridis, the genius behind the BlackBerry, the company’s co-founder and its former co-CEO. Minutes earlier, he said, he had spoken with Mr. Heins’s newest executive recruits, chief marketing officer Frank Boulben and chief operating officer Kristian Tear.

Mr. Boulben and Mr. Tear had dismissively told Mr. Lazaridis that the market for keyboard-equipped mobile phones – RIM’s signature offering – was dead.

In the board meeting, Mr. Lazaridis pointed to a BlackBerry with a keyboard. “I get this,” he said. “It’s clearly differentiated.” Then he pointed to a touchscreen phone. “I don’t get this.”

To turn away from a product that had always done well with corporate customers, and focus on selling yet another all-touch smartphone in a market crowded with them, was a huge mistake, Mr. Lazaridis warned his fellow directors. Some of them agreed.

The boardroom confrontation was a telling moment in the downfall of Research In Motion.

Once the giant of the smartphone business, RIM, which was renamed BlackBerry Ltd. in the summer, is now on its knees. The company reported a $965-million (U.S.) fiscal second-quarter loss Friday, primarily because of a massive writedown of Z10 phones that sit, unsold and unwanted, about eight months after they first hit the market. The company is cutting 4,500 jobs, 40 per cent of its work force, in a desperate bid to bring costs in line with plummeting revenue.

Investors, who have lived through the destruction of more than $75-billion of the company’s market value over the past five years, are still wondering how BlackBerry managed to blow its runaway lead and became a bit player in the smartphone market it invented.

An investigation by The Globe and Mail, which included interviews with two dozen past and present company insiders, exposes a series of deep rifts at the executive and boardroom levels.

Those divisions hurt the company’s ability to develop products just as it faced its greatest challenge from more nimble and creative rivals – and contributed to the downfall of Canada’s biggest technology company.

Once a fast-moving innovator that kept two steps ahead of the competition, RIM grew into a stumbling corporation, blinded by its own success and unable to replicate it. Several years ago, it owned the smartphone world: Even U.S. President Barack Obama was a BlackBerry addict. But after new rivals redefined the market, RIM responded with a string of devices that were late to market, missed the mark with consumers, and opened dangerous fault lines across the organization.

Months before their boardroom showdown, Mr. Heins and Mr. Lazaridis found themselves in another strategic standoff in which they were pitted against Jim Balsillie, Mr. Lazaridis’s long-time business partner and co-CEO.

Inside RIM, the brash Mr. Balsillie had championed a bold strategy to re-establish the company’s place at the forefront of mobile communications. The plan was to push wireless carriers to adopt RIM’s popular BlackBerry Messenger (BBM) instant messaging service as a replacement for their short text messaging system (SMS) applications – no matter what kind of phone their customers used.

It was a novel plan. If RIM could get BBM onto hundreds of millions of non-BlackBerry phones, and charge fees for it, the company would have an enormous new source of profit, Mr. Balsillie believed. “It was a really big idea,” said an employee who was involved in the project.

But the plan ran into stiff opposition at senior levels. Not long after Mr. Heins took over as RIM’s CEO in January, 2012, he killed it, with Mr. Lazaridis’s support.

That was it for Mr. Balsillie. Weeks later, he resigned from the board and cut his ties to the company.

“My reason for leaving the RIM board in March, 2012, was due to the company’s decision to cancel the BBM cross-platform strategy,” Mr. Balsillie said in a brief statement to The Globe and Mail, his first public comments on his departure. He declined a request for an interview.

Mr. Lazaridis, who declined to speak about board matters, resigned as a director this past March after delaying his retirement by a year at the board's request.

Now, BlackBerry’s future is in doubt. This week, Fairfax Financial Holdings Ltd., a Toronto-based investment company, announced a plan to lead a $4.7-billion takeover of the company. The offer is conditional, and requires a group of so-far uncommitted institutional investors to back Fairfax and provide financing.

The company’s near-collapse is a painful situation for Mr. Lazaridis, a gifted engineer who co-founded RIM in a tiny Waterloo office above a bagel shop in 1984.

“It’s really hurting me,” he said in an interview. “I can’t imagine what the employees must be thinking. Everyone is talking about the most likely scenario being that it will be broken up and sold off for parts. What will happen to the Waterloo region, or Canada? What company will take its place?”

