Losing the Signal: The Spectacular Rise and Fall of BlackBerry (19 page)

RIM was one of dozens of companies, most in the technology sector, involved in a spreading options backdating scandal. Publicly traded businesses typically compensate employees with options, allowing them to buy company stock at a fixed price over a set period of time. The more share prices rose, the more profit employees pocketed when exercising their right to buy shares at the discounted option price. During the tech boom and bust, stock prices were so volatile that some employees were left holding worthless options. Many companies remedied the problem by backdating option grants to a time when stocks traded at lower prices, thus increasing the potential for profit. Altering fixed dates on stock options is legal as long as changes are communicated to shareholders. RIM failed to follow the rule for years. Even worse, RIM’s chief financial officer, Dennis Kavelman, publicly denied company options were backdated when questioned at the company’s annual meeting the previous summer. RIM had an accounting problem and a regulatory disclosure issue.

Richardson advised the board that his committee had alerted the U.S. Securities and Exchange Commission and the Ontario Securities Commission about its findings. RIM was now under investigation by both regulators. At the same time, Richardson explained that his committee had found no evidence of intentional misconduct. Mistakes were made, he said, because of “sloppy administration.” His committee strongly recommended that Balsillie and Lazaridis remain as co-CEOs, but changes were needed. The new order was revealed when Balsillie told the meeting he was stepping down as chairman of the board. The next to go were Kendall Cork and Douglas Wright, directors responsible for overseeing stock options as members of the compensation
committee. The board accepted their resignations but took the unusual step of naming each honorary director emeritus, “in recognition of their special contributions to RIM.” There would also be changes in the finance department: Kavelman stepped down as CFO, moving into a senior administration job; his lieutenant, Angelo Loberto, transferred out of finance to operations.

RIM announced the moves three days later along with news that it was appointing former Toronto Stock Exchange CEO Barbara Stymiest and former IBM Canada CEO John Wetmore to the board. Two months later, on May 17, RIM announced it was restating all financial statements between 1999 and 2006 to reflect additional stock option compensation charges totaling nearly $250 million. The stock market shrugged off the financial hit. The share price of one of North America’s fastest growing companies was still on a tear. One week after RIM’s bad news about the multimillion-dollar charge, RIM’s stock closed at $166, a 22 percent leap from its closing price the day of the board’s March meeting.

What appeared to be a small financial setback was in fact a far more damaging blow than anyone, except a small circle of insiders, appreciated. Behind the scenes, the fifteen-year-old business marriage of Jim Balsillie and Mike Lazaridis was coming unglued. The co-CEOs, the pioneering mobile e-mailers who communicated incessantly on their BlackBerrys, handed regulators a paper trail that traced improper option practices to the highest level of the company. For many difficult days in the spring of 2007, SEC investigators and U.S. Justice Department officials in New York and OSC staff in Toronto grilled Balsillie, Lazaridis, and several senior RIM officials about hundreds of e-mails. According to regulatory documents, Balsillie and, on occasion, Lazaridis made e-mail requests to backdate options for recent hires and executives to improve their value. Loberto grew so concerned about the volume of backdating requests that he warned his supervisor in an e-mail obtained by regulators: “I can NOT continually change history.” Balsillie told U.S. and Canadian regulators from the beginning that he was directly involved in the backdating, but that he had not intended violating securities rules and did not realize he was doing so.

The inquisition was much harder on Lazaridis. He told regulators he had no knowledge the practice was improper; his job was engineering and innovation, not securities laws, finance, and stock options. He didn’t understand why regulators dragged him into a mess Balsillie, his finance team, and the
overseeing directors had failed to prevent. Less than a year after the conclusion of the NTP fiasco, his reputation and RIM’s credibility were again under assault. The prospect of a scandal and regulatory discipline devastated Lazaridis. “We had just gotten over NTP [which] was a nightmare,” he says. “Then it was the stock options. That literally knocked the wind out of my sails.” His friend, David Neale, said Lazaridis felt “completely humiliated” by the regulatory investigation. “I think it sickened him to his heart,” he says.

Larry Conlee says Lazaridis lost more than his zeal. The founder’s faith in Balsillie was badly shaken. “I think Mike felt betrayed,” Conlee says. Lazaridis declines to discuss his personal response to the scandal other than to say he was “blindsided” by the investigation and extra work required “to protect the company and protect ourselves personally.” He says he did not discuss the options crisis with Balsillie because lawyers warned the co-CEOs against discussing the case while they were under investigation. Lazaridis says he was also in no shape to confront his partner. “It was painful. I was frightened. I didn’t understand it.” Running a global company that he and Balsillie had built in the face of so many obstacles was no longer where he wanted to be.

