During the height of the world’s addiction to the device known as “the CrackBerry,” it would have been difficult to imagine the grim choices now facing Research In Motion Ltd.
Each quarterly report brought new and convincing evidence that Canada’s technology giant was unstoppable. RIM would routinely demolish the best forecasts of Bay Street and Wall Street – just as Apple Inc. does today – with massive increases in revenue, profit and BlackBerry shipments. Its share price flirted with the $150 mark, briefly making it larger than Royal Bank of Canada. That was less than four years ago; it feels like an eternity.
RIM’s downhill slide began slowly, with a few signs that Apple and other rivals like Samsung Electronics Co. Ltd. were winning over consumers with slick phones and software. Then it accelerated into a full-blown crisis. Today, the company’s outlook is so murky – and its U.S. business is disintegrating so quickly – that it no longer feels confident enough to predict how many BlackBerrys it thinks it can sell in the next quarter.
So, for the first time, RIM is doing what companies in crisis do: It’s facing its troubles head-on and putting every option on the table. Under new leadership, a litany of ideas that would have once been considered far too extreme are now all in play, from licensing the closely-guarded BlackBerry software to spinning off entire divisions or putting the whole company up for sale.
With year-end results released in late March that showed just how bad things have become – the company reported a quarterly loss for the first time in seven years – new chief executive officer Thorsten Heins vowed to undertake a “comprehensive review” of the business.
“This is not without risks and challenges,” he says. “And there’s no guarantee of success.” But for a company that has lost more than 90 per cent of its value, there’s also little choice. The Globe and Mail spoke to current and former RIM insiders, wireless industry experts and analysts to assess some of the most radical options that Mr. Heins and the directors could pursue.
1. SELL THE COMPANY
Mr. Heins did not rule out putting the company up for sale, an option that was never discussed openly during the tenure of former co-CEOs Jim Balsillie and Mike Lazaridis.
Whether anyone wants to buy it, of course, is another question. The technology industry is notoriously fast-moving; consumer technology moves even faster. The wireless handset business, which sees consumers replace their phones more frequently than TVs or even desktop computers, is almost entirely unpredictable. So buying a failing handset business is a very risky investment.
“I don’t think there’s any bidder,” says Peter Misek, an analyst with Jefferies & Co. Inc. “I don’t think anybody’s been able to get their arms around the rate of decline.”
That doesn’t mean companies have not looked at RIM. Nokia Corp. and Microsoft Corp., which have teamed up to run Windows Phone on Nokia’s new smartphones, looked at making a bid for RIM, sources previously told The Globe, but withdrew when it became clear how quickly RIM’s market share in the United States was dropping.
The complexity of RIM’s business model is another factor for a potential buyer. RIM doesn’t just make BlackBerrys, nor does it simply offer wireless service. The company has created an intricate web of secure servers on different continents that send encrypted data traffic in and out of almost every wireless carrier on Earth, and basically every Fortune 500 company. RIM also has around 18,000 employees, around the globe, in everything from advanced R&D to highly specific tech support roles. It would not be an easy acquisition for even the biggest companies, such as Microsoft.
“Selling this company would be quite the undertaking,” says National Bank Financial analyst Kris Thompson, who is quite bearish on the chances of a RIM takeover, even from a private equity firm that might find the company’s cheap valuation compelling. “How is private equity going to go in and clean this up? They have quite the organization. I think an outright sale to turn this company around is probably not in the cards.”
Colin Gillis, a senior technology analyst with BGC Financial, said a private equity firm might be interested in buying the company for its cash flow, but even such a purchase probably won’t be feasible unless the stock remains depressed for longer.
“The 52-week high was 56 bucks,” he says. “Can the board in good faith take a $20 bid? It can’t.”
2. BREAK IT UP
The idea of breaking RIM into separate pieces is not new. Former RBC analyst Mike Abramsky, who recently left the bank, advocated doing this to RIM back in July, in a note titled “Split the Berry.” Many see merit in the idea, including some former employees.
RIM has effectively operated as two companies for years, with technology and innovation falling to Mr. Lazaridis and sales and marketing falling to Mr. Balsillie. (Each executive oversaw separate campuses in Waterloo, with parallel chains of command.) The idea of splitting the company, however, involves separating RIM’s hardware and devices business (which makes BlackBerry handsets and PlayBook tablets, as well as the mobile software that runs on them) from the hugely valuable, but largely invisible, software and services side of the business. The latter includes the company’s secure global network of servers, as well as the enterprise services RIM offers to security-obsessed corporate and government clients.
