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 anymore.”
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.”
IAIN
MARLOW, OMAR EL AKKAD
The
Globe and Mail
Business & Investment Opportunities
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