rim

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

Saving Private RIM

Over the past couple weeks, we’ve read a number of bedtimes stories about RIM’s next move. They all start with the same trope: Once upon a time, late last century, Apple was on the edge of the precipice and still managed to come back — and how! Today, RIM’s situation isn’t nearly as dire as Apple’s was then. Unlike Apple, it doesn’t need a cash transfusion and, in the words of Thorsten Heins, RIM’s new CEO: “If you look at the platform it’s still growing, if you look at the devices we’ve got a single phone that’s sold 45 million units.” RIM will pull off an Apple-like rebound and live happily ever after.

Equating RIM 2012 with Apple 1997 is, in so many respects, delusional. Let me count the ways.

First, the context, the marketplace. In its dark days, Apple faced PC clones running Windows. With Microsoft’s 95% market share, it wasn’t even a two-platform race. Microsoft came to Apple’s rescue with a $150M investment and a commitment to continue writing apps for the Macintosh. This was enlightened self-interest on Microsoft’s part: Discreetly tucked into the agreement was the settlement of a brewing IP suit. And by keeping their highly visible (if economically unthreatening) competitor alive, Microsoft hoped to score a few goodwill points in the face of the DOJ’s antitrust investigations.

Fifteen years later, there’s no looming smartphone monopoly. We have a genuine two-horse race between Android and iOS, and a third horse, Microsoft, circling in the paddock. This is a very different world, a much rougher one with bruisers such as Apple, Samsung, Huawei, and ZTE…with this many players, there’s no rationale for investing in a fallen player.

Second, ecosystems. In Stephen Elop’s ringing (if infelicitously timed) words, yesterday’s platform struggles have become all-out ecosystem wars. To claw back into the race, let alone to return to its former CrackBerry glory, RIM must build an array of content and services that can equal or better those that will be offered by the dominant players in 2013.

This isn’t just about app stores — a challenge unto itself when developers ask why they should commit to a troubled player. Smartphone and tablet users expect entertainment, navigation, synchronization between their devices and other Cloud services.

In the Daily Telegraph interview quoted earlier, Thorsten Heins boasts that BB10, the upcoming BlackBerry 10 OS, will have “true multitasking, … potentially running a car’s navigation, entertainment and gaming systems for the whole family“. Elsewhere, he refers to a new world of applications in which your Blackberry will connect to “the embedded systems that run constantly in the background of everyday life – from parking meters and car computers to credit card machines and ticket counters“. (Home automation can’t be very far off.) Even more majestically, Heins tells us that RIM’s mission is “to build a new mobile computing platform to empower a people in a way they didn’t think possible“.

This all sounds like a noble and worthy goal…but it’s a bit vague. How will RIM’s approach be different from — or better than — the competing ecosystems?

This leads us to our third point: The engineering team (or, “it’s simply a matter of implementation”). When Steve Jobs reverse-acquired Apple in 1997, he brought with him the creators of NextStep, the likes of Avie Tevanian, Bertrand Serlet, and Scott Forstall. They led a team of talented, like-minded computer scientists whose goal was clear: Replace the decrepit Mac OS with a truly modern foundation. It took them the better part of five years to produce what we know as OS X.

RIM acquired QNX, the foundation for BB10, a mere two years ago. After a quick bow to the work ethic and technical manhood of RIM’s engineers, one must ask if they’re in the same league as the team Jobs brought to Apple 2.0, if they can accomplish everything they need to do by early 2013. Weren’t most of these engineers already onboard when RIM fell asleep at the switch?

Fourth and last, leadership. Using Apple 1997 as the model for turning around a once-great company invites challenging comparisons. Or, more accurately, a single comparison: Is Thorsten Heins made of the same unobtainium as Steve Jobs? This isn’t a question of IQ, of neo-cortex, but of Mind, of being sufficiently agitated, of having the right animal inside.

The prodigal Jobs returned to Apple having known stellar business success with Pixar, and just-as-stellar lack thereof at NeXT (despite the company’s technical prowess). Heins, by contrast, is an insider. He’s been part of RIM’s problem since 2007.

But enough of this fantasy. Let’s turn to the latest story: RIM’s CEO has conceded that the company might have to license its platform:

To deliver BB10 we may need to look at licensing it to someone who can do this at a way better cost proposition than I can do it.

