Losing the Signal: The Spectacular Rise and Fall of BlackBerry (11 page)

In the end, the meeting was a success. Intel ultimately ordered two thousand devices. And Klimstra, though chastened, was not fired or subjected to any further consequences. He sat silently, watching Highway 401, Canada’s busiest roadway, unfurl as Balsillie spent the ride back on another call. Balsillie does not recall the details of the interaction, but Klimstra, who stayed with RIM another eight years, never forgot. To him it is an enduring tale of his boss’s tactical prowess, and it only cemented his loyalty to Balsillie. “Honestly, I would follow [Balsillie] into a fire,” Klimstra says.

Patrick Spence was returning to Manhattan in style—new suit, shiny shoes, and polished patter. Weeks earlier, he had been cleaning up battery-leaking Leapfrogs in steamy New York warehouses. Now, after Kavelman’s enthusiastic reception in New York, he was returning as RIM’s Wall Street evangelist. The tall, former varsity volleyball player was armed with a cheat sheet of local bank and brokerage executives furnished by a local Microsoft reseller. He quickly learned that the Winter Garden Atrium of the World Financial Center was the place to approach dealmakers and analysts to offer demonstrations. Some prospects invited Spence up to their offices. One senior banker practiced putting golf balls as Spence installed BlackBerry software on his desktop computer. The banker laid down his putter and looked on in amazement when Spence showed him that a test e-mail sent from the banker’s computer to himself arrived faster on the BlackBerry than it did to his own desktop in-box. The banker ordered two BlackBerrys that afternoon—one each for himself and his assistant.

BlackBerry’s first users weren’t typical early adopters—gearheads who
routinely rushed out to experiment with any new technology. The first converts were senior legal and banking advisers who needed to be first with information. Once Fortune 1000 CEOs saw their bankers and lawyers cradling BlackBerrys at meetings, they wanted their own. The constancy of BlackBerry e-mails gave new urgency to business communications. Bosses with BlackBerrys chastised lieutenants for slow responses to e-mails that many still took a day or two to read. They made sure that changed. Senior BlackBerry-using executives in turn ordered BlackBerrys for
their
direct reports so they could stay in touch constantly. The BlackBerry virus was starting to spread.

Although corporate bosses were starting to embrace BlackBerry, Lazaridis and Balsillie knew they faced a challenge selling bulk orders to big businesses. Technology purchases were the domain of chief information officers (CIOs). These executives were conservative and frowned on technology that exposed internal communications. “The problem with going through IT is they had to approve everything. It would take a year,” says Lazaridis. “You had to test everything, approve it, and most of these [CIOs] didn’t want it anyway. It was just another thing to deal with. But once a CEO tried it, that was it.”

The solution, Lazaridis and Balsillie decided, was an unorthodox plan to infiltrate Fortune 1000 companies. RIM made it easy for influential managers and executives to link the addictive BlackBerry system into their corporate e-mail without involving the IT department. Their secret weapon was the software designed by RIM engineer Gary Mousseau. The program was included free with every BlackBerry purchase and took only fifteen minutes to install on any computer. Once it was running, it connected the BlackBerry to a user’s e-mail and the device was operational. RIM even priced the devices so they fell within executives’ discretionary spending budgets. The idea was to get a critical mass of top executives in a company to use BlackBerrys before their CIO realized a new technology had infiltrated the business. This would be all the leverage RIM needed, Balsillie and Lazaridis believed, to convince CIOs to acquire sophisticated RIM servers to centrally manage large volumes of BlackBerry devices from within their IT departments. The CIO end run was a unique strategy, making BlackBerry the first IT product ever sold from the top down, pushed by senior management onto their IT organizations.

One of BlackBerry’s big early converts was financial services giant Merrill Lynch. John McKinley, chief technology officer for the brokerage and banking Goliath, was standing near Kavelman at the Soundview conference
as he demonstrated the BlackBerry to others. “This was really eye-opening,” McKinley says. Unlike other mobile devices, “it wasn’t trying to solve all problems, but taking one use case—e-mail—and trying to deliver it in a new paradigm. It struck me these guys were onto something new and distinctive.” He wanted to bring BlackBerry to Merrill as soon as possible.