Competition rising

Mike Lazaridis was at home on his treadmill and watching television when he first saw the Apple iPhone in early 2007. There were a few things he didn’t understand about the product. So, that summer, he pried one open to look inside and was shocked. It was like Apple had stuffed a Mac computer into a cellphone, he thought.

To Mr. Lazaridis, a life-long tinkerer who had built an oscilloscope and computer while in high school, the iPhone was a device that broke all the rules. The operating system alone took up 700 megabytes of memory, and the device used two processors. The entire BlackBerry ran on one processor and used 32 MB. Unlike the BlackBerry, the iPhone had a fully Internet-capable browser. That meant it would strain the networks of wireless companies like AT&T Inc., something those carriers hadn’t previously allowed. RIM by contrast used a rudimentary browser that limited data usage.

“I said, ‘How did they get AT&T to allow [that]?’ Mr. Lazaridis recalled in the interview at his Waterloo office. “ ‘It’s going to collapse the network.’ And in fact, some time later it did.”

Publicly, Mr. Lazaridis and Mr. Balsillie belittled the iPhone and its shortcomings, including its short battery life, weaker security and initial lack of e-mail. That earned them a reputation for being cocky and, eventually, out of touch. “That’s marketing,” Mr. Lazaridis explained. “You position your strengths against their weaknesses.”

Internally, he had a very different message. “If that thing catches on, we’re competing with a Mac, not a Nokia,” he recalled telling his staff.

RIM soon earned a chance to show up its new rival. RIM’s early smartphones had been a hit for Verizon Wireless, one of the biggest U.S. wireless players. Frozen out of the iPhone – Apple had signed an exclusive deal with AT&T – Verizon executives approached RIM in June, 2007, and asked if it could develop “an iPhone killer.” The product would need to have a touchscreen with no physical keyboard. Verizon would back the U.S. launch with a massive marketing campaign.

RIM executives jumped at the chance. At one management meeting, Mr. Balsillie called it RIM’s most important strategic opportunity since the launch of its two-way e-mail pager.

The product was the BlackBerry Storm. It was the most complex and ambitious project the company had ever done, but “the technology was cobbled together quickly and wasn’t quite ready,” said one former senior company insider who was involved in the project.

The product was months late, hitting the market just before U.S. Thanksgiving in 2008. Many customers hated it. The touchscreen, RIM’s first, was awkward to manipulate. The product ran on a single processor and was slow and buggy. Mr. Balsillie put on a brave face, declaring the launch to be “an overwhelming success,” but sales lagged the iPhone and customer returns were high.

The Storm campaign didn’t seem so disastrous at the time: RIM was in the midst of a torrid global expansion. In August, 2009, Fortune crowned it the world’s fastest-growing company. A year after the Storm launch, market research firm comScore reported that four of the top five smartphones U.S. customers intended to buy in the next three months were BlackBerrys.

But the Storm had failed to give Verizon Wireless the Apple-killer it coveted, and RIM soon abandoned the product. So the carrier turned to Google Inc. and its new operating system, Android, and built a massive marketing campaign around Motorola’s Droid phone in 2009 – at the expense of marketing dollars to support BlackBerry products. Verizon’s “iDon’t” campaign highlighted all the shortcomings of the iPhone that Android addressed with its consumer-friendly user interface.

Rather than hurt Apple, the Droid and other Android-powered phones began to steal share first from Palm and Microsoft, and then RIM. By December, 2010, Android’s market share in the U.S. had grown to 23.5 per cent from 5.2 per cent a year earlier, as RIM’s dropped by 10 points, to 31.6 per cent, according to comScore. By late 2011, Android commanded 47.3 per cent of the U.S. market, while RIM had just 16 per cent.

A shift by smartphone users

This post-iPhone period was an era of strategic confusion for RIM. The overall state of the industry “was a bit schizophrenic,” said Patrick Spence, RIM’s former executive vice-president of global sales, who left in 2012. “There was a time when the [wireless] carriers tried to keep data usage predictable. Then it shifted to a period of trying to drive much more usage in different packages, when the iPhone became compelling.”

If there were new rules of the game, RIM would require new tools. The summer after the Storm launched, Mr. Lazaridis bought Torch Mobile, a software development firm that created Internet browsers for mobile phones.

But the process of moving, or “porting,” the Torch browser onto RIM’s highly-customized system proved complex and time-consuming. RIM’s technology was based on Java computer code and an operating system built in the 1990s, while the Apple and Android systems used newer software platforms and standards that made it easier to build friendlier user interfaces. “This really meant we were not positioned for the future,” Mr. Lazaridis said. In order to survive, RIM would have to change its DNA.