Dumbfoundingly, the licensing idea (which, presumably, will include BlackBerry Messenger), has been met with approval: ”RIM is in trouble and is seemingly finally listening to reason“.

This gambit doesn’t work. It didn’t work for Palm (twice!), nor for Nokia with Symbian. And it really didn’t work for Apple when it licensed the Mac OS to PowerComputing and Motorola in 1995. The Mac clones quickly underpriced the original products and siphoned profits out of Apple’s income statement. Jobs reversed that decision in 1997, and, after much initial criticism, was ultimately vindicated.

With these examples, what drives Heins to think that the BlackBerry 10 clones won’t underprice RIM’s own devices and empty the cash register? BlackBerry Messenger may be well-liked, but it’s also under attack by free, multi-device services such as iMessage.

So, where does this leave RIM? The use of “Private” in this note’s title isn’t a facile pun. It points to a possible avenue for the BlackBerry maker. If it decides to license the software layer of its (formerly) proprietary platform, RIM will indisputably see hardware dollars disappear much faster than software licenses can be signed. RIM will forego a known source of revenue in order to grow a new income stream that, given enough time, might be strong enough to keep the company solvent.

For a publicly-traded company, switching business models in this way is a factual impossibility, it defies business gravity. Shareholders might applaud the long-term strategy but when the cheering stops, they’ll dump the stock.

If RIM wants to do something bold, such as focusing on software and services, they might consider taking the company private. As I write this, RIM has a market cap that’s less than $4B and more than $2B in apparently unencumbered cash. Management and the Board could work with a Private Equity fund, a KKR-type organization, and buy the company from the shareholders.

The ink dries, the curtains close. Backstage, in private, the company performs painful surgery, sheds the groups and businesses that are no longer required by the new, tighter focus. This may be hard on employees, but it’s unavoidable either way: Lose some of the company now, or the entire thing soon enough.

In theory, the company re-emerges smaller but stronger, with a highly profitable software and services business model.

Will this work for RIM? I don’t think so. Given the company’s low market cap and the availability of private capital, if this were an attractive move, it would have been attempted already. Cold-hearted investors looking at the risk involved must have already asked themselves the burning question: How do you compete with free? How do you sell licenses when Android hands them out, gratis (even if licensees have to pay for a few Microsoft patents)?

Sadly for former BlackBerry fans like yours truly — or for current ones who appreciate its core functionality — there aren’t many moves left for RIM on the smartphone chessboard.

JLG@mondaynote.com

What’s next for RIM?

A sad coincidence provides a stark contrast between the fortunes of two high tech companies, titans present and past. Last week, on (almost) the same day that the iPhone celebrated its fifth birthday, RIM issued very bad quarterly numbers: Down 43% year-to-year to $2.8B; a $518M net loss compared to a $695M profit in the same quarter last year.

A short five years ago, the BlackBerry was sine qua non in the smartphone world. Today, the future looks gloomy: RIM admits that they expect “the next several quarters to be very challenging”; they announce “a global workforce reduction of approximately 5,000 employees”; and, last but not least, they tell us that the new BB10 OS, initially promised for the end of the year, will be delayed until Q1 2013.

The downward trend has been evident for some time. It led to the replacement of RIM’s historic co-CEOs, Messrs. Lazaridis and Balsillie, with former co-COO Thorsten Heins – and it leads us to ask a series of questions about RIM’s survival.

Will BB10, RIM’s answer to iOS and Android — the company’s “number one priority” — ever ship? And, if it does, will it matter?

Probably not…and probably not.

To start with, BB10 isn’t a next-generation OS, it’s not a version N+1. It’s a whole new infrastructure based on QNX. Certainly, QNX is robust, venerable, and respected — but over its nearly 30 years, it has evolved into the premier OS for real-time applications embedded in consumer electronics, medical devices, and automobiles, not smartphones. From the QNX website:

QNX software is the preferred choice for life-critical systems such as air traffic control systems, surgical equipment, and nuclear power plants. And its cool multimedia features have QNX software turning up in everything from in-dash radios and infotainment systems to the latest casino gaming terminals.