RIM couldn’t have asked for a more influential customer. When BlackBerrys first arrived at Merrill in early 1999, the company had forty-five thousand employees across the country. Merrill employees soon became addicted. “It quickly became a Web of people that had one saying, ‘Hey, you have to get this guy one and this guy one,’ “ says Spence. “I was seeding it with reckless abandon into Merrill because it was the best marketing and sales investment we could make.”

Spence was back in Waterloo in late January 1999 when RIM received one of its first BlackBerry online orders. The buyer was Michael Dell, founder of computer maker Dell Inc. Spence couldn’t believe it. RIM had only launched BlackBerry days earlier, and its Web site ordering system was still a work in progress. How could a Waterloo company be on the radar of one of America’s most successful entrepreneurs? It had to be a hoax, Spence figured. But when he e-mailed Dell to offer his assistance, he got an immediate reply from the billionaire. Spence was soon on his way to Round Rock, Texas, where he worked with Dell’s IT department to deploy devices for about one hundred executives and IT specialists in the following weeks.

Soon the rave reviews rolled in.
BusinessWeek
called BlackBerry “close to perfect pocket E-mail.”
PC World
dubbed RIM’s latest the best wireless communications device of the year.
Fortune
named BlackBerry one of seven “cult brands,” alongside Ben & Jerry’s and Nike.
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Celebrities from Pamela Anderson to Howard Stern would not part with the device.
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Microsoft’s Bill Gates and General Electric’s Jack Welch were early champions. Every time GE’s world-trotting boss stepped away from a golf game or social event to scan his BlackBerry, he signaled to influential friends and associates that effective leadership includes instant e-mail access.

Stories abounded about how BlackBerry transformed corporate life. One of Welch’s top lieutenants, GE Capital CEO Michael Neal, slept with a BlackBerry under his pillow, Don McMurtry says. Spence began noticing a
change with the lunch crowd in lower Manhattan. People were ignoring their tablemates and peering down at their BlackBerrys instead. Traders nicknamed the device “CrackBerry.” If you were bent over the cradled device, oblivious to your surroundings, you were doing the “BlackBerry Prayer.” Before long, the ranks of RIM’s evangelists had grown to include thousands of its customers.

Spence and fellow evangelists were greeted like conquering heroes when they returned with weekly tales from the trenches. Colleagues who had worked long, frustrating hours to perfect the BlackBerry were astonished by its fame south of the border. “You knew and could feel you were part of something special,” he says.

The dot-com bubble was the era of the rock-star tech analyst. With one call, Morgan Stanley’s Mary Meeker and Merrill’s Steve Milunovich could make or break a young high-tech firm’s prospects. Milunovich shared his views on RIM for the first time in May 18, 1999. His report raved about BlackBerry’s ease of use, durability, and market potential. Impressed, the analyst put a $13 price target on the stock, 20 percent higher than its last price.

Milunovich’s call jolted RIM stock awake. Three months earlier, RIM had debuted on the U.S. public markets, opening at just under $13 in early February on the NASDAQ. It then began to sink, losing more than a third of its value in the following weeks. The stock wasn’t going anywhere—until Milunovich’s report came out.

On the day of the Merrill report, 24 million RIM shares traded hands on NASDAQ—more than the combined volume of the previous ten days on the exchange—pushing the stock above Milunovich’s optimistic $13 target. Other analysts followed with glowing reports. Two months later, the stock was trading at $26. By mid-November it had doubled again. In March 2000, the stock hit a new high-water mark, closing at more than $156 per share on Nasdaq (and C$227 on the Toronto Stock Exchange), giving RIM, a company of five hundred employees, a market value of $11 billion (C$16 billion).

When soaring BlackBerry sales pushed RIM’s revenues to $85 million for its fiscal year starting March 1, 1999, Balsillie saw an opportunity to harness U.S. investor enthusiasm. In October 1999, RIM raised $172 million by selling 5.6 million shares on NASDAQ. Martha Stewart and World Wrestling
Federation impresario Vince McMahon were taking their companies public at the same time, and during one day of meetings with investors in Boston, Balsillie and Kavelman kept running into menacing wrestlers and women in crisp blouses and gray pleated skirts brandishing cookies as the deal teams crossed paths. “This was my first exposure to raising money in the United States,” says Balsillie. “Funny world.”

