Losing the Signal: The Spectacular Rise and Fall of BlackBerry (15 page)

In a town where information is power, some of the most potent players that day were the few politicians who owned BlackBerrys. After Democratic congressman Rob Andrews was barred from his office, he set up shop on a park bench, communicating on his BlackBerry throughout the morning.
¹⁰
Republican congressman Dick Armey retreated to his car to fire off BlackBerry e-mails.
¹¹
When he learned House Speaker Dennis Hastert was headed to Andrews Air Force Base, Armey joined him in time to be helicoptered to a Virginia mountain bunker, well ahead of House and Senate leaders. The isolated leaders arranged conference calls with far-flung party members, but many were shut out by inaccurate calling codes. It would be more than ten hours after the first terrorist attack before federal politicians were able to fully communicate. This time they did it the old-fashioned way: in person. At 7:30 p.m. hundreds of senators and congressmen gathered in front of the Capitol building for a televised message to a devastated nation. “We stand together,” Hastert told the television audience. Shoulder to shoulder, Democrats and GOP approved in the following days a number of initiatives. One was a plan for a modernized communications system. One of the first upgrades came weeks later when the House issued BlackBerrys to all 435 representatives.

Another enhancement took place behind closed doors. The National Security Agency dispatched a team to work with RIM on a device that became known as “CryptoBerry.” RIM and government officials have said little about the CryptoBerry. Balsillie lifted the veil slightly during a December 2003 quarterly conference call with investors and financial analysts. RIM had worked “intimately” with the United States, Canada, and other countries to design special encryption codes for CryptoBerrys, he said. The system was so bulletproof that even IT managers couldn’t decipher e-mails traveling through government networks. Government demand “popped” for the devices in 2003, Balsillie says. That same year the United States launched Operation Iraqi Freedom to topple Saddam Hussein’s regime. A Department of Defense manager let it slip in an interview with the trade publication
Government Computer News
that NSA personnel were armed with CryptoBerrys during the invasion.
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BlackBerry was no longer an outsider in the Beltway. It was an official pipeline of Washington’s most closely guarded secrets.

Balsillie hurried past the elegant boutiques, chic apartments, and palm trees lining Cannes’s famed Boulevard de la Croisette. It was a cold, wet, and windy evening in February 2003, little better than winter-bound Waterloo but typical of the reception Balsillie was getting on the French Riviera. Balsillie hoped that was about to change as he ducked into the white art deco splendor of Cannes’s flagship Hôtel Martinez.

The RIM chief was in town to steal a few minutes with some of Europe’s most powerful wireless carrier CEOs at the global industry’s annual conference. His goal was to convince them to offer BlackBerry smartphones to their customers. So far, he’d had little luck.

Securing face time was a hopeless endeavor at the cavernous Palais des Festivals et des Congrès, where more than twenty thousand people from 150 countries hobnobbed. Balsillie came across as a pushy promoter, pestering conference organizers to add more panel discussions on wireless data and begging his contact at Lehman Brothers, Greg Feller, to introduce him around the investment bank’s cocktail reception. “He never missed a trick” to promote RIM, Feller says. “He didn’t want to go into the room and be a nobody. Jim had a unique story and he was going to be pretty loud about it.”

Balsillie’s name tag may as well have read Mr. Nobody as he entered the Martinez. He’d come to crash a gala for the industry who’s who, but Balsillie navigated hopelessly around the cocktail reception unable to break through crowds of hangers-on flanking the CEOs he badly wanted to meet.

Balsillie was getting desperate. How would he get their attention? He left the reception to clear his head. Nearby, he saw the grand ballroom where dinner would be served. He decided to check it out.

The room was empty save for waiters in white jackets and black ties making final preparations. Balsillie wandered by a table at the front of the room and read the place cards. René Obermann, a top executive of Deutsche Telekom, Boris Nemsic, CEO of central European carrier A1 Telekom, Gilles Pélisson of France’s Bouygues Télécom—they were all seated at the table, all of the people he wanted to meet.

Balsillie had an idea. He approached the nearest waiter. “
Monsieur,
there’s supposed to be another setting here,” he said, pointing to the table. The waiter returned moments later with a chair and setting, gingerly moving the other dishes and cutlery around to accommodate one more person. Balsillie thanked him as though channeling the full authority of the conference organizers.

Balsillie pulled a business card from his pocket and folded it in two. He studied the calligraphy on the other place cards and did what he thought was a passable forgery of his own name on his improvised place card. Voilà! He admired his work for a moment: his card was smaller than the others and the ink was blue, not black. But it didn’t look that bad.
Not bad at all,
he thought.

He placed it on the new setting. Then he rearranged the other cards at the table. He placed TurkCell CEO Muzaffer Akpinar to his right and Nemsic to his left. The two he really wanted to talk to were Obermann and Pélisson, but he placed them one over on each side. He didn’t want to be too obvious.

