Losing the Signal: The Spectacular Rise and Fall of BlackBerry (18 page)

As the cataclysm approached, Balsillie became consumed with dread. He kept his fragile state from colleagues because, in his words, “I knew they looked to me as a rock of stability.” A crack in his tough-guy exterior was hardly what the troops needed now. On the advice of friends, he booked a Toronto hotel room that November to meet with a man whose job was staring down defeat. Hearing a knock on the door, Balsillie came face-to-face with Donn Smith. Balsillie had heard about Smith from sports friends. The lanternjawed guru had helped prominent golfers overcome the yips, nervous hands on the putting green. Hockey stars such as Jarome Iginla, Doug Weight, and Bill Guerin turned to Smith to crawl out of slumps. Often their problems weren’t physical. Players had to get their head back in the game and Smith knew how to get them there.

Once Balsillie explained his circumstances, Smith shared his own story. He was one of ten children born into a hard-luck family in Prince Edward Island. According to Smith’s book,
Internal Perfection,
his parents lacked money for such basic necessities as indoor plumbing or electricity.
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As a young man, Smith battled a drinking problem, moved to Alberta to work as a pipe fitter, corked his alcohol dependency, and parlayed his redemption into a new career as a high-end personal life coach. Smith shared past traumas with clients to put them at ease. Anything bad they were going through had already happened to him.

Smith helped clients cage their fears. The trick, he told Balsillie, was summoning a joyful experience. RIM’s chief was comforted that night by the memory of carefree childhood swims in a lake near the family home in Peterborough. Balsillie didn’t want to let go of the dreamy recollection when Smith pulled him back to reality after a minute. In that short time, Smith had shown him he had the ability to push away fears and think about something other than the NTP fiasco. By the end of his first session, Balsillie was able to hold his happy memory for several minutes. “He taught me how to put my nervousness in a box,” he says. “You understand this is about choice. You know you can get out of it. It gives you your power back.” To Balsillie the athlete, it was no different than working a weak muscle with a trainer. “He knew how to shut the nervousness out. It worked, it was what I needed,” he says. “It shifted the dread feeling out of me, and I started sleeping and eating properly. The sense of relief was remarkable.”

As Balsillie continued to meet with Smith over the next weeks and months, he recovered enough energy to confront the NTP nightmare. If RIM could delay Judge Spencer’s injunction until the U.S. Patent office finished its review of NTP’s patents, it might have a chance. The injunction was stalled, and in February 2006, the Patent Office announced what RIM had waited three years to hear. NTP’s wireless e-mail patents were invalidated.
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The messy war, however, was not over. NTP vowed to challenge the patent invalidation, opening another maze of hearings and rulings. Judge Spencer, furious with RIM’s blitzkrieg of appeals and lobbying, dug in his heels. The Patent Office had no legal authority over his court, he said. As he once told RIM, “This is still probably one of the few places left where money and power and political influence don’t mean a damn thing.”

RIM was out of options. If RIM and NTP did not strike a settlement within thirty days, Judge Spencer would enforce the injunction. Both sides were ready to settle. RIM could not risk losing customers and NTP’s legal position had weakened. It could take years of appeals to resolve the ongoing patent validity, and RIM had strengthened its bargaining position by developing an e-mail detour on its U.S. BlackBerry service that did not trip over NTP’s patents.

RIM dispatched a team of lawyers to a New York law office to meet with NTP’s Stout and an arbitrator to end the five-year legal odyssey. Within a few days, they struck a preliminary agreement. With the end finally in sight, Balsillie did not want to make the decision alone. He turned to Lazaridis and
RIM’s board, which rarely disagreed with the CEOs, asking them what they would do in his shoes. By the end of the meeting, everyone was behind him. In March the two sides announced a settlement. NTP’s persistent demand for royalties was off the table. Instead RIM would pay NTP a lump sum of $612.5 million. Thomas Campana did not live to see his case validated. The heavy smoker died of cancer in 2004. NTP’s law firm, Wiley Rein, pocketed $245 million of the settlement, the largest contingency fee earned by any U.S. law firm that year.
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Campana’s widow, Stout, and other investors shared the rest of RIM’s payment. Stout marked the victory with a three-week hunting trip to New Zealand, where, with a crossbow, he bagged another icon, a majestic red stag known locally as the trophy of kings. In Waterloo, there were no celebrations. “It’s not a good feeling to write this kind of check,” Balsillie told reporters. Privately he believed the outcome was an important financial win because NTP’s royalty demand would have drained RIM’s cash flow for years. RIM restored its profits within a year of writing the NTP check. What was harder to recover, however, was the personal damage.