“For a long time, we’ve been advocating for RIM to take more drastic options than they’ve been considering, which would include splitting the company, selling off assets, or getting it sold to whatever buyers might be interested,” Mr. Abramsky said in an interview. “Alternatively, there’s the path of irrelevancy, which is what Yahoo and AOL are on.”
The idea would be to free up the two very different businesses to pursue distinct growth and innovation strategies, without coming into conflict with each other. “If you treated (BlackBerry services) as a separate business, you’d make different decisions,” says one former RIM employee. Right now, inside the company, there’s a view that both the services and hardware divisions must compromise because of the other unit’s business interests. “And both sides take a hit on that,” says the former employee.
Some have argued that RIM would be worth more split into two; the brand erosion caused by its lacklustre handsets may be clouding the value of its BlackBerry network business. Indeed, Mr. Abramsky valued that network in July at being worth as much as $21-billion, three times the current value of the entire company.
Mr. Heins has maintained that RIM is more valuable as an integrated player – that its point of differentiation is a combination of its devices, favoured by some users for their keyboards, and its network services, beloved by IT professionals for their security.
But that dual skill set could be a curse as well as a boon.
“They’re in an identity crisis,” says a recently departed RIM executive. “They don’t know what they’re trying to do any more. Everything that made them different aren’t differentiators any more.”
3. FIND A PARTNER, LIKE SAMSUNG
On a conference call with analysts on March 29, Mr. Heins said the company is now open to many things, including licensing opportunities and partnerships. That could take a number of forms, but would most likely mean licensing BlackBerry’s next-generation operating system, BlackBerry 10, to hardware rivals, such as Samsung Electronics Co. Ltd.
The point would be to gain wider distribution for RIM’s software platform, which has lagged far behind the rival systems built by Google Inc., with its Android software, and Apple’s iOS, which runs across iPhones, newer iPods and iPads. Both of these rival platforms have hundreds of thousands of apps. RIM’s ecosystem has languished – many app developers simply don’t see the point in creating software for the BlackBerry – and now faces a new threat in Microsoft’s Windows Phone, which is vying for third place.
By giving its software over to hardware companies to run on non-BlackBerry devices – as Google does with Android to device makers such as Samsung and HTC Corp. – RIM could build much needed scale. But it may be too late for this option. (There has been talk that a licensing deal was being discussed with Samsung, but fell apart.) Some suspect potential hardware partners, such as Samsung, would rather wean themselves off of their overwhelming reliance on Google’s Android software by opting to use Windows Phone, which is geared more to consumers.
Mr. Thompson of National Bank says conversations with wireless executives have led him to believe that carriers are touting next-generation Windows devices to their business clients, rather than promoting RIM’s new BlackBerry 10 devices, due out in the fall.
A senior Canadian wireless executive confirms that Microsoft has raised its game. “Carriers like anything that creates competition at the platform level because it lowers overall device costs and hence device subsidies,” says the executive, who did not want to be named because of his employer’s business relationship with RIM. “We also like new functionality, which drives ARPU [or average revenue per user, because of wireless data usage charges]”
RIM could also offer its immensely popular BlackBerry Messenger (BBM) service – which some emerging market carriers offer as a standalone monthly plan – to rivals. The service has more than 50 million users around the world, many of whom use it fanatically, but rival messaging services such as WhatsApp and Apple’s iMessage are also gaining popularity.
RIM could choose to partner with rival manufacturers on its hardware.
Some analysts believe that RIM may have reached out to Shenzhen-based Huawei Technologies in order to have the Chinese manufacturer make cheap devices for RIM in emerging markets. where RIM is already under pressure from Huawei and other cheap handset makers like ZTE Corp.
Some, though, see such licensing and formal hardware partnerships as unlikely.
“You go with Android, or with a low-cost [device manufacturer, such as Huawei]– you’re now competing with yourself, it would be suicide,” Mr. Abramsky says. “If they’re even thinking about that, it’s nuts. Why would anybody buy a regular BlackBerry?”