Merrill Lynch led the RIM offer—and announced an order for 1,500 BlackBerrys. That day, Patrick Spence got a call from Ken LeVine, a senior IT executive at Citigroup. “You just made my life hell,” LeVine told him. Spence had already seeded about fifty devices into Citi’s Salomon Smith Barney investment banking unit. When they learned of the Merrill order, hundreds more executives bombarded LeVine with calls and e-mails, demanding their own BlackBerry. Four months later, Salomon placed an order for 2,500 devices, and LeVine later came to work for RIM.

To outsiders, Balsillie and Lazaridis, now paper billionaires, were the new princes of the dot-com age. Lazaridis declared BlackBerry “the first addictive application since the video game.”
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RIM’s success won Balsillie access to business luminaries. If the son of an electrician was fazed by business celebrities, he never let it show. When he met Michael Dell in 1999 at New York’s Four Seasons Hotel for breakfast, heads turned as they walked through the lobby. As they neared their table, Balsillie deadpanned to Dell: “I hope it doesn’t make you uncomfortable having everyone look at me.”

RIM’s successful fall 1999 U.S. stock offering earned the company a place of honor at one of Wall Street’s most exclusive rituals—the closing dinner. The event is a longstanding celebration hosted by bankers grateful for clients showering them with multimillion-dollar fees. The dinners were traditionally staid private club affairs involving dull speeches and expensive cigars. At the height of the tech boom, however, revelries had grown exotic and feverish. Parties were staged at elite Manhattan restaurants and clubs. Occasionally, advisers and executives were ferried on private jets to Las Vegas or Monaco. Merrill Lynch approached Lazaridis and Balsillie with plans to fete NASDAQ’s new tech darling. But their night would be unlike any the Wall Street firm had hosted. Having battled to survive for sixteen years, RIM’s cautious bosses were conditioned for adversity, not success. There had never
been any room for self-congratulation because the company had always been on guard for the next challenge. How would they celebrate their coming-out party?

Instead of flying to a distant pleasure palace, Balsillie and Lazaridis stayed true to their roots by celebrating Waterloo and Canadian culture. If the underwriters wanted to bankroll a celebration, the CEOs decided it should be for all RIM employees, which is why on a cold January in 2000 Wall Street technology bankers and lawyers found themselves at Lulu’s Roadhouse, a Kmart-turned-music hall on the outskirts of Kitchener-Waterloo, that had been drawing both students and middle-aged suburban revelers since the 1980s. The club had a sunken, tennis court–sized dance floor and a sprawling wood and brick bar that Guinness World Records deemed the world’s longest. As the bar filled up, some two thousand guests, including hundreds of engineering students from University of Waterloo, noticed the stage being readied with microphones. But they were not for corporate speeches.

“I personally felt it was a party and our success and the event spoke for themselves, so no need to grab the microphone and talk about it,” Balsillie says. When the lights went up a group of men walked to the front of the stage. The crowd roared as they recognized one of Canada’s best known bands, the Barenaked Ladies. The playful group started off with impromptu songs about two things the hometown crowd held dear: beer and BlackBerrys. Their signature song, “If I Had a Million Dollars,” was the hit of the night. For many in the audience who were on their way to being paper millionaires that was no longer a hypothetical question. “We wandered around looking at each other saying, ‘Wow, this is really happening,’ “ says Perry Jarmuszewski.

Lazaridis stole a glance at Balsillie. He knew his co-CEO was thinking the same thing:
Can you believe this guy?
Seated across the table, talking endlessly, hands wild in the air, was Carl Yankowski, CEO of Palm Inc. Yankowski had invited the RIM chiefs to dinner in New York in the spring of 2000 to initiate takeover talks. Going into the meal, Balsillie and Lazaridis understood their host considered them the main course. An MIT-trained engineer, Yankowski had breezed through a series of senior marketing posts with Sony, PepsiCo, and Reebok. He had hit the jackpot a few months earlier upon taking the helm at Palm.