RIM executives figured they had time to reinvent the company. For years they had successfully fended off a host of challengers. Apple’s aggressive negotiating tactics had alienated many carriers, and the iPhone didn’t seem like a threat to RIM’s most loyal base of customers – businesses and governments. They would sustain RIM while it fixed its technology issues.

But smartphone users were rapidly shifting their focus to software applications, rather than choosing devices based solely on hardware. RIM found it difficult to make the transition, said Neeraj Monga, director of research with Veritas Investment Research Corp. The company’s engineering culture had served it well when it delivered efficient, low-power devices to enterprise customers. But features that suited corporate chief information officers weren’t what appealed to the general public.

“The problem wasn’t that we stopped listening to customers,” said one former RIM insider. “We believed we knew better what customers needed long term than they did. Consumers would say, ‘I want a faster browser.’ We might say, ‘You might think you want a faster browser, but you don’t want to pay overage on your bill.’ ‘Well, I want a super big very responsive touchscreen.’ ‘Well, you might think you want that, but you don’t want your phone to die at 2 p.m.’ “We would say, ‘We know better, and they’ll eventually figure it out.’ ”

Trying to satisfy its two sets of customers – consumers and corporate users – could leave the company satisfying neither. When RIM executives showed off plans to add camera, game and music applications to its products to several hundred Fortune 500 chief information officers at a company event in Orlando in 2010, they weren’t prepared for the backlash that followed. Large corporate customers didn’t want personal applications on corporate phones, said a former RIM executive who attended the session.

Meanwhile, it turned out consumers didn’t care so much about battery life or security features. They wanted apps. Apple’s iOs and Google’s Android systems were relatively easy for outside software developers to use, compared to BlackBerry’s technically complicated Java-based system.

Blackberry’s apps looked “uglier” than those programmed in more modern languages, and the simulator used to test the apps often didn’t recreate the actual experience, said Trevor Nimegeers, a Calgary-based entrepreneur whose software company, Wmode, has developed apps for BlackBerry. Further, RIM exerted tight control over developers before it would sign off on their apps for use on BlackBerrys, stifling creativity. “Developers wanted to be embraced, not controlled,” Mr. Nimegeers said. As a result, hot apps such as Instagram and Tumblr bypassed BlackBerry.

A split company

One key to RIM’s early success was its corporate structure. It is unusual for a company to have two CEOs – Mr. Lazaridis focused on engineering, product management and supply chain, while Mr. Balsillie looked after sales, finance and other corporate functions – but for a long time, it worked. Mr. Lazaridis’s side of the shop made the phones, and Mr. Balsillie’s sold them. The two men were collegial and collaborative.

Below the top executives, however, the two sides of the company didn’t always get along. And as the company grew into a leviathan with $20-billion in annual sales, the structure sometimes made it difficult to get definitive decisions or establish clear accountability. That contributed to a chronic problem for RIM: speed. “They were always slow to market, and there were always delays in launching,” said James Moorman, an analyst with S&P Capital IQ Equity Research. “It was compounded by miscalculating the speed at which the consumer market changed.”

Sometimes, feedback from customers that might inspire changes would die at middle management, because senior executives didn’t want to bring it to Mr. Lazaridis, a former insider said.

The split company also lost a major unifying force when chief operating officer Larry Conlee retired in 2009. Mr. Conlee was a whip-cracker who held executives to account for decisions and deadlines, establishing a project management office. Many insiders agreed that after he left, a slack attitude toward hitting targets began to permeate the company. “There was a gap” after Mr. Conlee’s departure, Adam Belsher, a former RIM vice-president, told The Globe last year. “There was no real operational executive on the product side that would really get teams to hit deadlines.”

After relying on its own technology for so long, Mr. Lazaridis decided the company’s next advance would come from outside. In April, 2010, RIM announced a deal to acquire Ottawa-based QNX Software, a cutting-edge software maker that would provide the building blocks for the BlackBerry 10 operating system – the new platform Mr. Lazaridis knew the company needed.

QNX was a specialist in industrial controls that used up-to-date software tools to run applications ranging from 911 call centres to wireless broadband services in vehicles. Its technology was the perfect core for smartphones and tablets, RIM’s leaders felt.