4. BECOME A NICHE COMPANY
As annoyed RIM employees will often point out, their company has tens of millions of loyal users around the world. The problem is the lack of growth: the figure grew by only two million in its most recent quarter to 77 million. By comparison, Apple sold more than 37 million iPhones in their last quarter – as well as 15.4 million iPads and 15.4 million iPods.
Though perhaps an unfair comparison, given that Apple is now the most valuable corporation in the world, those figures are a sign of RIM’s diminished stature among the mobile tech titans that are Apple, Google and Samsung, a giant that makes everything from smart TVs to fridges and washers and dryers.
Another option for RIM is accepting that stature in order to focus itself better as a niche player in a narrower field – for example, catering only to business and government users or to emerging markets. Or it could get out of the business of making handsets, and become a software and services company.
Mr. Heins talked about on the first of those three options on the recent call, promising to “refocus on the enterprise business.” Analysts balked, concerned about the BYOD – Bring Your Own Device – phenomenon that has allowed employees who prefer iPhones and Android phones to start using them for work, with the blessing of their employers’ IT departments. (The company was forced to clarify via an official blog post titled, “RIM Remains Committed to the Consumer Market,” where it specified that Mr. Heins meant that they wouldn’t be focusing resources on consumer software applications.)
Focusing more specifically on business users is still an option, but it’s not one that many think is viable by itself. “They can’t ‘Go back to the enterprise,’ it’s the stupidest thing I’ve ever heard,” says the former RIM employee. “Businesses, unless they’re government departments or big businesses where security trumps everything” would be foolish to not allow employees to buy phones with their own money, the ex-employee says. “RIM knows that – inside and out.”
Focusing on emerging economies in Southeast Asia and Latin America, where RIM is by far the dominant smartphone player, is another option, but analysts say lower margins in those markets would not be able to sustain RIM over the long term – especially when its rivals are so rich in cash flow.
The third option, shifting to become only a software and services company, makes sense to Mr. Misek, but – like several of the options before RIM – would necessitate a brutal and unpleasant transition, involving many thousands of lost jobs.
“The question is, can they downsize the business and remain profitable running a smaller, niche enterprise business?” says National Bank’s Mr. Thompson. “Our thesis is that they don’t need half of their employees to do that.”
5. STAY THE COURSE, WITH ALL THE RISKS
RIM clearly has several radical options ahead of it, but Mr. Heins has indicated a preference for pursuing the current strategy – waiting for BlackBerry 10 to come out and attempting to win back the hearts of smartphone consumers.
But this option could be the riskiest of all. What if BlackBerry 10 smartphones come out and nobody cares? “BB10 could be the greatest [operating system]in history and it still might not sell at all because the ecosystem is not there, the apps are not there,” says Canaccord Genuity technology analyst Michael Walkley.
RIM has so far been reluctant to put much marketing support behind BB10. It will still be months before those devices hit the shelves, and in the meantime, the company wants to continue selling current-generation BlackBerry 7 devices. But at some point, RIM will have to begin marketing BB10 in a big way if it wants consumers to consider switching from iPhones and Android devices.
“The major risk is that the new platform doesn’t get traction, doesn’t get [wireless]carrier support, doesn’t get developer support, and volumes continue to decline,” says Mr. Gillis of BGC. “Just look at the difficulty that Microsoft is having trying to get [its Windows software for mobile devices]out there. This is a tough process.”
To make matters worse, RIM doesn’t exactly have time on its side. “Things can unravel very quickly – you’ve seen this with Nokia and RIM and Palm and others,” says Mr. Walkley. “These are not slow changes.” As recently as 2008, RIM and Nokia accounted for about 75 per cent of the profits in the worldwide handset market, according to a Canaccord report. Today, Apple and Samsung make 95 per cent of the sector’s profits.
Of course, the most radical change of all is the fact that these options are actually on the table, which would have been inconceivable when Mr. Balsillie and Mr. Lazaridis were in charge. Indeed, these options were even hard to fathom as recently as January, when Mr. Heins took over and told employees in an internal address that RIM was “a fantastic growth and profit story. There’s no reason to go and sell the company.”
Mr. Abramsky says: “The change in tone between when Thorsten first took over to the last earnings call was quite dramatic. But as things get more and more challenging, quickly, the willingness to explore these options, that were formerly considered silly or ridiculous to them, becomes obviously higher.”