“You name all the great things that RIM was able to do, this thing just sucked it all out. I mean, why bother building a great organization if this can happen to it?”

Mike Lazaridis, ever the boy electrician, liked to relax by tearing apart small machines in his spare time. Just as he once opened radios in his basement lab for fun, Lazaridis lifted hoods on competitors’ phones. Staff visiting his third-floor office in a building called RIM 4 grew accustomed to disemboweled phones with chipsets, antennas, and wires strewn across his desk. Usually the desktop autopsies confirmed Lazaridis’s faith that BlackBerry was the smartest phone on the market.

In the summer of 2007, however, Lazaridis cracked open a phone that gave him pause. “They’ve put a Mac in this thing,” he marveled after peering inside one of the new iPhones. Ever since Apple’s phone went on sale in June, critics and consumers were effusive about the sleek phone’s playful touch screen, elegant graphics, and high-resolution images. Lazaridis saw much more. This was no ordinary smartphone. It was a small mobile Apple computer whose operating system used 700 megabytes of memory—more than twenty-two times the computing power of the BlackBerry. The iPhone had a full Safari browser that traveled everywhere on the Internet. With AT&T’s backing, he could see, Apple was changing the direction of the industry.

Lazaridis shared the revelation with his handset engineers, who had been pushing to expand BlackBerry’s Internet reach for years. Before, Lazaridis had waved them off. Carriers wouldn’t allow RIM to include more than a simple browser because it would crash their networks. After his iPhone autopsy, however, he realized the smartphone race was in danger of shifting. If consumers
and carriers continued to embrace the iPhone, BlackBerry would need more than its efficient e-mail and battery to lead the market. “If this thing catches on, we’re competing with a Mac, not a Nokia,” he said. The new battleground was mobile computing. Lazaridis figured RIM’s core corporate market was safe because the iPhone couldn’t match BlackBerry’s reliable keyboard and in-house network delivery of secure e-mails. But in the consumer market, where the Pearl phone was competing, RIM needed a full Web browser. BlackBerry was a sensation because it put e-mail in people’s pockets. Now, iPhone was offering the full Internet. If BlackBerry was to prevail, he told RIM’s engineers, “We have to fix everything that’s wrong with the iPhone.”

While Lazaridis pushed internally for a response to the iPhone, publicly he and Balsillie dismissed their new rival. Companies often ignore competitors’ triumphs, but by downplaying a consumer sensation, RIM suddenly seemed out of touch. “I haven’t seen one,” Balsillie told the
Toronto Star
after the iPhone went on sale in June.
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Months later, when the iPhone grabbed a fifth of the U.S. smartphone market, Lazaridis complained to the
New York Times
about its keyboard: “I couldn’t type on it and I still can’t type on it, and a lot of my friends can’t type on it…. It’s hard to type on a piece of glass.”
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With every click of his PowerPoint presentation, Lazaridis felt his audience grow slack and bored. It was late August 2007 and RIM’s boss was making a pitch in a Manhattan hotel meeting room to a team of senior executives from Verizon and its British affiliate Vodafone. Lazaridis and Conlee had been invited to New York by the carriers to propose new phone ideas. Although the iPhone wasn’t mentioned, there was no doubt Verizon and Vodafone were looking for a device that might supplant what was now America’s fastest-selling smartphone.

Judging by the drooping faces of John Stratton, Verizon’s chief marketing officer, his colleagues, and the executives from Vodafone, Lazaridis was losing the room.

RIM’s co-CEO had started with a pitch for BlackBerry Bold, due to launch in 2008. Clicking from slide to slide, Lazaridis extolled Bold’s improved keyboard, with an innovative track pad to replace the trackball, and large screen. This, he told the room, was the best phone RIM ever designed. But to Stratton and company, Bold failed to live up to its name. Up against AT&T and its
exclusive multiyear deal to sell the iPhone, Verizon had little interest in another keyboard phone, nor did Vodafone. “The whole atmosphere was, AT&T has the iPhone and we don’t, so what do we do?” remembers Conlee. “Neither of those carriers likes to lose. It’s a religious war.”