When RIM acquired QNX from Harman International in 2010, the OS came with a handful of sophisticated but narrow, focused tool kits and libraries. Tool kits that let developers build “high-value consumer-grade solutions that range from simple media players to multiple-node systems with intra-vehicle multimedia sharing.” Algorithms that “improve the clarity, quality, and accuracy of voice communications for the most challenging acoustic environments … from conference rooms to automobiles.”

Admirable, certainly, but can they do Angry Birds?

What QNX lacks is a general-purpose application framework for developers. This is the most important (and fattest) part of the smartphone operating system. To app developers, the app framework manifests itself as APIs (Application Programming Interfaces). There are more than 1,000 APIs in Android and iOS. Building such a framework is a complex, time consuming task. A vital one, too: No app framework means no developers, no apps, no sale in the smartphone era.

RIM’s CEO saw that the company’s engineers needed more time, bowed to reality, and announced that BB10 would be delayed until “Q1 2013”.

In normal times, delaying an OS release by a few months is almost routine, part of an always arduous development process. But these times aren’t normal: In the smartphone wars, nine months is a very long time. And we suspect there will be further delays: How many of the company’s software engineers will lash themselves to the mast as RIM continues to lose money, market share, partners, credibility? How many of their best techies have already fled to companies where their work will have a chance to matter, to be enjoyed by fellow app developers and by legions of paying customers?

But let’s assume BB10 finally ships (and that it doesn’t suffer from too many early release bugs). Will it matter? By Q1 2013, Android and iOS will be even more entrenched; BB10 — and whatever new hardware RIM can manage to produce while it sinks and lays people off — will have to be strikingly superior to reverse the company’s slide into insignificance. RIM will have to build a real ecosystem (app store, media, companion devices, payment system) that can compete with what Apple and Google deploy…to say nothing of what Samsung appears to be building.

We could stop here. If BB10 doesn’t matter, that’s the end of the road for RIM. Investors seemed to agree. The day after the quarterly earnings release, RIM shares lost 19% of their value. Subtracting RIM’s $2.2B in cash from its latest $3.8B market cap, the company is left with a (putative) enterprise value of $1.6B. Since its high in June 2008 — a mere four years — RIM has lost about 95% of its value.

Which raises another question: Under the circumstances, why are investors now buying RIM shares? (78M shares last Friday, more than 4X the average daily volume.) Are they philanthropists and necrophiliacs…or astute traders? What prospective endgame justifies the uptick?

There are two theories.

First, RIM will be cut up and sold in pieces: A BB10 licensing business, a BBM (BlackBerry Messenger) operation, an entry-level hardware unit. On closer examination, however, this doesn’t make much sense.

– CEO Heins says RIM licensing will be “fully open”, by which he probably means even more open than Android. Right. Who needs a fledgling OS — without an ecosystem?

– BlackBerry Messenger is/was well-loved, and for good reason, but it doesn’t make sense on its own. Which smartphone platform would it run on? Android, iOS, Windows Phone? Or Tizen for high-end feature phones?

– As to the hardware unit, Huawei, ZTE, and others already produce low-cost BlackBerry killers sold in developing countries and, soon, everywhere. They don’t need RIM’s imprimatur, particularly if BBM and BB10 are no longer part of the brand.

Which leads us to the second theory: RIM sold as a whole to a muscular player such as one of the Chinese companies already mentioned. This could present a different sort of problem: BlackBerries are still popular with many government agencies around the world and Huawei, for one, isn’t. As for other wholecloth buyers: Samsung is busy with four platforms already (Bada, Tizen, Windows Phone, Android). Microsoft has its own story with Nokia. Who else?

Speaking of Ballmer & Co., yet another line of thought is that RIM will ditch BB10 and jump on the Windows Phone platform. Easier said than done, we saw what happened when Nokia osborned its Symbian and MeeGo devices. The move would need to be done in secret and quickly. (Allegedly, Nokia got its first Windows Phone devices from Compal, an experienced Taiwanese supplier; that might be a place to look for a quick transition.) Running BBM on top of Windows Phone 8 would please customers. Microsoft’s ecosystem would also help.

Would Microsoft want to see RIM join the Windows Phone party? Probably…but RIM’s CEO nixed that move. Moreover, Heins nixed all such moves, including joining the Android camp: He wants RIM to stay on its own platform.