Mr. Lazaridis decided to take a page from the business strategy book The Innovator’s Dilemma by Clayton Christensen. The book outlines how established organizations that succeeded against challengers often did so by allowing small, cloistered teams to develop their own disruptive products, free from the influence of the rest of the organization.

Mr. Lazaridis decided he would isolate the QNX team and get them to focus solely on the new operating system, while leaving existing programmers to work on products for its existing platform, BlackBerry 7. Eventually he hoped QNX, led by its CEO Dan Dodge, would retrain his entire organization.

But first, RIM had to answer a key question: If it wanted to remake the BlackBerry on the QNX system, what was the best way to do that? Should it move over some of its old Java-based applications, or rewrite them all from scratch? If the company abandoned Java altogether, what would it mean for third-party developers who used it?

These were not easy decisions. Discussions among the senior leaders in Mr. Lazaridis’ organization dragged on for a year – far too long, according to several insiders.

Eventually, the decision was made: BlackBerry 10 would be built from scratch. The problem with that approach was that a new team was being entrusted to recreate the BlackBerry. Those who had created the original system were still working on devices for the BlackBerry 7 platform. Once again, the company was split.

“We had bought a powerful operating system and needed to move to it. But the BB7 was late,” Mr. Lazaridis said. “Every week, I was getting requests for more hires, more resources. The conundrum was, how do I pull resources off the BB7 to rewrite all the apps on top of QNX?”

PlayBook pain

The QNX team’s first assignment was to work on an operating system for the PlayBook, RIM’s answer to Apple’s successful iPad tablet. Mr. Lazaridis saw the work as a precursor to the BlackBerry 10 line of smartphones and was impressed by what the team brought to the product. “It helped our developers experience the power and elegance of QNX,” he said.

But the QNX team was overwhelmed and needed to draw heavily on the company’s other resources to complete the PlayBook. Similar issues arose later on the BlackBerry 10. The tablet, originally slated to come out in the fall of 2010, didn’t appear until April, 2011, and it failed to sell. It was an awkward accessory to RIM’s smartphones, and lacked e-mail, contacts and apps. Once again, RIM had missed the mark: Tablets that sold well worked as standalone devices, which the PlayBook wasn’t.

Some questioned the wisdom of launching the PlayBook in the first place, feeling it was a needless and costly distraction. And the decision to isolate QNX also created tensions and morale problems: Those who weren’t on the team worried about their future.

“To me, the most logical thing would have been to integrate the operating system organizations into one,” said one senior executive who was caught up in the fray. “Then you’d have a whole team, not 150 people sitting around saying, ‘I don’t know what I’m going to do next,’ and another 150 people saying ‘I’m over my head.’ ”

Meanwhile, RIM’s lack of an advanced smartphone meant that it continued to bleed market share to Apple and Android, especially in the United States. In December, 2010, Verizon Wireless announced it would invest in fourth generation (4G) LTE technology to accommodate the growing demands of customers who wanted to surf the Internet on their phones. It signalled to device makers that it would look to feature 4G smartphones in its marketing.

RIM’s 4G phone effort was the BlackBerry 10, but it was far from ready. RIM executives tried to make an engineering argument to carriers that 4G technology was no more efficient than 3G, and that its Bold phones were just fine. Mr. Lazaridis, Mr. Heins and chief technology officer David Yach “were trying to reshape the argument because they knew our products couldn’t go there,” a former executive said. “It was a fight to stay in [promotional] programs with carriers. We lost channel support and feature ads.”

The PlayBook debacle and mounting delays of the BlackBerry 10 harmed the organization in other ways.

For years, Mr. Yach and Mr. Lazaridis had enjoyed a close working relationship. But as the well-regarded Mr. Yach began to question the company’s ability to hit deadlines on products, his views were dismissed and he was made to feel he wasn’t a team player, damaging their relationship, observers said. He left the company in early 2012.

The PlayBook flop merely added to the sense of a company in decline; 2011 became a significant turning point for RIM. As it became clear the brand was getting trounced in the market, and the BlackBerry 10 project was hit by significant delays, the stock plunged, falling from $69 (Canadian) in February to less than $15 by the year’s end.

The pressure mounted on Mr. Balsillie, Mr. Lazaridis and the board. In January, 2012, they stepped aside as co-CEOs and handed it over to Thorsten Heins, a German executive who had run the company’s handset division.