Palm’s parent, 3Com
¹
, was about to capitalize on dot-com mania when Yankowski joined by selling a stake in its popular personal digital assistant maker through an initial public offering. On its first day of trading in March 2000, Palm’s stock soared from its offering price of $38 a share to more than $95 at closing. The score gave Palm a stock market valuation of more than $50 billion, making its new CEO $1 billion richer on paper and handing Palm a powerful currency for stock-based takeover offers.
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Palm’s overpriced stock inflated Yankowski’s ego. During media interviews on Palm’s first day of trading, he showed up in a $3,000 wool suit shimmering with pinstripes woven from 14-karat gold thread. The man with the golden suit carried himself like he believed in his own Midas touch. “He couldn’t be in a room with you for thirty minutes without taking credit for at least three big moments in computing history,” says Andrea Butter, a former Palm executive and company biographer.

As the night unfolded, there wasn’t a thing about Palm’s inner workings Yankowski wouldn’t share with his two guests, as if it didn’t matter that they knew. He talked and talked. Then the conversation turned to personal pursuits. Yankowski wanted to know where they went to school, what jets they flew, what cars they drove.

When he discovered the RIM executives flew in a used Westwind jet, Yankowski declared he was certified to pilot dozens of planes. When the Palm CEO enquired about Lazaridis’s impressive home theater, Yankowski bragged about his $250,000 Nantucket home stereo system, custom-built by Sony engineers. Learning that Lazaridis drove a new BMW M5, Yankowski leaned in. “Mike,” he said. “I have an M6.” There was no stopping Yankowski. “Whatever you said, he had to be better,” Balsillie says.

Yankowski recalls the one-upmanship as “the kind of light discussion we were having over dinner.” What the Palm CEO didn’t realize was that his two guests, who were so in synch they could practically finish each other’s sentences, subtly used their two-man advantage to amuse themselves at the expense of their unsuspecting suitor as the night went on.

The RIM duo turned his boasting into a sport. They began fibbing about their own accomplishments to see if he’d try to top them—and he took the bait every time. “We were just making shit up,” says Balsillie. The CEO crowing contest took a turn for the ridiculous when Balsillie falsely told Yankowski he’d won an Olympic gold medal playing for Canada’s national hockey team.
Top that!
As Balsillie recalls, Yankowski volleyed back that he’d won several medals. Balsillie felt his BlackBerry buzz. He looked down. It was a message from Lazaridis, sitting next to him. “1–0 for you.” The RIM bosses quietly exchanged scores through the rest of dinner. After this evening, Balsillie and Lazaridis referred to Yankowski as “Topper,” a nod to the fictional
Dilbert
comic strip character who routinely interrupts office conversations with cries of “That’s nothing,” followed by implausible claims that he insulated his house with cheese or swallowed insects to spin silk.

There was a bigger game under way. Though they flattered Yankowski with attention, RIM’s partners had no interest in selling their company. They took Yankowski’s calls, showed up for meetings, and swapped boasts to keep him off guard. “Most people’s instincts tell them to seek clarity in business dealings, but ambiguity is more powerful in my view,” Balsillie explains. “You’d be surprised how long you can string competitors along without ever showing your cards.” An unsuspecting Yankowski pursued a takeover of RIM
for months. Throughout Yankowski’s courtship of RIM, Balsillie downplayed his own company’s abilities and ambitions—flashing what he calls the “Aw, shucks card.” BlackBerry, he told Yankowski, was a small niche device lacking the global appeal of Palm. He talked of licensing Palm’s operating system and continually asked what RIM should do next. “That seemed to be his primary preoccupation,” Yankowski says. That’s exactly what RIM wanted him to think. “My objective,” comments Balsillie, “was to get him to underestimate RIM.”

When Balsillie joined Yankowski in San Francisco for dinner later in 2000, the RIM chief pulled out a prototype of an upgraded BlackBerry, called the 957, which shared many of the features of the latest Palm device, including a large, square screen. He handed the model to Yankowski, who was suddenly full of questions:

“What network will RIM use for this BlackBerry?”

“We haven’t told anybody yet,” Balsillie replied.

Eyeing the screen, Yankowski flashed Balsillie a big grin. “That’s okay. I already know.”

“What do you mean?”