Few people knew of the emotional toll the case took on RIM’s chiefs. Lazaridis looked for solace in his faith, and Balsillie in his new guru. The humiliating legal spectacle had unnerved the company’s leaders and diverted their attention from emerging competitors. “We lost some of who we were through that,” says Patrick Spence. “That’s ultimately the cost to the company. It’s not the $612 million. It’s what that cost us in terms of taking focus away from where we needed to go.”

Steve Jobs walked onto the stage of a San Francisco conference center to announce a revolution his competitors would regret underestimating.

Dressed in his signature black mock turtleneck and faded jeans on the morning of January 9, 2007, Apple’s founder announced he would “change everything.” He had three firsts to proclaim: a touch-screen iPod, a mobile phone, and an Internet communications device. Turning to more than four thousand tech reporters, bloggers, and cheering employees in the room he asked: “Are you getting it? These are not three separate devices. This is one device and we are calling it iPhone. Today Apple is going to reinvent the phone.”

For the next eighty minutes Jobs trumpeted the iPhone by comparing it with “not so smart” smartphones, leaving no doubt that BlackBerry, the runaway market leader, was his target. Apple’s iPhone, he promised, wouldn’t come with the frustrating “fixed” or “plastic” keyboards that made Internet navigation so cumbersome. “We are going to … get rid of all these buttons and use this giant screen,” he said waving an iPhone at his audience. Poking, pinching, and swiping across the glass surface, he scrolled music files, played Beatles songs, screened a clip of the hit TV series
The Office,
and listened to a voice mail from Al Gore. This wasn’t the “baby Internet,” he said, dismissing the limited Web browsers of BlackBerry and other smartphone makers; this was “the Internet in your pocket.” The only thing bolder than iPhone’s design was its price tag: $499, twice the price of the latest BlackBerry.

Jobs had something else in his pocket. At the presentation’s end, he invited
a guest onstage. The room fell quiet when Stanley Sigman, the stocky CEO of Cingular Wireless, emerged from the wings. It was an appearance few would have imagined. Jobs had been a vocal critic of the nation’s powerful carriers. He resisted entering the phone business for years because of the stifling control exerted by big wireless carriers, whom he once called “the four orifices.”
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Ironically, Sigman now represented the biggest orifice of them all. Days earlier, Cingular was devoured by AT&T as part of a $67 billion takeover of RIM’s earliest U.S. carrier, BellSouth. AT&T was now the world’s preeminent telecom operator.

“We come from two different worlds,” Jobs said of Sigman, looking stiff beside him in a navy blue jacket, clutching white cue cards. Despite their differences, he and Sigman “worked wonderfully together,” Jobs added. Sigman agreed, following his notes. Two years earlier, the Cingular executive said, the carrier signed a contract to sell an Apple phone it hadn’t seen, an unheard-of concession by any carrier. Apple was also given carte blanche and unlimited bandwidth to develop services BlackBerry was denied by carriers—video downloads, map searches, and full Internet browsing. This was market disruption Silicon Valley style: Apple aimed to win by ignoring the established rules. In exchange for the unusual freedoms, Apple granted Cingular a multiyear contract to sell iPhones exclusively in the United States. “Ours is a unique relationship that lets Apple be Apple and Cingular be Cingular,” Sigman said.

Jobs finished his presentation by making one more announcement. From now on, Apple Computer, Inc. would be Apple Inc. Gesturing to an overhead chart, he pointed out that in 2006 almost 200 million personal computers were sold globally. One billion mobile phones were sold during the same period. Silicon Valley could no longer afford to ignore the smartphone market that BlackBerry had created. Apple, Jobs boasted, would grab 1 percent of the mobile phone market by selling 10 million iPhones in the following year. Apple was pivoting from its computing roots to grab a share of the world’s fastest-growing technology market. Jobs rationalized the shift by reaching north to BlackBerry country to quote Canadian ice hockey legend Wayne Gretzky:

“I skate to where the puck is going to be, not where it has been.”

Standing in a tightly secured office about forty miles south of San Francisco, engineers watched a webcast of Jobs’s iPhone presentation with growing
dread. The fretting took place in Building 44,
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one of scores of structures at Googleplex, the Mountain View headquarters of Google. For the previous fifteen months Google had been secretly working on a smartphone. Like Jobs, Google founders Sergey Brin and Larry Page had their eyes fixed on the exploding mobile phone market. What Jobs hadn’t said in San Francisco was that the fastest-growing, most lucrative segment of the mobile phone market was the wireless data boom RIM had detonated five years earlier. U.S. carriers were projected to more than double 2005 wireless data revenues to above $27 billion that year.
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Data was Google’s DNA. Its search engine delivered websites, media, and maps to the digital world. If the world was going mobile, Google had to be there in a much bigger way.