Almost immediately, there was division about how to roll out the BlackBerry 10. The original strategy had called for the company to launch an all-touchscreen version first, because sales were still going well for the company’s BlackBerry 7 keyboard phone.

But by 2012, sales of BlackBerry 7 phones had lost steam, and Mr. Lazaridis, now deputy chairman, felt the company should switch its priority to getting a keyboard version out, to meet the demand from BlackBerry die-hards.

“This is our bread and butter, our iconic device,” he told an executive at the company. “The keyboard is one of the reasons they buy BlackBerrys.”

Mr. Heins’s new management team held firm, sources close to the board said. “They believed everything was going to full touch” and that the QNX-designed system was clearly superior to what was available on other mobile operating systems.

To Mr. Lazaridis, abandoning the company’s competitive advantage in the hopes consumers would embrace yet another touchscreen was too risky a strategy, setting up the showdown at the board last year. In the end, management agreed to continue developing the Q10 keyboard phone. But the all-touchscreen Z10 would be launched first.

By the time the first BlackBerry 10 smartphones were unveiled in January of this year, market observers generally agreed that the products were two years too late – a view widely shared among many senior RIM insiders.

“Buying QNX was the right play ultimately,” said Mr. Spence. “But we didn’t make the turn fast enough. Everyone underestimated the complexity” involved in building the new system.

A BBM plan

For 20 years, Jim Balsillie and Mike Lazaridis operated in tandem, building an increasingly successful partnership that allowed each other’s strengths to flourish.

They shared an office in their early years, even possessing each other’s voice mail passwords.

As RIM grew, they worked in separate buildings but spoke several times a day. “They had a relationship I wish I had with my wife,” one mid-level executive said.

But they had different personalities and their lives seldom intersected outside the office. They have barely spoken since leaving the company.

For Mr. Lazaridis, science was both a job and a pastime. Mr. Balsillie was brash, competitive and athletic, and wore his reputation for being aggressive, even bullying in meetings, as a badge of honour. If anything, he viewed that outward toughness as a job requirement, not unlike tech CEOs such as Steve Ballmer at Microsoft Corp. or Apple’s Steve Jobs. “Show me how else you build a $20-billion company,” he once confided to a colleague. “If I was Mr. Easy-going, they would kill BlackBerry.”

The two rarely disagreed on key strategic moves – until their last year together. Mr. Lazaridis believed BlackBerry 10 would herald RIM’s renaissance. Mr. Balsillie wasn’t so sure.

Mr. Balsillie was concerned that Google had commoditized the smartphone market by making its Android operating system available for free to any handset maker. By 2011, wireless carriers were warning him that they would be ordering fewer BlackBerry products unless he dropped his prices to match rival manufacturers.

So Mr. Balsillie pushed an alternative plan.

The idea started with Aaron Brown, the executive who oversaw the services division at RIM. By 2010, this division was earning $800-million per quarter in revenue from the monthly service access fee it charged mobile carriers for every BlackBerry subscriber. More than 90 per cent of that was profit. Carriers tried to chip away at those fees – Google and Apple didn’t charge them – but RIM always pushed back. Mr. Balsillie was particularly insistent on keeping the service fees. But the executives knew the company’s weakening position in devices would increase pressure on services revenues as well.

Even after its terrible year in 2011, RIM still had several advantages, including close relationships with the world’s major carriers. It also had BlackBerry Messenger.

RIM developers created the BBM app in 2005 to enable users to communicate not by e-mail but by using their devices’ “personal identification numbers” or PINs. It was the first instant messaging service built for wireless devices, and it caught on quickly. It was reliable, free, always on and users could send as many messages as they wanted at no extra cost, unlike basic text messages. PINs were random codes, not phone numbers or e-mail addresses, enhancing privacy. That made BBM extremely popular in countries where citizens didn’t enjoy as many freedoms as Western democracies, and helped drive handset sales there.

BBM’s developers added a few clever elements that also made it addictive. For example, users would know when a message had been delivered and when it had been read, marked D and R. Today there are 60 million monthly active users.

But BBM only worked on BlackBerrys. As Apple and Android took off, BBM knock-offs appeared that could function on those devices, including Kik Interactive Inc., founded by Ted Livingston, a former RIM co-op student. Today Kik, boasts 85 million users, more than BlackBerry (which sued Mr. Livingston for allegedly copying its program). Others, such as WhatsApp, are even larger. Instant messaging “is the killer app of the mobile era,” Mr. Livingston said. “We think there will be a Google or Facebook-sized company that comes out of this category.”