Balsillie returned to the reception and waited until all guests had taken their seats. He walked into the ballroom, pretending to look hither and yonder for his seat.
Wherever could it be? Ah, there it is!
“I guess this is my seat,” he said as he approached the table, mustering an expression of nonchalance mixed with a sense of good fortune.

As the banter turned to shoptalk, Balsillie pitched his tablemates. BlackBerry was no longer just an e-mail device; it was a full smartphone with an integrated speaker and microphone. The big American networks—including Verizon, AT&T, and T-Mobile—had all signed on in the past eighteen months, he explained. Their big multinational clients, including Johnson & Johnson, Goldman Sachs, and GE—loved the product so much they wanted to roll it out by the thousands to their employees in Europe. “They just want to know who to call,” Balsillie said.

By the end of the meal Balsillie had pocketed business cards from all the senior executives at his table and the names of their lieutenants he should contact next. Within months, talks were under way with all of the carriers. Balsillie had finagled the European entrée he badly coveted.

RIM’s close relationship with major U.S. customers gave it a powerful lever with European carriers who were indifferent to BlackBerry’s North American success. Overseas carriers generated the bulk of their revenues from cellular voice calls and simple text messages. They purchased most of their phones primarily from the “MENS Club,” the world’s biggest cellphone makers Motorola, Ericsson, Nokia, and Siemens. Their limited e-mail services paled against BlackBerry offerings, and the promise of wireless e-mail traffic was not something European carriers embraced as eagerly as their North American counterparts.

Unable to break through fortress Europe, Balsillie and his sales team looked for a smaller player that had more to gain by expanding traffic with BlackBerrys. That led them to Britain’s BT Cellnet, a more adventurous carrier that was among the first to upgrade its network to increase data capacity. RIM’s contract with BT Cellnet opened the door for U.S. multinationals to deploy BlackBerrys to Europe. When RIM and BT Cellnet sales teams began pitching BlackBerrys to Britain’s leading businesses, large European carriers paid closer attention to the Waterloo upstart. One of the first to notice was Ivan Donn, director of mobile applications for Vodafone, Britain’s dominant carrier. When Donn talked to business clients about the Canadian device, the message was clear: “There were three reasons they liked it: It. Fucking. Works,” says Donn. Wireless data was becoming a lucrative business and Vodafone, its very name a contraction of the words voice, data, and phone, risked losing market share if it focused too narrowly on cellphone voice services.

Expanding data traffic made sense to Donn’s colleagues at Vodafone. What didn’t were RIM’s expensive service fees. The monthly $10 service access fee that RIM charged carriers for each BlackBerry customer was as unpopular in Europe as it was in the United States. “It was alien and counterintuitive to a mobile operator,” says Donn. “A lot of people thought it was unacceptable.” When Donn took a closer look at the fee math, he saw an opportunity.
Multinational corporate customers were willing to pay about thirty times more for BlackBerry e-mail service than Vodafone was charging at the time for equivalent data usage. RIM’s service access fees would be a small price to pay for a potentially substantial increase in revenues.

Vodafone held its nose, swallowed RIM’s service access fees, and placed orders for BlackBerrys. At first, however, the devices idled in warehouses. Vodafone’s salespeople were trained to sell voice phones, not data. Sales teams were so handicapped that when they called on customers they were unable to offer a basic BlackBerry demonstration because Vodafone had not installed BlackBerry servers in its own systems. Without a server connection, the demo phones were little more than paperweights. Frustrated with Vodafone’s slow progress, RIM sales crews leaned on the British carrier to purchase more BlackBerrys. If relations between RIM and Vodafone didn’t improve, the smartphone maker’s European charge would falter.

The fraying relationship between the carrier and the device maker began to shift when RIM hired British sales veteran Mary Grundy to manage the Vodafone account. At first Grundy couldn’t get past the front door. Her initial meeting with the head of Vodafone UK’s enterprise business, Kyle Whitehill, took place in the carrier’s lobby. Whitehill gave her an earful: unless Grundy could help Vodafone expand phone sales, the relationship wasn’t going anywhere, he said. Grundy’s strategy was to win Vodafone over by embedding herself in the British carrier. She was given a desk at Vodafone, created BlackBerry training manuals, accompanied the carrier’s sales staff on customer calls, and secured RIM’s backing for special phone discounts and promotions. Inventory started moving after she convinced Vodafone to launch a two-for-one BlackBerry sales campaign called “Juice It Up.” Within a year, Vodafone was squeezing fresh profits with BlackBerry sales exceeding thirty thousand devices a month.

RIM’s enterprising sales rep grew so close to Vodafone’s sales team that Grundy once appeared in a skit at a Vodafone sales conference. A Vodafone executive wearing a bowler hat portrayed RIM in the pantomime, but it was Grundy who stole the show when she appeared onstage disguised as a wolf to mimic the carrier’s competitor BT Cellnet devouring customers. When the Waterloo company moved to the next sales stage, RIM would be wearing the wolf mask.

