blackberry

BlackBerry: The Endgame

 

The BlackBerry was the first truly modern smartphone, the king of Personal Information Management On The Go. But under its modern presentation lurked its most fatal flaw, a software engine that couldn’t be adapted to the Smartphone 2.0 era.

Jet-lagged in New York City on January 4th 2007, just back from New Years in Paris, I left my West 54th Street hotel around 6am in search of coffee. At the corner of the Avenue of the Americas, I saw glowing Starbucks stores in every direction. I walked to the nearest one and lined up to get my first ration of the sacred fluid. Ahead of me, behind me, and on down the line, everyone held a BlackBerry, checking email and BBM messages, wearing a serious but professional frown. The BlackBerry was the de rigueur smartphone for bankers, lawyers, accountants, and anyone else who, like me, wanted to be seen as a four-star businessperson.

Five days later, on January 9th, Steve Jobs walked on stage holding an iPhone and the era of the BlackBerry, the Starbucks of smartphones, would soon be over. Even if it took three years for BlackBerry sales to start their plunge, the iPhone introduction truly was a turning point In BlackBerry’s life.

RIM (as the company was once called) shipped 2M Blackberries in the first quarter of 2007 and quickly ascended to a peak of 14.6M units by Q4 2010, only to fall back to pre-2007 levels by the end of 2013:

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Last week, BlackBerry Limited (now the name of the company) released its latest quarterly numbers and they are not good: Revenue plunged to $916M vs. $1.57B a year ago (-42%); the company lost $207M and shipped just 2.1M smartphones, more than a half-million shy of the Q1 2007 number. For reference, IDC tells us that the smartphone industry shipped about 300M units in the second quarter of 2014, with Android and iOS devices accounting for 96% of the global market.

Explanations abound for BlackBerry’s precipitous fall.

Many focus on the company’s leaders, with ex-CEO Jim Balsillie and RIM founder Mike Lazaridis taking the brunt of the criticism. In a March 2011 Monday Note uncharitably titled The Inmates Have Taken Over The Asylum, I quoted the colorful but enigmatic Jim Balsillie speaking in tongues:

“There’s tremendous turbulence in the ecosystem, of course, in mobility. And that’s sort of an obvious thing, but also there’s tremendous architectural contention at play. And so I’m going to really frame our mobile architectural distinction. We’ve taken two fundamentally different approaches in their causalness. It’s a causal difference, not just nuance. It’s not just a causal direction that I’m going to really articulate here—and feel free to go as deep as you want—it’s really as fundamental as causalness.”

This and a barely less bizarre Lazaridis discussion of “application tonnage” led one to wonder what had happened to the two people who had so energetically led RIM/BlackBerry to the top of the industry. Where did they take the wrong turn? What was the cause of the panic in their disoriented statements?

Software. I call it the Apple ][ syndrome.

Once upon a time, the Apple ][ was a friendly, capable, well-loved computer. Its internal software was reliable because of its simplicity: The operating system launched applications and managed the machine’s 8-bit CPU, memory, and peripherals. But the Apple ][ software wasn’t built from the modular architecture that we see in modern operating systems, so it couldn’t adapt as Moore’s Law allowed more powerful processors. A radical change was needed. Hence the internecine war between the Apple ][ and Steve Jobs’ Mac group.

Similarly, the BlackBerry had a simple, robust software engine that helped the company sell millions of devices to the business community, as well as to lay consumers. I recall how my spouse marveled at the disappearance of the sync cable when I moved her from a Palm to a Blackberry and when she saw her data emails, calendar and address book effortless fly from her PC to her new smartphone. (And her PC mechanic was happy to be freed from Hotsync Not Working calls.)

But like the Apple ][, advances in hardware and heightened customer expectations outran the software engine’s ability to evolve.

This isn’t something that escaped RIM’s management. As recounted in a well-documented Globe and Mail story, Mike Lazaridis quickly realized what he was against:

“Mike Lazaridis was at home on his treadmill and watching television when he first saw the Apple iPhone in early 2007. There were a few things he didn’t understand about the product. So, that summer, he pried one open to look inside and was shocked. It was like Apple had stuffed a Mac computer into a cellphone, he thought.