RIM’s Mr. Brown believed he could tap into this unfolding trend. While working with Mr. Balsillie on other projects, around late 2010 and early 2011, he began to talk up the concept of offering BBM on other mobile platforms.

Mr. Balsillie loved it. At the time, some carriers were pushing for rebates on their monthly service fees. Mr. Brown was willing to comply if the carriers would agree to open new parts of their business to RIM. He and Mr. Balsillie struck upon an idea: Why not give carriers the opportunity to offer BBM to all their customers – no matter what devices they used?

Most wireless executives were not fans of instant messaging services and other “over-the-top” apps such as Skype because they eroded the carriers’ revenue from text messaging.

To counter that threat, carriers banded together to develop a standardized “rich communication service” (RCS) platform that would enable their customers to exchange text messages, videos, games and other digital information. But the initiative has gained little traction; one commentator recently labelled RCS a “zombie technology.”

SMS 2.0

Mr. Balsillie began floating the idea that carriers could instead offer BBM as their own enhanced version of text messaging, generating revenue for carriers while providing a cut for RIM. He called it “SMS 2.0.” (SMS stands for “short message service.”) RIM would agree to reduce the fees it charged for services, in exchange for gaining access to hundreds of millions of non-BlackBerry users.

He and Mr. Brown discussed several options. For example, carriers could offer BBM as part of a standard “talk and text” plan for entry-level smartphone users. Because of its extra functions, BBM would save customers from having to buy a data plan.

Or, carriers could offer an expensive plan that included BBM and other offerings from BlackBerry, including one gigabyte of cloud storage on which they could keep photos or songs. The carriers could then sell extra services such as radio through BBM. It would also make the wireless companies’ customers “stickier” – less likely to defect – since they couldn’t move stored data to rival mobile carriers as easily.

The SMS 2.0 plan was a throwback to RIM’s move a decade earlier to form partnerships with mobile providers and share revenues. It was a chance to make BBM the dominant chat messaging service, and would have created a new story

for the BlackBerry brand.

A few carriers responded positively to Mr. Balsillie’s initial entreaties and by mid-2011, he was calling SMS 2.0 the company’s top strategic priority.

To round out the strategy, and build a suite of cross-platform services, RIM made a few acquisitions, such as instant messaging firm LiveProfile. The service had about 15 million users and worked on Apple and Android devices, giving BBM the entrée it needed to those platforms.

But the plan deeply divided the company. BBM was still an important driver of BlackBerry sales. Making it widely available to competitors represented an added threat to RIM’s faltering handset business, led by Mr. Heins at the time. Many inside the company felt a cross-platform BBM made sense, but only when BlackBerry 10 was out. Mr. Balsillie and proponents of his plan felt that would be too late.

“It’s fair to say [the risk to handset sales] was a shared concern of everybody I spoke to,” said former RIM executive Mr. Spence. “But it was hard to deny the fact [carriers’ text messaging] revenue was declining. These carriers were looking for a solution and this was a potential solution.”

One former executive felt Mr. Balsillie was overestimating the revenue potential of his software-driven strategy. As Mr. Balsillie talked up SMS 2.0, Mr. Heins and his team increasingly cast doubt on it internally. “He was absolutely canvassing behind the scenes working to kill it,” said one company insider.

As for Mr. Lazaridis, he was supportive of launching BBM for rival operating systems, but was concerned about the costs and risks involved in building out the SMS 2.0 strategy, said a source close to the board. “We weren’t in a position to be investing in free services that required massive capital expenditure [and could provide] zero payback for maybe a few years if we’re successful,” the source said. Like others, Mr. Lazaridis worried about handset sales.

But Mr. Balsillie was increasingly convinced that SMS 2.0 was the way to go. After pitching the plan to CEOs of 12 of the largest wireless carriers in the world in late 2011, he believed he could sign up at least one major U.S. carrier – insiders say AT&T was interested – as well as Telefonica and one or two other European carriers. That’s all it would take, he felt, to convince others to adopt BBM en masse.

But other RIM executives who were part of the growing SMS 2.0 team also encountered resistance.

Mr. Balsillie was pushing to formally launch SMS 2.0 at an industry conference at the end of February, 2013. But with the company under mounting pressure to overhaul its top leadership, he and Mr. Lazaridis handed the reins to Mr. Heins in late January.