BlackBerry pushed so far ahead of other smartphone makers with its e-mail and voice services that corporate clients and carriers began worrying RIM was effectively becoming a monopoly. They didn’t want to see it turn into the next Microsoft or Nokia, dominant industry players that threw their weight around with customers. One of the earliest answers to these complaints was Good Technology, a California start-up selling e-mail software that could be loaded onto any mobile device. Quietly backed by a few U.S. carriers, Good Technology signed hundreds of U.S. business clients. The new competitor didn’t come close to matching RIM’s full-service offerings, but Balsillie saw long-term dangers. By creating agnostic software for any mobile device, the California rival was giving businesses and carriers more choice. They could now pick from a variety of devices, some cheaper than BlackBerrys, which were not taxed with RIM’s expensive service access fees.

RIM capitulated to pressure for more choice by opening its e-mail system to other handset makers. They would design keyboard phones, and RIM would supply software and links to connect the phones to its data network. In exchange RIM charged licensing fees. RIM called this new program BlackBerry Connect. Many employees couldn’t understand why RIM was rushing to aid competitors. It wasn’t. Like some Balsillie strategies, appearances were deceiving.

Balsillie and a small team of executives had other ambitions for Connect. This was more than a licensing program; it was a Trojan horse. RIM’s long-term game was to buy time. Competitors who signed up with RIM would be preoccupied making BlackBerry Connect phones rather than creating their own rival e-mail service. RIM gained an inside peek at rivals’ long-term development plans and opened the door to new customers. Every enterprise customer signed up under the program represented another stream of service access fees for RIM. It wasn’t empowering competitors at all; it was locking in its lead. “Sometimes you have to disguise yourself as another animal in the forest,” says Tyler Nelson, a RIM vice president who ran the program.

Lazaridis was initially concerned that Connect would distract RIM’s engineers and designers at a time when RIM was racing to keep up with demand and introduce new BlackBerrys. He never worried, however, that corporate customers would abandon RIM for the Connect phones offered by other handset makers. Their Connect phones could not hope to match the security and encryption protections that made BlackBerry such a valuable business communications tool. “We knew ultimately that the enterprise
customer … was never going to go for it, because it was not a verifiably secure solution,” he says. “It was our advantage. It wasn’t hidden; it was in plain sight.”

Unaware of RIM’s hidden agenda, phone makers in Europe and Asia flocked to the program to strengthen their presence in North America with BlackBerry-enabled phones. Samsung was so keen to make a Connect phone that one of its employees idled for weeks at a Waterloo hotel waiting for RIM to grant him a meeting with Balsillie. Finally the visitor appeared at the company’s offices in a distraught state. Samsung, he explained, would not let him return home to his family and job in South Korea unless he secured a Connect deal. RIM opened Connect discussions with Samsung, and the manager was free to fly home.

RIM’s most dedicated Connect partner was Nokia. The Finnish phone maker had been trying to break into the U.S. wireless business market for years, and Connect looked like an easy shortcut. Nokia’s executives did not worry about dancing with a competitor because Balsillie played down RIM’s ambitions during initial discussions in 2002. “He emphasized he didn’t believe RIM would be able to compete in the hardware business [and] might even give up their hardware business,” says Panu Kuusisto, who managed Nokia’s Connect agreement with RIM.

Nokia spent two years and millions of dollars on research and development and manufacturing of the BlackBerry Connect phones to fulfill its part of the bargain. RIM, however, seemed less committed. It delayed software deliveries, and when they finally shipped, the programs often lacked the latest BlackBerry features. Nokia grew so infuriated with the slow progress that it summoned Nelson and RIM’s chief legal officer, Karima Bawa, to a meeting in 2004 at its Helsinki headquarters. Marko Luhtala, an enterprise sales executive with the Finnish company, stood in front of an oversized map of the world as he complained to the RIM duo about the heavy costs of software delays. Pointing to the map, he fumed: “These dots are ships full of parts heading to our manufacturing facilities. When they arrive I own the inventory on them. You’ve just cost me because that [software] code isn’t in the plant.” Luhtala continued to wait. The slow pace was deliberate. “We’d find all sorts of ways to credibly slow down their engineering process for as long as possible,” says Nelson. “We told Nokia it was a series of unfortunate delays.”

By the summer of 2004, Nokia was in a panic. One week before Nokia was finally about to launch its BlackBerry phone with Spanish carrier Telefónica, Nokia discovered RIM had not negotiated an agreement with the
carrier to deploy the product. Without a deal, Telefónica wouldn’t let Nokia BlackBerry phones onto its network. Instead the Spanish carrier opted to buy conventional BlackBerrys directly from RIM. Not a single Nokia Connect phone had been activated by September 1, a huge disappointment for a handset maker that planned to sell 150,000 of the phones that year. Kuusito finally understood the Waterloo company’s game. “At that point, nearly two years after signing the Connect deal, we really started to think maybe the whole BlackBerry Connect program was a plot and Nokia was being abused by RIM,” he says. “We were so ignorant that they must have been just laughing at us,” he says.