Can Heins stick to his guns? We’ll see what he has to say after his brand new (effective July 1st) General Counsel, Steve Zipperstein, takes him aside and whispers in his ear about shareholder lawsuits. For almost 10 years, RIM’s new legal eagle worked for the US Department of Justice as a federal prosecutor…

RIM’s $2.2B in cash, no debt, gives it a bit of maneuvering room: It’s a lot easier to sell your company, or parts of it, when there is money in the bank. Further, the 55 days (of average sales) in channel inventory isn’t completely bad news, some of it could be flushed — at a loss — to generate additional cash and more “runway”. But for how long?

JLG@mondaynote.com

RIM’s Future: Dead, Alive, Reborn?

Much has been written about RIM’s gloomy quarterly numbers, most of it sensible (with one brain flatulence exception). The attention is a testament—an apt word—to the place RIM once occupied. From its humble pager origins, the BlackBerry, rightly nicknamed CrackBerry, became the de rigueur device of enterprise users. Like most former BlackBerry fans, I have my own fond memories of its world-class mail/contacts/calendar PIM service and of the impeccable OTA (Over The Air) synchronization that freed my wife from her Palm USB cable and HotSync travails.

As always, Horace Dediu digests the numbers for us, adds insight, and comes up with a somber conclusion (emphasis added):

The selection of tools for workers by a group that claims to understand their needs better than they do is an archaic concept.
This was true even in 2005 when RIM began targeting consumers. It was then that they saw the writing on the wall–that their enterprise business was being commoditized. All of RIM’s growth since has been in consumer segments. By abandoning that trajectory RIM is effectively giving up on growth. And giving up on growth is simply giving up.

For the first time in seven years, RIM lost money, $125M; revenue is down 25% from a year ago; unit volume decreased by 11% from the previous quarter. The only somewhat positive sign is that cash increased by $610M leaving RIM with $2.1B in its coffers, a fact preeminently featured in their press release. The message is clear: Look, we’ve got plenty of cash to last us until “late 2012” when we’ll be back with new BB10-powered smartphones.

This is a dubious proposition.

RIM will undoubtedly undergo another two or three quarters of marketshare erosion and losses. Last quarter’s combination of positive cash flow in spite of losses can’t be repeated indefinitely, there’s only so much inventory you can liquidate—at a loss—before you see the bottom of the cash register.

This isn’t to say that Thorsten Heins, RIM’s new CEO, isn’t making an effort, starting with housecleaning: Much to everyone’s relief, former co-CEO Jim Balsillie is “severing all ties with the BlackBerry maker” after a brief stay on the Board when dethroned in January. Jim Rowan, the former co-COO (Heins was the other half before becoming CEO), is also leaving RIM. More significantly, software CTO David Yach is sailing away after 13 years at the helm. Nobody accused RIM of making poor quality hardware, it’s the outmoded and late software that fell the smartphone leader.

For too long, RIM execs (and not just David Yach) didn’t heed the software threat from Google and Apple, they thought their enterprise franchise was impregnable. But by 2010, reality could no longer be ignored; RIM panicked and looked for an OS to replace their aging software engine. They found QNX, a UNIX-like system hatched at the University of Waterloo next door and used by its then-owner, Harman International, for real-time audio and infotainment embedded applications. Dating from the early eighties, QNX is mature and well-tested — but no more adept as a smartphone OS than a vanilla Linux distro. Certainly, you’ll find Linux code at the bottom of the Android stack, but what makes Android successful are its thick, rich layer of frameworks that are indispensable to application developers.

When RIM bought QNX from Harman, the OS offered little or nothing of such vital smartphone app frameworks. David Yach’s team had to build them from the ground up (or, perhaps, adapt some from the Open Source world). This doesn’t happen quickly—ask Google why they acquired Android, or look at Apple’s years of stealth iOS development based on its own OS X. The difficulty in engineering a fully-functional foundation on which to build competitive apps explains why RIM’s “Amateur Hour Is Over” PlayBook tablet lacked a native email client when it was released last spring. And this is why the new BB10 phones are slated for ‘‘late 2012”. By that time, Samsung and Apple will have newer software and hardware—and an even larger market share.

The trouble for RIM is simply stated: Too little too late, while the money runs out. If only the cure were as easily put.