A few weeks later, Mr. Heins killed the SMS 2.0 strategy, backed by Mr. Lazaridis.

“We had to get the BlackBerry 10 out, and we couldn’t be distracted,” said a source close to the board. “Everything else was shelved. And if that meant getting rid of strategies that didn’t fit, or weren’t complete, or required resources, I think [Mr. Heins] did the right thing.”

The Globe and Mail requested interviews with Mr. Heins and with Barbara Stymiest, the chair of the board. The company declined, but agreed to agreed to provide answers to written questions.

Asked why he shelved SMS 2.0, Mr. Heins said in an e-mailed response: “There are so many [instant messaging] alternatives in the marketplace that we wanted to be careful to launch only when we felt we could clearly differentiate our offering.”

Mr. Balsillie, no longer an executive but still a board member, urged directors to reconsider, but they backed the new CEO. Mr. Balsillie couldn’t abide by the decision. He resigned from the board in late March, then sold all his stock. Few people knew the reason for his departure, including his long-time co-CEO, Mr. Lazaridis.

BlackBerry did launch a version of its BBM application last weekend for iPhones and Android devices, but simply as a stand-alone app. Andrew Bocking, the executive who oversees BBM, said that with built-in capabilities to have group chats, share photos, calendar items and other features, “it really takes BBM to a whole other level … I believe there is an opportunity for a dominant player in instant messaging and there will be one winner-take-all.”

To those who championed the SMS 2.0 strategy, most of them now gone, RIM should have been well on its way there already.

A fizzled launch

Finally, close to six years after Apple unveiled the iPhone, the long-awaited BlackBerry 10 made its debut at a glitzy launch event in January, featuring singer Alicia Keys as the company’s “global creative director.” It was a minor detail in a much larger story, but the made-up title and meaningless job irked some who wondered why the company was distracting itself with celebrity endorsements while in the fight of its life.

The Z10 device itself won a number of positive reviews. The New York Times’ David Pogue, who previously had predicted that the BlackBerry was doomed, began his review: “I’m sorry. I was wrong.” But eight months later, it’s hard to see the launch as anything other than a total business failure, given the sheer volume of unsold smartphones now written off.

The marketing campaign was confusing and vague: An ad that ran during the Super Bowl failed to explain what made the product distinct. A source close to the board said directors weren’t shown the ad before it ran, and some didn’t understand the content or the slogan, “Keep Moving.” There were no lineups, and no buzz for the product – nothing like the frenzy of publicity that seems to surround the launch of each new version of the iPhone.

Once again, the market had shifted, and there was little demand for the Z10 in an era where sophisticated operating systems were commonplace and phones were getting cheaper. The one advantage the BlackBerry may have had over its rivals – a physical keyboard – wasn’t present in the first model to hit the market.

“The only people still clamouring for a new smartphone from BlackBerry were in it for the keyboard,” said S&P’s Mr. Moorman. “Then they come out with a touchscreen. Anyone who wanted a touchscreen was already gone.”

As it turns out, both Mr. Balsillie and Mr. Lazaridis were proven right. It was hard enough to compete in a commoditizing smartphone market. Leading with the wrong product on top of that only made BlackBerry’s task more hopeless. Mr. Heins’s strategic errors only compounded the challenging situation he had inherited.

The product was difficult to sell for other reasons. One company insider said it could take close to an hour for young sales staff to demonstrate the product in dealer stores.

And many long-time BlackBerry users found that the new system was too different from the classic BlackBerry experience for their liking. Many of the little “moments of delight,” as they are called in the company, were forgotten or overlooked by the QNX developers who lacked ties to the company’s past. For example, users can’t hit “u” and look at the last unread message in their inbox, nor can they easily shift to the next or previous e-mail, as they could on older BlackBerrys. Pocket-dialling is a constant hazard.

Meanwhile, the company was slow to provide service to business users – such as helping them to transfer applications they had written for the old BlackBerry system. Software developers were left with dead-end investments after learning they would have to rewrite their apps for the new system if they wanted to remain part of the BlackBerry world. Many simply didn’t bother.

“The decisions we made over the last two years were made within the context of a volatile, competitive and ever-changing marketplace – and always with the goal of delivering the vital technology that our customers need,” Mr. Heins said in a written response to questions about the success of the BlackBerry 10 launch. While he called the launch “a significant accomplishment and one that involved the reinvention of our company,” he acknowledged it “did not meet our expectations.”

