Losing the Signal: The Spectacular Rise and Fall of BlackBerry (12 page)

Motorola had the resources to out-engineer BlackBerry. But the communications giant was preoccupied with corporate restructuring and lost interest in what it considered a niche messaging market. Also, Motorola was convinced the future of wireless communications lay in outer space, investing heavily in a consortium of satellites called Iridium to provide global wireless phone service. The project was plagued with challenges. Satellite phones were too expensive at $3,000 each and service was spotty.
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Iridium filed for bankruptcy in 1999, and Motorola wrote off billions of dollars it had invested in the company. With competitors preoccupied or looking elsewhere, the long-shot from Waterloo moved into the lead of a race for mobile data business that everyone had underestimated.

From the voice on the other end of the line, Lisa Garrard knew this wouldn’t be a pleasant call. It was another chief information officer from a Wall Street bank, thundering for one of RIM’s bosses
—It doesn’t matter which one.
The executive assistant to Balsillie and Lazaridis, Garrard called out from her hallway desk, midway between the two CEOs’ offices. “Mike, Jim, there’s another call for you. It’s the CIO of—”

“I’m not here, but I’m pretty sure Mike is!” Balsillie called out from his office.

“I’m not here either!” Lazaridis replied.

“Guys …” Garrard said. Peering into Balsillie’s office she saw him slide under his desk. “I saw your head!”

“That’s not my head,” Balsillie giggled. “There’s nobody here but us chickens!”

Everyone at RIM was diving for cover in 2001. BlackBerry was selling faster than anyone predicted, and the Waterloo company was feeling the strain
of its success. RIM’s BlackBerry user base rocketed from 25,000 in fiscal 2000 to 165,000 the following year. There was no time to pop champagne. If the company couldn’t keep pace with demands, prosperity would be short-lived. RIM raced to keep up by hiring an average of two people a day, more than doubling its workforce to 1,260 inside a year. The company scrambled to find room for everyone, buying or leasing buildings around the Waterloo region. No matter where they landed, new employees were greeted with confusion. Without a fully functional back office, billing for the BlackBerry service was a nightmare; RIM didn’t even have a proper billing system to charge customers until months after the device was launched.

RIM’s evangelists had done an effective job of converting people to BlackBerrys, but some sales people didn’t initially keep track of who received the product. When RIM’s controller Harvey Taylor complained to sales vice president Don McMurtry that hundreds of customers weren’t paying monthly service charges he was unprepared for the response. “Who cares,” McMurtry replied. “Losing a few hundred to get tens of thousands of orders is an acceptable cost.” Although the company tried to track down freeloaders, product manager Dave Castell says “we ended up paying monthly airtime for BlackBerrys used by God-knows-who for years.” Balsillie says the company was able smoke out some of the non-paying customers by cutting off service on some accounts. Customers were outraged, Balsillie says. “We asked for forgiveness, but we also asked for money.”

A bigger issue was the rickety network shuttling e-mail messages. Delays and system crashes were daily headaches. E-mails were often twenty minutes late. Sometimes they would arrive five hours late. Occasionally, they disappeared altogether, lost in space. The situation made a mockery of RIM’s claim that BlackBerry was “Always On, Always Connected.”

Suffice to say, RIM’s customers weren’t the patient types. Senior executives who couldn’t live without BlackBerrys came down hard on their chief information officers; when the yelling stopped, the CIOs turned the heat up on Lazaridis and Balsillie. John McKinley, Merrill Lynch’s chief technology officer and an early BlackBerry champion, was a frequent caller and he wasn’t happy. The conversations were “adrenaline-filled,” he says. “It was a very direct dialogue, letting them know we viewed this as really critical, and when there were repeated instances, our patience wasn’t unlimited.”

When RIM’s chickens came out from under their desks, feathers flew. “We hated those calls so much,” says Balsillie. “They’d threaten everything. They’d
say, ‘I don’t care, just make it fucking work.’ It [was] like root canal without anesthetic.” RIM salesman Patrick Spence missed his sister’s university graduation reception—which he was hosting at his home—spending most of the celebration on a conference call with a RIM engineer and an incensed Salomon Smith Barney’s incensed IT specialist Ken LeVine, who was himself under fire from bankers unable to communicate with their team during crucial deal negotiations.

There was no quick fix for RIM’s network issues. The problems resided at both BellSouth and RIM. Each side blamed the other. When managers from the two companies sat down in New Jersey to solve the crisis in the latter part of 2000, the meeting deteriorated into a shouting match between RIM’s irreverent young engineers and the carrier’s graying executives.