Verizon had been caught off guard by iPhone’s ascendency. Two years earlier, Verizon rejected an overture from Steve Jobs to partner with Apple on its plans for a new phone.
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A stickler for bandwidth reliability, the New York–based carrier wouldn’t relinquish control of its network to an unseen phone Jobs wanted complete authority to design. Like Lazaridis, Verizon executives correctly predicted iPhone traffic would create gridlock on AT&T’s network. What they didn’t anticipate was that consumers didn’t care. A multibillion-dollar market in carrier revenue was opening up and AT&T had a lock on the hottest device. RIM’s Bold was no match for the iPhone.

Sensing the audience’s mood, Lazaridis hurried to plan B. Up on the screen, surrounded by lightning, shone an ebony glass-covered phone. That, Lazaridis explained, was Storm. Phone and computer companies had experimented with touch-screen devices for years. None, he said, could match the magic touch of Storm. Pulling out a prototype, Lazaridis pressed a finger on the glass screen. There would be no sweeping fingers, no clumsy iPhone typos on this device. To make the point, his finger hovered like a computer mouse over a digital version of BlackBerry’s signature keyboard on the phone’s touch screen. When he pressed on a digital key, the entire screen clicked down like a giant button, replicating the tactile feel of tapping a BlackBerry keyboard. RIM had combined the navigation feel of a computer mouse with the secure handling of a BlackBerry keyboard. Under the hood, the ingenious floating Storm screen was designed to activate existing BlackBerry software every time it was clicked. This was how RIM would outsmart Apple, by combining the best of BlackBerry with the seductive lure of a touch screen. His old swagger returning, Lazaridis hailed the next smartphone wave. No one disagreed. Superlatives followed as Verizon and Vodaphone executives passed around the prototype. “They were over the moon,” Lazaridis would remember. “They loved the prototype. They called it revolutionary.”

RIM had its own reasons for backing the kind of touch phone that Lazaridis had initially and so publicly disdained. Verizon and Vodafone were two of the world’s biggest carriers with deep ties into the U.S. and European consumer phone market. Their endorsement of Storm came with an estimated $100 million marketing budget and thousands of retail stores to promote the
phone. If Storm took off, the two carriers could potentially sell millions of phones. RIM could stand toe-to-toe with Apple. This was the biggest break in RIM’s history. When Lazaridis and Conlee returned to Waterloo, Balsillie had only one reservation about the Verizon contract. RIM had to make the transformative phone in nine months. Was it possible for RIM to deliver in such a short time frame? The answer, Lazaridis and Conlee agreed, was yes.

Conlee broke the news about RIM’s ambitious deal to a select group of engineering executives shortly after the Manhattan meeting. In a room located adjacent to his office in RIM 4, Conlee outlined the secret project for the company’s first touch phone. The code name for the product was Project Storm, a nod to the disruptive impact RIM hoped the phone would have on the market. But that day the name captured a blizzard of objections from the company’s engineers.

RIM was racing to roll out Bold phones for 2008; now it wanted to shift gears and create a new phone in nine months! It took eighteen months to create a new BlackBerry. A touch phone was something else. Although Storm would use BlackBerry’s existing operating system, it would need new hardware, radio and antenna configurations, and additional software. RIM products were reliable, never this rushed. There would be no time for proper “soak-testing”—engineering talk for working bugs out of software. Waving off protests, Conlee, RIM’s product enforcer, asked each engineer to explain what he or she needed to make the touch phone happen. The room of problem solvers reluctantly itemized the parts, software, and staff they would need,
immediately.
Conlee then turned to Perry Jarmuszewski, a soft-spoken radio engineer who had been with RIM for more than a decade. “Perry I guess you’re good to go. You haven’t said anything,” Conlee offered.

Jarmuszewski, who preferred solving problems to making them, had deliberately held his tongue. Prodded by Conlee, he pushed back. “On a scale of 0 to 10, if 10 means no way, then this project is an 11,” he said. “It’s impossible. It’s something I would not be able to deliver.” Conlee shrugged and gave his marching orders: “Well, you guys are the heads of our engineering groups. You are paid accordingly. I expect you to get it done. Verizon wants an answer to the iPhone. We have to do it.”

As engineers filed out, they looked anxiously at RIM’s chief technology officer, David Yach. He’d just returned from a short holiday ready to devote the next months to fine-tuning the Bold phone. Now this. Yach would later say he and his colleagues understood the importance of the touch-phone contract.
“But the importance didn’t mean we could get it done any faster than we’d ever built a phone before,” says Yach.