As for Mr. Lazaridis, he has not given up on the enterprise he founded 29 years ago.

He is still a minority shareholder in BlackBerry, and continues to be the subject of rumours he may join a group to buy out his former company.

Mr. Lazaridis declined to discuss any such plans, but it is clear he believes the BlackBerry story is not over.

“Many companies go through cycles. Intel experienced it, IBM experienced it, Apple experienced it. Our job was to reinvent ourselves, which we all believed BB10 would do,” he said.

“The fact that a Canadian company was able to compete in that space with two of the largest tech companies in the world is a big deal. People counted IBM, Apple and other companies out only to be proven wrong. I am rooting that they are wrong on BlackBerry as well.”

With reports from Tara Perkins, Omar El Akkad and Iain Marlow

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AN INTERVIEW WITH CEO THORSTEN HEINS

Did you make the most of the strategic opportunities before you when you became CEO? Did you make the right choices? Are there any you would reconsider?

When I was appointed CEO in January, 2012, I knew there were challenges and opportunities for all of us at BlackBerry. We had an aging OS and no LTE product, for example. What we have created with BlackBerry 10, BES 10 and BBM is a reliable and secure foundation to enable us to continue to innovate and create new opportunities. The decisions we made over the last two years were made within the context of a volatile, competitive and ever-changing marketplace – and always with the goal of delivering the vital technology that our customers need and creating value for our shareholders.

How do you feel about the way things have turned out with the BlackBerry 10 launch?

We launched a new platform that delivers a new and different user experience, an experience that was engineered for people who value extreme productivity, but the downside is that there is a steeper learning curve when it comes to adopting any new technology that is disruptive, and I believe that contributed to the slower sales.

Why was BlackBerry 10 so late?

As you know, there were delays during the process, but we are proud of what our team has developed and brought to market. The integration of the new features into the platform proved to be more complex and thus more time-consuming than anticipated. The issues were not related to the quality or functionality of the features in the software, but rather the time required to manage the integration of such a large volume of code and prepare it for commercial use globally.

Has this been difficult for you personally?

This isn’t about me; this is about our employees and our customers. One of BlackBerry’s greatest strengths is its talented, committed and passionate employees. And that is why the recent reduction to the work force was particularly challenging and difficult, albeit necessary, to address our position in a maturing and more competitive industry, and to drive the company toward profitability.

This interview has been edited and condensed.

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Why the China plan was shelved

One of the many strategies that became a casualty of internal feuding at Research In Motion Ltd. was a confidential plan for a China-backed venture to sell the company’s wireless network systems in Asia.

In the summer of 2010, RIM’s chairwoman Barbara Stymiest and then co-chief executive officer Jim Balsillie approached the state-owned fund China Investment Corp. (CIC) with an overture to form a joint venture. According to people familiar with the discussions, Mr. Balsillie and CIC reached a preliminary understanding in 2011. Under the plan, Beijing agreed to approve RIM as the official supplier of wireless operating systems in China, one of world’s biggest and fastest growing mobile markets that was virtually closed to foreign competitors.

A new China-based company would be formed and owned by CIC, RIM and a handful of Chinese mobile phone makers. The venture would sell Chinese-made phones which, under a licensing agreement, would operate on RIM’s core software.

“Beijing was very keen to do this deal,” said one person involved in the talks.

Mr. Balsillie championed the venture as a lucrative window into the tightly controlled Chinese market. But according to insiders, RIM co-CEO Mike Lazaridis and a number of directors worried the plan would distract the company from its core focus on launching a new smartphone, the BlackBerry 10.

While RIM’s executives debated the China strategy internally for nearly two years, its potential Asian partners were left in the dark. “We heard nothing. The whole thing just frittered away,” said one person close to the Chinese partners.

Shortly after Thorsten Heins was appointed RIM’s CEO in 2013, the China plan was shelved. Mr. Heins declined in a statement to discuss the abandoned venture.

Jacquie McNish and Sean Silcoff

Follow us on Twitter: @SeanSilcoff, @jacquiemcnish

Companies & investments Mentioned In This Article (2)

Company Price Change Volume
BlackBerry Limited
BB-T
10.75 -3.327 % 2,779,514
BlackBerry Limited
BBRY-Q
9.95 -3.116 % 15,142,602

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