Google got into the game in 2005 by acquiring Android, a mobile device start-up co-founded by Silicon Valley innovator Andy Rubin. The acquisition was followed by the launch of two projects known to only a few Google executives. The first, code-named Dream, was a long-term effort by Rubin to build a touch-screen phone. It was nowhere near the finish line when Jobs strode onstage that day. The second project, Sooner, was in the final stages of development: it was to be a BlackBerry-like phone with a keyboard and advanced applications, including a full Internet browser and Google Maps.
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Sooner’s team understood immediately what Jobs’s virtuoso iPhone demo meant: Project Sooner was a goner. If Google wanted its phone to make it, the keyboard had to go. Rubin’s Dream touch-screen phone was moved into the fast lane.
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Fred Vogelstein summed up iPhone’s impact that day in his book
Dogfight
with a quote by Google engineer Chris DeSalvo: “We’re going to have to start over.”
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Mike Lazaridis was home on his treadmill when he saw a TV report about Apple’s news. He soon forgot about exercise. There was Steve Jobs waving a small glass object, downloading music, videos, and maps from the Internet onto a phone. “How did they do that?” Lazaridis wondered. His curiosity turned to disbelief when Sigman took the stage to announce Cingular’s deal to sell Apple’s phone. What was its parent, AT&T, thinking? “It’s going to collapse the network,” he thought.

The next day Lazaridis grabbed Balsillie at the office and pulled him in front of a computer.

“Jim, I want you to watch this,” he said, linking to a Webcast of the iPhone unveiling. “They put a full Web browser on that thing. The carriers aren’t letting us put a full browser on our products.”

Balsillie’s first thought was RIM was losing AT&T as a customer.

“Apple’s got a better deal,” Balsillie said. ‘We were never allowed that. The U.S. market is going to be tougher.”

“These guys are really, really good,” Lazaridis replied. “This is different.”

“It’s okay—we’ll be fine.”

RIM’s chiefs didn’t give much additional thought to Apple for months. “It wasn’t a threat to RIM’s core business,” says Lazaridis’s top lieutenant, Larry Conlee. “It wasn’t secure. It had rapid battery drain and a lousy [digital] keyboard.” If the iPhone gained traction, RIM’s senior executives believed, it would be with consumers who cared more about YouTube and other Internet escapes than efficiency and security. Offering mobile access to broader Internet content, says Conlee, “was not a space where we parked our business.”

Lazaridis and Balsillie had more urgent concerns than Apple’s new phone. They were scrambling to feed a world hungry for BlackBerrys. By 2007, RIM was adding more than a million BlackBerry subscribers a quarter and split its stock, three for one, following a two-for-one split three years earlier. Anyone who had bought in early 1999 for $13 a share and held on would have seen their investment rise forty-fold in value in eight years. Its new consumer phone, the Pearl, was a sensation, with sales leaping 59 percent, to 6.4 million handsets in fiscal 2007. Balsillie’s global ambitions were another strain. Lawyers and marketing staff were racing to fulfill his plan to sign up a hundred foreign carriers from Venezeula to Vietnam within a year. Conlee grew concerned that emerging market carrier customers were not generating sufficient profits to justify extra work for RIM’s stretched staff. “You never have the luxury of being able to say yes to everything,” Conlee says. “We had to commit dollars and hours we didn’t have.”

There weren’t enough manufacturing facilities or employees to keep up with the growth. For instance, the company’s practice of holding new-hire Monday gatherings was becoming a logistical nightmare. Sometimes there were so many recruits that buses were hired to ferry new hires to hotel conference rooms. Senior executives were so busy they only appeared on pretaped video presentations. RIM was building so many new offices that it soon became Waterloo’s largest landlord, owning an estimated 30 percent of the city’s commercial real estate. Unlike Silicon Valley, where corporate headquarters are
playful and futuristic monuments to their founders’ visions, RIM’s was a testament to the founder’s fiscal and engineering restraint. In a hurry to keep up with demand, there was little time for creativity. Virtually all of the Waterloo offices were dull gray glass-and-cement structures, with cookie-cutter offices furnished with the same utilitarian brand of chairs, wood desks, and tables.