“Did we push the teams too hard?” says Lazaridis. “Probably. Can you show me a company that doesn’t? I’d be hard-pressed to believe you. The pressure Jobs put his iPhone team through was worse than anything I ever put on my team. The fact is, that’s how business runs.”

After years of flying below the radar, RIM’s chiefs were in the limelight as Lazaridis and Balsillie won awards and mainstream media attention. In March 2008, Wall Street’s weekly financial bible,
Barron’s,
called RIM’s co-CEOs “underappreciated northern lights,” adding both to its annual list of the world’s best CEOs.
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Also on the list was Steve Jobs. After Mac computers, iTunes, and the iPhone, Jobs was Silicon Valley’s undisputed king of cool. By comparison, Lazaridis and Balsillie were bright but awkward public speakers. When Jobs spoke, his fans cheered. When Lazaridis and Balsillie stepped onstage, people sometimes scratched their heads.

For all his confidence, Balsillie could be a surprisingly baffling public speaker. The executive who carefully rehearsed scripts for customer presentations preferred a let’s-see-what-happens approach to interviews. He once explained his speaking strategy to university students: “The great thing is, when I talk, nobody knows what I’m going to say, including me.”
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On April Fools Day, 2008, Balsillie gave the kind of spontaneous interview that gives publicists coronaries. Wearing a tan jacket and a blue T-shirt, Balsillie sat down with George Stroumboulopoulos, host of a popular Canadian Broadcasting Corporation TV show. Referencing the popular iPhone, Stroumboulopoulos asked if it was time to add to RIM’s lineup: “Do you ever look at it and go, ‘What are we going to do if this isn’t our primary business, growing RIM beyond … a BlackBerry?’ ”

“Um, no,” Balsillie laughed, “we’re a very poorly diversified portfolio.”

“You’re just going to focus on one thing!” said Stroumboulopoulos.

“It either goes to the moon or it crashes to Earth,” Balsillie replied.

In the spring of 2008, no one believed RIM would flame out. Its stock market value was more than $70 billion, quarterly revenues were up 100 percent from the previous year, and the company sold sixty thousand BlackBerrys daily. Still, the company couldn’t afford to be arrogant. The iPhone had
grabbed a 17 percent share of the U.S. smartphone market, while RIM’s share slipped from 45 to 40 percent.
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This was more than a battle of dueling devices. Apple and RIM were competing to capture consumer imagination. When Jobs promoted the iPhone he talked about tangible pleasures—the ability to search Paris maps, listen to Bob Dylan, play video games, and tap cameras that captured the world. When Lazaridis talked about RIM’s phones, you needed an engineering degree to parse his words. Unveiling RIM’s Bold phone at a conference in Orlando, Florida, in May 2008, he began with a spiel ripped from a product manual: “3G tri-band HSDPA. Quad band Edge. Wi-Fi A, B, and G. GPS. 624 megahertz strong-armed with MMX. Powerhouse processing. Bold. Brilliant, strong color display. The best keyboard we’ve ever made.”

Translation? RIM was launching a third-generation phone that came with Wi-Fi, GPS, and a more powerful processor. To technology wonks in the theater, corporate IT managers, and CIOs, Lazaridis made perfect sense. He was announcing the smartest new smartphone for business customers. But to investors, journalists, and nonengineers, Lazaridis might as well have been reciting algorithms.

In other public appearances that spring, Lazaridis fretted about the very thing iPhone users considered irrelevant: network capacity. One of the great strengths of RIM’s internal network system was its ability to compress large amounts of data, a service that reduced bandwidth use and data charges for big customers. When he was presented with a global leadership award by the Computerworld honors program, Lazaridis, the practical engineer, lectured an interviewer about the wireless industry’s long history of preserving limited bandwidth: “We have to keep that same way of reasoning, that same conservative conserving mind-set going forward as we apply more and more applications to the wireless spectrum.”
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Three months later, in July 2008, Apple smashed the networks Lazaridis wanted to conserve by launching the App Store. The online outlet was stocked with software applications that iPhone users, then numbering 6 million, could download. A finger swipe could race cars through video games, book hotel rooms, and order food. Apple sold more than 10 million apps in three days. The number rose to 60 million in a month.
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By 2011, the App store was stocked with half a million apps and had registered more than 15 billion downloads.
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Bandwidth conservation was yesterday’s priority. AT&T’s networks were so clogged that customers began suing Apple and the carrier for dropped calls
and other transmission headaches. The message was clear: wireless data traffic was only going to get bigger. The answer was not conservation, rather, it was bigger, faster wireless highways.