Both sides had a point. BellSouth was adding base stations to accommodate expanded Mobitex traffic, particularly in Manhattan, but not fast enough. To prevent the clogged network from collapsing, BellSouth’s engineers sometimes delayed the flow of messages into the pipeline, drawing accusations from RIM that the carrier was “throttling” traffic. For its part, BellSouth had plenty to complain about. RIM activated new Wall Street customers without giving BellSouth notice. The added traffic quickly overwhelmed the nearest BellSouth Mobitex base stations. A senior Morgan Stanley executive went to the top at BellSouth, calling chairman John Clendenin to complain that a new shipment of BlackBerrys wasn’t working. As tensions rose, flustered BellSouth executives insisted RIM give the carrier four to six months’ notice before a new customer was brought online. The edict was greeted with howls of laughter in Waterloo.

RIM engineers were loath to concede problems could be traced to Waterloo. RIM’s initial Relay system may have been ingenious, but it was a makeshift wonder. It was located in a modestly sized server room, and it occasionally ran over a laptop belonging to one of the system’s architects, Allan Lewis, when it needed to be debugged. The server room was sometimes used as a thoroughfare; the network once went down after an employee tripped over a power cord. Lewis and his colleagues always figured the Relay system was a preliminary, temporary setup that would be replaced with a more powerful system to accommodate tomorrow’s increased traffic. What he and everyone else at RIM failed to anticipate was how fast tomorrow would come. Once, the Relay crashed when Lewis was visiting Disney World in Florida with his family. The only person in Waterloo who could fix it was warming a bar seat. When the engineer arrived at RIM’s offices, Lewis patiently communicated with
the woozy engineer over his BlackBerry as they worked together to fix the server.

As RIM’s engineers raced to work out bugs in a network upgrade called Relay 2, the outages got worse—one left BlackBerry users in the United States without e-mails for hours during Thanksgiving. “You [always] felt like you were a thread away from the thing just crashing,” says sales VP Justin Fabian. In early 2001, the company successfully switched the network over to Relay 2, the first of many upgrades needed to cope with a mounting daily avalanche of e-mails.

BlackBerry’s long-term success wouldn’t have been possible without the support of conservative executives who were trained skeptics about new technology. Chief information officers began appearing in major North American companies in the 1980s as computers assumed a key role in corporate back rooms.
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When businesses purchased mainframe computers in the 1960s, data processing supervisors handled accounting and financial reporting. As computing powers expanded with the arrival of desktops and powerful software programs, technology expertise became an essential business tool. Big companies allocated hundreds of millions of dollars to hardware and software purchases and they needed senior executives to take charge. As the pace of automation accelerated in the 2000s, technology investments become highstake decisions. Computing, software, and hardware start-ups jockeyed with technology giants for lucrative corporate accounts. In this fevered market, CIOs operated with caution. Would the technology last? Might it overburden existing systems or expose the company to hackers? Would the supplier survive? Inevitably, many big companies preferred to stick with the likes of Oracle, Microsoft, or IBM, blue-chip technology suppliers that wouldn’t embarrass the CIO.

Balsillie’s original plan was to infiltrate Fortune 1000 companies by bypassing CIOs. If RIM’s evangelists seeded BlackBerrys with enough top executives, they would force the CIO to embrace RIM, he thought. What this plan didn’t anticipate, however, were the anxieties triggered by an e-mail system that called for companies to install RIM’s Business Enterprise Server (BES) software in their internal computing systems. There was no way a BlackBerry server would be allowed behind fiercely guarded corporate network
firewalls unless CIOs were convinced the RIM system was secure and dependable.

“I knew we had a gap that was impeding the sales process,” says sales VP Don McMurtry. His answer was to recruit veteran IT consultants experienced with large-scale corporate technology applications. They understood CIO preoccupations with security and won them over by explaining unique protections invisible to most BlackBerry users. RIM’s in-house network gave the company the ability to guarantee the safe passage of every message. Using an advanced encryption standard similar to one used by the U.S. military for internal communications, RIM designed its BlackBerry system to ensure every e-mail was automatically protected by an encryption code when sent. On arrival the message was decoded before appearing in the recipient’s in-box. Every company or organization that acquired a RIM server received customized encryption keys that authenticated and decoded e-mails. The keys were unique to every customer and the system was so protected that even RIM could not unscramble messages traveling through its relay system.