We won’t dwell on the contrast between what Heins said in his first press conference as CEO in January (“Stay the Course”) and the changes he now claims are necessary. He has had time to assess the situation and has declared “We Can’t Be All Things To All People”, by which he means abandoning consumer-oriented multimedia initiatives, a retreat Horace Dediu equates to a wholesale giving up on growth, to becoming hopeless.

For my part, I can’t help but wonder: What did Thorsten Heins see, say, and do since he joined RIM in 2007, right when the Jesus Phone came out? At the time, as his bio points out, he was Senior VP of the BlackBerry Handheld Business unit…

Today, RIM’s new CEO isn’t looking away. In public statements last week, he made it clear that all options are on the table. We can ignore the possibility that RIM might find licensees for its OS (what OS?). This leaves RIM with a single option: Sell the company…but to whom? Asus, Samsung, HTC? Why not ZTE and Huawei while we’re at it? None of this makes sense, these are not necrophiliac companies, they’re happily riding Android.

Disregard the talk of buying RIM for its alleged patent portfolio. This is the company that, after years of fight, had to pay NTP more than $600M, and Visto more than $260M in patent settlements. In any event, as the Nortel example shows, one can buy patents without getting saddled with the company.

Of course, there is one intriguing possibility left: Microsoft could do to RIM what it did to Nokia. They could convince RIM to abandon its unlikely-to-succeed “native” software effort and become the second prong in Microsoft’s effort to regain significance in the smartphone wars. We can picture the headlines: RIM Joins Nokia in Adopting Windows Phone, Microsoft Now Firmly Back in the Race…

We’ll soon know if Microsoft, after toying a few times with a RIM acquisition, now finds a more realistic management team and Board sitting across from them at the negotiating table.

JLG@mondaynote.com

Will Microsoft buy RIM or Nokia?

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.

JLG@mondaynote.com

2011: Shift Happens

Whatever 2011 was, it wasn’t The Year Of The Incumbent. The high-tech world has never seen the ground shift under so many established companies. This causes afflicted CEOs to exhibit the usual symptoms of disorientation: reorg spams, mindless muttering of old mantras and, in more severe cases, speaking in tongues, using secret language known only to their co-CEO.

Let’s start with the Wintel Empire

Intel. The company just re-organized its mobile activities, merging four pre-existing groups into a single business unit. In a world where mobile devices are taking off while PC sales flag, Intel has effectively lost the new market to ARM. Even if, after years of broken promises, Intel finally produces a low-power x86 chip that meets the requirements of smartphones and tablets, it won’t be enough to take the market back from ARM.

Here’s why: The Cambridge company made two smart decisions. First, it didn’t fight Intel on its sacred PC ground; and, second, it licensed its designs rather than manufacture microprocessors. Now, ARM licensees are in the hundreds and a rich ecosystem of customizing extensions, design houses and silicon foundries has given the architecture a dominant and probably unassailable position in the Post-PC world.

We’ll see if Intel recognizes the futility of trying to dominate the new theatre of operations with its old weapons and tactics, or if it goes back and reacquires an ARM license. This alone won’t solve its problems: customers of ARM-based Systems On a Chip (SOC) are used to flexibility (customization) and low prices. The first ingredient isn’t in evidence in the culture of a company used to dictate terms to PC makers. The second, low prices, is trouble for the kind of healthy margins Intel derives from its Wintel quasi-monopoly. Speaking of which…

Microsoft. The company also reorged its mobile business: Andy Lees, formerly President of its Windows Phone division just got benched. The sugar-coating is Andy keeps his President title, in “a new role working for me [Ballmer] on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8”. Right.

Ballmer once predicted Windows Mobile would achieve 40% market share by 2012, Andy Lee pays the price for failing to achieve traction with Windows Phone: according to Gartner, Microsoft’s new mobile OS got 1.6% market share in Q2 2011.

Microsoft will have to buy Nokia in order to fully control its destiny in this huge new market currently dominated by Android-based handset makers (with Samsung in the lead) and by Apple. In spite of efforts to ‘‘tax” Android licensees, the old Windows PC licensing model won’t work for Microsoft. The vertical, integrated, not to say “Apple” approach works well for Microsoft in its flourishing Xbox/Kinect business, it could also work for MicroNokia phones. Moreover, what will Microsoft do once Googorola integrates Moto hardware + Android system software + Google applications and Cloud services?
In the good old PC business Microsoft’s situation is very different, it’s still on top of the world. But the high-growth years are in the past. In the US, for Q2 2011, PC sales declined by 4.2%; in Europe, for Q3 this time, PC sales went down by 11.4% (both numbers are year-to-year comparisons).