A more complex challenge was manufacturing. RIM built its Waterloo plant in 2002 so that its research and development teams could work closely with production and quality control could be managed locally. With snowballing sales, those ambitions were no longer sustainable in 2007. The factory was already working at full capacity. The solution, Conlee decided, was tapping manufacturing partners in Mexico, United States, and Europe. When he met with a consultant to draft a proposal, he was immediately warned off. Outsourcing such complex technology would endanger quality control, the consultant said. When Conlee said his priority was keeping up with sales that were expanding 25 percent from each quarter to the next, the consultant replied such a growth rate was impossible.

“Welcome to the problem,” Conlee said.

The iPhone had a cult following before a single phone was sold. In a year filled with breaking news about the U.S. military surge in Iraq and Paris Hilton’s jail sentence, media couldn’t write enough advance stories about the coming of a smartphone that gadget blog Gizmodo dubbed the “true Jesus Phone.” Apple followed through with a publicity campaign leading up to the launch that was filled with spiritual overtones. “Touching is believing” was the slogan of print and TV ads featuring a finger reaching out of the darkness to touch the phone. Journalists happily played along, comparing the image to Michelangelo’s Sistine Chapel painting of God stretching to touch the finger of Adam. The iPhone’s retail debut day, or “iDay,” as it was dubbed, June 29, 2007, was also the date of the Roman holiday celebrating the feast of the martyred apostles St. Peter and St. Paul. By that day, it had already inspired more than 11,000 print articles and generated 69 million Google hits.
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No one understood consumers’ digital desires better than Steve Jobs. A generation earlier Apple’s elegant Macintosh took desktop computers mainstream. Six years before the iPhone launch, Apple reinvented the music business in the face of industry skepticism by making portable music easy and fun
with the iPod digital music player and its iTunes online music service. Computer and music industry executives dismissed iTunes as a pipe dream. Record labels would not initially yield to Apple the right to control the online distribution of music purchases, but eventually relented.
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They were wrong. Apple offered a lifeline to a drowning business, and Jobs appealed personally to artists hurt by Internet music pirates, including Bob Dylan, who agreed to let iTunes prerelease his new album
Modern Times.
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For the first time in thirty years, a Dylan album ranked number one on the
Billboard
chart. Other music celebrities and music labels soon followed Mr. Tambourine Man.

Now Apple was reinventing another industry. It had convinced one of the world’s most powerful carriers to promote the type of device the industry had resisted for years: a phone that allowed users to carry the Internet in their pockets. Eight years after RIM had unseated Motorola with its mobile e-mail service, the iPhone was challenging BlackBerry as the new standard of wireless communications. Gizmodo’s editor-in-chief, Brian Lam, who coined the phrase “Jesus phone,” says iPhone’s success was preordained. BlackBerry and other smartphones were dull, utilitarian tools meant for corporate types who lacked imagination. The iPhone, with its elegant design and hypnotic zoom and pinch touch interface, he says, was for “everyday people.” In its first three months, more than 1 million iPhones were sold, matching the quarterly sales volume of the RIM’s Pearl, only months earlier hailed by critics as the phone of the future.

To rivals such as RIM, Nokia, and Motorola, the iPhone’s popularity was illogical. Its battery lasted less than eight hours, it operated on an older, slower second-generation network, and, as Lazaridis predicted, music, video, and other downloads strained AT&T’s network. RIM now faced an adversary it didn’t understand. “By all rights the product should have failed, but it did not,” said David Yach, RIM’s chief technology officer. To Yach and other senior RIM executives, Apple changed the competitive landscape by shifting the raison d’être of smartphones from something that was functional to a product that was beautiful. “I learned that beauty matters…. RIM was caught incredulous that people wanted to buy this thing.”

John Richardson started RIM’s board meeting on March 2, 2007, with a somber update no one wanted to hear. This would not be a discussion about Apple or
the iPhone. No, this was a pressing emergency jeopardizing the reputation of the company and its senior executives. Richardson, a retired accounting and insurance company executive, headed a special committee of the board appointed in 2006 to investigate RIM’s stock option practices. The company alerted shareholders months earlier of a potential $25 million to $45 million charge relating to employee option grants. The committee’s investigation revealed a bigger problem than anticipated. Guided by Toronto securities lawyer Rob Staley, Richardson discussed the findings of a report by Staley’s firm, Bennett Jones. RIM, the report concluded, had improperly backdated hundreds of option grants to more than sixty managers and senior executives, including Balsillie and Lazaridis, to inflate the value of the benefits over nearly a decade ending in 2006.