“It says right here.” Yankowski pointed to the letters CDPD in the top right corner of the screen. CDPD, short for cellular digital packet data, was a wireless data network technology heavily promoted by its creator, AT&T. So that’s what RIM’s up to: dumping Mobitex for CDPD, Yankowski figured. Palm was already testing its next device on the CDPD data network.

Balsillie was still giddy when he caught up with David Yach, a Canadian engineer who had been recently hired away from California software maker Sybase as RIM’s chief technology officer. Joining Yach in RIM’s jet, Balsillie blurted out: “He fell for it!” In fact, what he showed Yankowski earlier in the evening was a decoy with the screen changed to read CDPD by one of Yach’s engineers, with the specific intent of fooling the Palm boss. RIM had no interest in CDPD. Lazaridis viewed it as technically inferior technology, correctly predicting it would soon be dead. If Palm wanted to jump to CDPD, that was fine with Balsillie. For now, RIM was sticking with Mobitex, a slower but more reliable messaging highway.

Yankowski has no recollection of the San Francisco dinner, but he remembers what happened soon afterward. Takeover talks broke off abruptly when Balsillie said he would have no part of a deal that did not hand him full
executive control of the merged company. The petulant demand by a firm with one-twelfth the revenues of Palm seemed preposterous to Yankowski, who recalled Balsillie “throwing a hissy fit.” Once again, the Palm CEO misread the RIM bosses. That was just Balsillie’s way of saying “game over.”

Palm was one of several mobile device makers courting corporate alliances around the turn of the new millennium. Cellphone, direct paging, and computer manufacturers were all looking for partners as increasingly sophisticated network technology made it possible for users to browse the Web, send messages, and phone on a single pocket-sized device. Blurring technology boundaries, coupled with rapid growth in consumer demand for mobile products, sparked a global race by software, cellphone, and handset makers to launch all-in-one devices, soon to be called smartphones.
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Accelerating this rush was the dot-com frenzy. Soaring technology share prices provided large publicly traded companies with robust takeover currencies to spend on stock-based mergers with competitors. Many companies were on the prowl.

The player everyone in the handset business feared was Microsoft. The Redmond, Washington, giant had already conquered the personal computing market. Many believed the global cellular market, which was fast approaching 1 billion subscribers in 2000, was its next target. Microsoft made its first move in 1998, approaching the world’s largest cellular phone maker, Nokia, to explore a joint venture to develop enhanced phone software. Even though Nokia dominated the global cellular market with a 30 percent share, it saw Microsoft as an aggressor that needed to be contained. Microsoft had crushed early computing and Internet partners in its quest to dominate desktop applications with what regulators would later call an “embrace, extend, and extinguish” strategy that sometimes put allies out of business.
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Mobile device makers were determined not to make the same mistake. Months after Microsoft’s overture, Nokia joined forces with rivals Ericsson and Motorola to create a new mobile operating system called Symbian. Microsoft responded by teaming with South Korea’s Samsung Electronics Co. to launch Stinger, a software package for cellphones.

RIM decided to sit out the convergence dance. Lazaridis didn’t buy into the idea that the handset race would be won by smartphones combining computing, phone, and Internet services. To him, that made no sense. All-purpose
operating systems sucked batteries dry, hogged wireless bandwidth, and were awkward to use with their tap-and-write touch screens or full, shrunken desktop keyboards. He and his engineers had spent years creating the world’s most efficient handheld device, focusing on a single, perfect application: wireless e-mail. It was light on battery use and e-mails were dispatched so efficiently that an average month of messages consumed less network spectrum than one local telephone call.
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It was one thing to buck an industry fad. The bigger danger was that some global mammoth would simply smash the small Waterloo upstart. The rival Balsillie and Lazaridis worried about most was Microsoft after it signaled an interest in wireless e-mail by joining a short-lived venture with semiconductor maker Qualcomm in the late 1990s. At the same time Microsoft executives, including CEO Steve Ballmer, began asking RIM staff questions at trade shows about how BlackBerry worked. Microsoft’s combative generals would not be thrown off by the playful ruses that kept Yankowski at bay. Nor was Balsillie inclined to mess with them. “I had an expression: Never moon the gorilla,” Balsillie says. “Microsoft was the gorilla. We cut them by far the widest berth of anyone.”