At the same time, according to IDC the tablet market grew 264.5% in Q3 (admire the idiotic .5% precision, and consider tablets started from a small 2010 base). Worldwide, including the newly launched Kindle Fire, 2011 tablets shipments will be around 100 million units. Of which Microsoft will have nothing, or close to nothing if we include a small number of the confidential Tablet PC devices. The rise of tablets causes clone makers such as Dell, Samsung and Asus (but not Acer) to give up on netbooks.

In 2012, Microsoft is expected to launch a Windows 8 version suited for tablets. That version will be different from the desktop product: in a break with its monogamous Wintel relationship, Windows 8 will support ARM-based tablets. This “forks” Windows and many applications in two different flavors. Here again, the once dominant Microsoft lost its footing and is forced to play catch-up with a “best of both world” (or not optimized for either) product.

In the meantime, Redmond clings to a PC-centric party line, calling interloping smartphones and tablets “companion products’’. One can guess how different the chant would be if Microsoft dominated smartphones or tablets.

Still, like Intel, Microsoft is a growing, profitable and cash-rich company. Even if one is skeptical of their chances to re-assert themselves in the Post-PC world, these companies have the financial means to do so. The same cannot be said of the fallen smartphone leaders.

RIM: ‘Amateur hour is over.This is what the company imprudently claimed when introducing its PlayBook tablet. It is an expensive failure ($485M written off last quarter) but RIM co-CEOs remain eerily bullish: ‘Just you wait…’ For next quarter’s new phones, for the new BlackBerry 10 OS (based on QNX), for a software update for the PlayBook…

I remember being in New York City early January 2007 (right before the iPhone introduction). Jet-lagged after flying in from Paris, I got up very early and walked to Avenue of The Americas. Looking left, looking right, I saw Starbucks signs. I got to the closest coffee shop and saw everyone in the line ahead of me holding a BlackBerry, a.k.a. CrackBerry for its addictive nature. Mid-december 2011, RIM shares were down 80% from February this year:

Sammy the Walrus IV provides a detailed timeline for RIM’s fall on his blog, it’s painful.

On Horace Dediu’s Asymco site, you’ll find a piece titled “Does the phone market forgive failure?”. Horace’s answer is a clear and analytical No. Which raises the question: What’s next for RIM? The company has relatively low cash reserves ($1.5B) and few friends, now, on financial markets. It is attacked at the low end by Chinese Android licensees and, above, by everyone from Samsung to Nokia and Apple. Not a pretty picture. Vocal shareholders demand a change in management to turn the company around. But to do what? Does anyone want the job? And, if you do, doesn’t it disqualify you?

Nokia: The company has more cash, about 10B€ ($13B) and a big partner in Microsoft. The latest Nokia financials are here and show the company’s business decelerates on all fronts, this in a booming market. Even if initial reactions to the newest Windows Phone handsets aren’t said to be wildly enthusiastic, it is a bit early to draw conclusions. But Wall Street (whose wisdom is less than infinite) has already passed judgment:

Let’s put it plainly: No one but RIM needs RIM; but Microsoft’s future in the smartphone (and, perhaps, tablet) market requires a strong Nokia. Other Windows Phone “partners” such as Samsung are happily pushing Android handsets, they don’t need Microsoft the way PC OEMs still need Windows. Why struggle with a two-headed hydra when you can acquire Nokia and have only one CEO fully in charge? Would this be Andy Lees’ mission?

All this stumbling takes place in the midst of the biggest wave of growth, innovation and disruption the high-tech industry has ever seen: the mobile devices + Cloud + social graph combination is destroying (most) incumbents on its path. Google, Apple, Facebook, Samsung and others such as Amazon are taking over. 2012 should be an interesting year for bankers and attorneys.

JLG@mondaynote.com


RIM: What Did You Know and When Did You Know It?