[…] the iPhone was a device that broke all the rules. The operating system alone took up 700 megabytes of memory, and the device used two processors. The entire BlackBerry ran on one processor and used 32 MB. Unlike the BlackBerry, the iPhone had a fully Internet-capable browser.”

So at a very early stage in the shift to the Smartphone 2.0 era, RIM understood the nature and extent of their problem: BlackBerry’s serviceable but outdated software engine was against a much more capable architecture. The BlackBerry was a generation behind.

It wasn’t until 2010 that RIM acquired QNX, a “Unix-ish” operating system that was first shipped in 1982 by Quantum Software Systems, founded by two Waterloo University students. Why did Lazaridis’ company take three years to act on the sharp, accurate recognition of its software problem? Three years were lost in attempts to tweak the old software engine, and in fights between Keyboard Forever! traditionalists and would-be adopters of a touch interface.

Adapting BlackBerry’s applications to QNX was more complicated than just fitting a new software engine into RIM’s product line. To start with, QNX didn’t have the thick layer of frameworks developers depend on to write their applications. These frameworks, which make up most of the 700 megabytes Lazaridis saw in the iPhone’s software engine, had to be rebuilt on top of a system that was well-respected in the real-time automotive, medical, and entertainment segment, but that was ill-suited for “normal” use.

To complicate things, the company had to struggle with its legacy, with existing applications and services. Which ones do we update for the new OS? which ones need to be rewritten from scratch? …and which ones do we drop entirely?

In reality, RIM was much more than three years behind iOS (and, later, Android). Depending on whom we listen to, the 2007 iPhone didn’t just didn’t stand on a modern (if incomplete) OS, it stood on 3 to 5 years of development, of trial and error.

BlackBerry had lost the software battle before it could even be fought.

All other factors that are invoked in explaining BlackBerry’s fall — company culture, hardware misdirections, loss of engineering talent — pale compared to the fundamentally unwinnable software battle.

(A side note: Two other players, Palm and Nokia, lost the battle for the same reason. Encumbered by once successful legacy platforms, they succumbed to the fresh approach taken by Android and iOS.)

Now under turnaround management, BlackBerry is looking for an exit. John Chen, the company’s new CEO, comes with a storied résumé that includes turning around database company Sybase and selling it to SAP in 2012. Surely, such an experienced executive doesn’t believe that the new keyboard-based BlackBerry Passport (or its Porsche Design sibling) can be the solution:

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Beyond serving the needs or wants of die-hard keyboard-only users, it’s hard to see the Passport gaining a foothold in the marketplace. Tepid reviews don’t help (“The Passport just doesn’t offer the tools I need to get my work done”); Android compatibility is a kludge; developers busy writing code for the two leading platforms won’t commit.

Chen, never departing from his optimistic script, touts BlackBerry’s security, Mobile Device Management, and the QNX operating system licenses for embedded industry applications.

None of this will move the needle in an appreciable way. And, because BlackBerry’s future is seen as uncertain, corporate customers who once used BlackBerry’s communication, security, and fleet management services continue to abandon their old supplier and turn to the likes of IBM and Good Technology.

The company isn’t in danger of a sudden financial death: Chen has more than $3B in cash at his disposal and the company burns about $35M of it every quarter. Blackberry’s current stock price says the company is worth about $5B, $2B more than its cash position. Therefore, Chen’s endgame is to sell the company, either whole or, more likely, in parts (IP portfolio, QNX OS…) for more than $2B net of cash.

Wall Street knows this, corporate customers know this, carriers looking at selling Passports and some services know this. And potential body parts buyers know this as well… and wait.

It’s not going to be pretty.

JLG@mondaynote.com

Blackberry’s Future

 

by Jean-Louis Gassée

Once the king of smartphones for business uses, Blackberry got a new CEO, a new operating system and new devices, with and without the traditional keyboard. In spite of these changes, the company’s latest numbers don’t paint a picture of revival.

Thorsten Heins doesn’t suffer a lack of enthusiasm. During the run up to the March release of its BlackBerry 10 operating system, RIM’s CEO painted an optimistic picture of a company on the rebound, a company that would correct the mistakes of the industry leaders:

“It’s still the same,” Heins said of the iPhone. “It is a sequential way to work and that’s not what people want today anymore. They want multitasking.”