Balsillie’s strategy for dealing with Microsoft was to undersell RIM’s potential. Upon launching BlackBerry, he pitched the device to Microsoft as a pager-like service to promote the software giant’s corporate e-mail software, Exchange. Little was made of BlackBerry’s e-mail potential. Microsoft was so taken with the device it installed one of the first BlackBerry servers at its headquarters. Before long, RIM was invited to set up booths at Microsoft conferences; no one objected when the Waterloo firm signed up attendees for BlackBerrys.

The friendly, casual alliance deteriorated in 2000 following RIM’s decision to make its e-mail service compatible with Lotus, Microsoft’s software rival. Another affront was the launch of the 957 BlackBerry. RIM’s first big-screen device abandoned the pager-like shape of the Leapfrog; now it looked more like a Palm Pilot and other competing PDAs that used Microsoft’s mobile operating system. Microsoft stopped inviting RIM to conferences. The BlackBerry server was even yanked out of its Redmond headquarters.

Lazaridis wanted to continue nurturing the Microsoft relationship, but Balsillie steered him away. He was worried Microsoft would exploit the relationship to RIM’s disadvantage. “[Bill] Gates was superpredatory, and nothing good would come from trying to form a relationship back then,” says
Balsillie. In fact, Microsoft turned out to be less threatening than Balsillie feared. Distracted by its battle with Apple, Microsoft was a halfhearted competitor in the wireless e-mail and smartphone race. It jumped in and out of alliances with various manufacturers, including Qualcomm, Palm, Motorola, Nokia, and South Korea’s LG Corp.,
⁶
but none of the initiatives vaulted Microsoft to the front of the smartphone pack.

When RIM began selling BlackBerry, Palm dominated the wireless handheld device business. Its 1999 launch of Palm VII, combining e-mail with the handset’s popular calendar and contact functions, was an instant hit. It sold more than a hundred thousand Palm VII devices during its first year, four times as many as BlackBerry. The lead was short-lived, however, once customers realized that e-mails were instantaneous on RIM’s device. Using e-mail on a Palm VII was a two-step process that involved flipping open an external antenna and waiting for messages to download. Also, unlike BlackBerry, Palm e-mails couldn’t be synched with corporate e-mail in-boxes. BlackBerry grabbed the lead in 2000, outselling Palm VII by about 40 percent and backed by its first marketing campaign, running print ads in business and trade publications touting its new PDA-sized 957 as “Berry Amazing.” By the end of 2001, Palm was in trouble. Its stock plunged more than 90 percent and Yankowski left. The handset maker tried in vain to recover with the launch of Palm i705 in 2002. Technology tastemaker Walt Mossberg dismissed its e-mail interface as “clumsy and inefficient,” chastising Palm for sticking with its trademark stylus and touch screen instead of adding a keyboard. “It amazes me that the company took 18 months to develop this device and yet failed to match some of the key things that made the RIM so popular,” he wrote in early 2002.
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The California company returned to its roots in 2003, acquiring an inventive smartphone start-up called Handspring, which happened to be owned by Jeff Hawkins and Donna Dubinsky, Palm’s founder and former CEO, respectively.

The major rival in the 2000 mobile data market was Motorola. The Chicago two-way radio maker had grown into a diversified global communications company with $38 billion in annual sales. It ranked second behind Nokia in global cellphone sales and was a formidable force in semiconductor, paging, walkie-talkie, and network equipment markets. Its PageWriter 2000, the world’s first two-way pager, launched in 1998, was the player BlackBerry had to beat. Like RIM, Motorola saw the need for a mobile communicator that could receive and send text messages. Unlike RIM, however, Motorola did not
have the benefit of the BellSouth’s national Mobitex data network. Instead, it relayed messages through the smaller ReFLEX network, which had limited capacity and reach. Messages were restricted to about five hundred characters and were often dropped or delayed. Active users were saddled with expensive monthly fees if they exceeded tight monthly text limits of six thousand characters, or twelve full-length e-mails. BlackBerry’s sturdier network and packet-sending capabilities allowed users to send messages as long as sixteen thousand characters and there were no limits on monthly e-mail volume.