Once it could demonstrate and fully explain BlackBerry’s security features, RIM’s relationship with the CIO community changed. Before long, CIOs were allies, not enemies. And the United States’ biggest companies threw open their doors and wallets to a company that was virtually unknown a year earlier.

As RIM’s business gained momentum, its stock became the plaything of speculators. After the stock’s enormous rise in the dot-com bubble, it took a hit along with every other tech company whose value had inflated beyond reason. Less than three months after topping $156 in March 2000, the stock had dropped by more than 75 percent, and analysts began to fret about its rising sales and marketing costs. But as RIM’s revenues continued to soar—rising more than 45 percent from quarter to quarter through the latter part of 2000—its stock rebounded and was back over $100 by October.

Balsillie, who kept his finance team poised to take advantage of hot equity markets, put out the word that RIM was ready to do its second U.S. stock offering in a year. He and Kavelman had cultivated interest among U.S. investors and Wall Street underwriters, and demand among investment bankers was so intense to join the offering that RIM hired three “bulge firms”—tier one Wall Street banks Merrill Lynch, Credit Suisse First Boston, and Goldman Sachs—to lead an offering of 6 million shares for $102 each in late October. Because of RIM’s dual U.S. and Canadian stock exchange listings, it was able to clear its prospectus with less onerous Canadian regulators within
days rather than the weeks it would have taken with the Securities and Exchange Commission. “We caught the market window by the skinniest of margins,” Balsillie says.

Almost immediately after the offering, RIM shares fell as tech stocks overall headed into a prolonged slump. RIM now had a war chest few early-stage companies could dream of. It would guarantee the company’s safe passage through the challenging industry conditions that lay ahead. Large tech stock offerings on Wall Street would be scarce for the next few years—until RIM again came to market in early 2004 to sell $945 million worth of stock.

BellSouth Wireless Data president Bill Lenahan had been right about RIM: it was better suited to making devices than building its own wireless service for thousands of customers. “It’s one thing to develop stuff like this,” says Lenahan. “It’s another to deliver and bill and support it. They didn’t have that capability.”

But another thing was clear to Lenahan by 2000: the little wireless e-mail device was a huge hit with powerful customers and had substantial growth prospects, while two-way paging’s moment in the spotlight would be fleeting. With two-way paging, customers could trade messages, check stock quotes, and send text messages to phones, “but that wasn’t what people wanted to do,” says former BellSouth executive Neale Hightower. What worked was putting corporate e-mail in their hands. The point was driven home in Atlanta, where BellSouth executives, including CEO Duane Ackerman, were among the first users to receive free BlackBerrys. Before long, they were so addicted that Ackerman forced them to place their devices on the desk during meetings to ensure nobody was distracted. “I think that was kind of the closer,” says Hightower.

Inside BellSouth, discussions ensued about when and how the carrier would start distributing BlackBerry directly. “After the product came out and we saw the performance and sell-on, we put our own plan together,” said Lenahan. “It was what the customer wanted in corporate America. And it became what the individual users wanted, what they needed once they understood the power of it. I think it was a very natural extension to move away from the airtime deal for both companies.”

Balsillie and Lazaridis knew they were not well suited to running their
own service. “We were just barely holding stuff together,” says Balsillie. RIM lacked the staff and experience to manage the billing and service needs of its booming customer base. But while it made sense to hand the back office administration over to BellSouth, Balsillie wasn’t going to yield everything. RIM’s airtime deal with the carrier enabled the Waterloo company to operate an in-house e-mail network, a unique right not enjoyed by other handset makers. Of the $40 RIM was charging each BlackBerry customer monthly, $10 went to BellSouth. If the carrier was going to take over billing and service, Balsillie insisted RIM would hold on to a share of the monthly fee. The carrier would have to pay what he called a “service access fee” of $10 a month for each customer. It was a brash demand, but Balsillie knew RIM had leverage. BellSouth was desperate to pocket a bigger share of BlackBerry’s profitable growth and RIM could reasonably argue it had to cover the costs of running its internal e-mail Relay system. “Sometimes in negotiations you have to find something stupid to hold onto and wave your hands madly,” Balsillie says. “I fought like crazy to get $10.” BellSouth capitulated, handing Balsillie the clout he needed to wrestle similar fees from other carriers eager to sell BlackBerrys. ARDIS followed, as did Canada’s Rogers and Bell, which ran similar data networks. Lenahan and his carrier counterparts didn’t like sharing any of their service revenues with RIM. If they wanted to get in on the gusher of revenues from wireless e-mail to feed their still-struggling data networks, they had no choice.