Rechristened as BlackBerry, Heins told us that the company would energize the develop community and spawn devices that are too exciting to describe:

“There’s one new product I’m really excited about, but I can’t really share it,” Heins told CNET in an interview today.

Last week, the company released its latest quarterly numbers and they are exciting, although not in the sense that Heins would like. The forecast was $3.4B in revenue and $0.07 in earnings per share; the reality was $3.1B in sales and, more important, a loss of $0.13 per share.

The numbers “excited” traders so much that BBRY shares lost 28% of their value in a single trading session, putting them back to their one-year-ago level.

The earnings release was followed by the customary conference call where the CEO and CFO review the numbers and answer questions from Wall Street analysts. Courtesy of Seeking Alpha, the call transcript is here and contains the obligatory pablum, including an excessive abuse of the F-word (22 occurrences):

Embracing our heritage of mobility first is very important as we build our culture and go through this transition. We don’t have to be all things to all people and all markets, and embracing this focus allows us to drive efficiency, be flexible and agile, and to ultimately drive best-in-class innovations. [...] We’re continuing to focus on improving all areas of the business…

Curiously, there’s no breakdown of the sales of BlackBerry devices. How much of their revenue was “energized” by the BB10? Without actual numbers, we’re left in a cloud of doubt about how well the new platform is actually doing.

The disquietude continues: There are no subscriber numbers, and no guidance other than an expectation of more losses next quarter. The glowing comments about cash-flow from operations ($630M, a nice number) are undercut by the disclosure of a substantial tax refund, without which the company would have eaten through $400M to $500M of cash.

As for tablets, the Blackberry PlayBook is no more, says the CEO. He’s unhappy with the device’s performance and is determined to focus on the company’s “core hardware portfolio“. (The company’s website no longer describes the product and only offers a software update for existing customers.)

Inevitably, the How Many Moves Remain? question comes up. Blackberry professes to do more than just devices, it claims to offer strong enterprise services and says it will propagate its BBM (Blackberry Messenger) to other platforms including Android and iOS. It also promotes a form of (limited) compatibility for (some) Android apps on its newer smartphones. But is anyone buying and in numbers that can save the company?

More to the point: Who wants to buy Blackberry (the company), for what reasons, and at what price?

Let’s back up. Last week, we heard that Microsoft had once again given up on its perennial hunt to capture a handset maker. This time, the prey was Nokia, Microsoft’s “special” Windows Phone licensee.

The official explanation for the Nokia blowup was that the price tag was too high, but price clearly wasn’t an issue. Nokia’s $14B market capitalization weighs in at about 5% of Microsoft’s $288B. Even when you tack on a 25% acquisition premium, the purchase should have been a reasonably easy sell, especially given Microsoft’s desire to take the handset business into its own hands, if only to counter (or mimic) the strategy established by Google and Motorola.

There’s really only one explanation, as I speculated last week: The engagement was dissolved because of Microsoft’s bleak view of Nokia’s business, that the Finnish company no longer has the technological acumen and brand loyalty that Microsoft needs to make Windows Phone a legitimate competitor with Android and iOS.

BlackBerry’s market capitalization now stands at about $6B. That’s less than half of Nokia’s. If Nokia, supported by Microsoft, can’t gain ground on Google and Apple devices, what gives us confidence that BlackBerry isn’t sliding into insignificance?

The BlackBerry name, as a brand, is strong. But a brand only exists as the carrier of a promise. A brand writes checks that the product cashes. Without a successful product, the brand dies (go ask Kodak).

While Nokia could be acquired by someone interested in the Windows Phone business, one is hard pressed to form a similar thought for Blackberry. It may be struggling, but there is a Windows Phone ecosystem, including handset makers. There is no such thing around BlackBerry. Developers aren’t writing apps for BB10 in ecosystem-making numbers, carriers have taken a wait-and-see posture, even the core group of dedicated users (I used to be one of them) appears to be losing faith.

This isn’t a brightly optimistic picture. Today, Blackberry finds itself caught between Samsung and Apple at the high end, and a rabidly fermenting crowd of Android (official or not) clones at the lower price range.

So, why not consider heresy, or apostasy: Ditch the newer BlackBerry OS too few developers believe in, and bet on Android devices to support BlackBerry’s enterprise services.

The answer is probably the same as it is for Nokia: It’s too late.

JLG@mondaynote.com