You’re under oath. The opposing attorney asks you: What did you know and when did you know it? Big Trouble. The legal eagle already knows the answer, that’s the basic rule: Only ask questions you know the answers to. You’re about to incriminate yourself.

This is what Mike Lazaridis and Jim Balsillie, RIM co-CEOs, are likely to face. They’ve been in legal jeopardy before: In 2009, they paid hefty penalties for backdating stock-options. But that’s nothing compared to what awaits them after RIM’s 21% share price drop on Friday, June 17th.

Far from new, shareholder lawsuits are becoming routine. Announce bad results and a specialized law firm files a class action suit on behalf of aggrieved shareholders. The savviest of these firms keep small-scale shareholders on retainer, ready to be proffered as representatives of the injured class.

Excessive — and sometimes downright unethical — class action suits are part of the cost of doing business as a publicly-traded company. Even the most frivolous claim eats up time and money. Better to settle, to make a deal between greedy but knowledgeable attorneys rather than expose yourself to the unpredictable reaction of a jury of your ‘‘peers’’, retirees barely making do on Social Security who see your millions as ill-gotten.

But for Lazaridis and Balsillie, the What and When Question is an exceptionally dangerous one.

On April 29th they issued a profit warning. They told shareholders that shipments for the current quarter would be “slightly below” the expected $5.2B to $5.6B, and that profit per share would take a 12% nosedive compared to the numbers they had forecast a mere four weeks before.

The RIMM ticker symbol lost 14% on the spot. All the while, RIM execs stuck to their yearly Earnings Per Share pronouncement (and I’m paraphrasing): “It’s a tough transition right now, but we’ll get through it. We have great products on the horizon and we stand by our $7.50 EPS number for the year!”

Six weeks later, that sunny analysis has became inoperative (“Not incorrect, not misinformed, not untrue—simply inoperative.”) Revenue has fallen to $4.9B and the outlook for the following quarter is even bleaker. Revenue will continue to fall for the year, no unit shipment forecast has been given, and the EPS estimate for the year was finally cut by 25%, to between $5.25 and $6.

This is nonsense, and it’s what makes the What and When question particularly dangerous for Mssrs. Lazaridis and Balsillie.

For the first half of the FY 2012 year, EPS will end up at about $2 ($1.33 for Q1 and somewhere between $.75 and $1.05 for Q2). How can anyone believe the sinking ship will suddenly right itself and produce an EPS between $3 and $4 for the second half as BlackBerry shipments continue to sink?

But, they’ll say, we have PlayBook shipments: 500,000 so far, with a 67% growth in International Revenues.

Do you smell “channel stuffing”?

To make your numbers at the end of the quarter, one is tempted to force-ship product into channels ahead of their actual needs, before the actual ‘‘sell-out’’ to real customers. Eventually, the channels barf and embarrassing numbers emerge.

For the PlayBook, RIM is spectacularly silent about units sold vs. units shipped. Given that the co-CEOs have never been shy about actual or fantasized feats, their caution on the number of PlayBooks actually sold is notable.

The same applies for the claimed 67% growth in international sales. Who knows how many of these have been shipped as a way to meet quarterly goals, but yet sit in carriers’ or distributors’ inventories?

Further, as we speak, low-end Android smartphones are coming to developing markets in very large numbers and are likely to further devastate RIM’s international business. See Amol Sarva’s piece on “Shanzai Blackberries’’. (Amol is the CEO of Peek, a mobile e-mail device company; his views on BlackBerry could be seen as biased, but the facts he cites are facts nonetheless.)

All this boils down to yet another possible profit warning as BlackBerry smartphones and PlayBook tablet sales fail to rise and restore earnings.

Back to the legal challenges: I think they’re serious. From March to late April to June, the numbers continued to fall. Shareholders–and their attornies–will demand emails and other documents, they’ll want to show that RIM execs “knew or should have known’’ that their public statements were incorrect. If the misstatements were deliberate, that’s fraud; even “good-faith” mistakes constitute reckless misconduct. Both are actionable, meaning expensive settlements and/or ejection.

How did we get there? Is this yet another example of the Incumbent’s Curse?:

“The Incumbent’s Curse works like a neurotransmitter disease: it starts slowly, there is no brutal onset of symptoms. The patient’s good health of the moment encourages denial; but when the malady becomes obvious it’s hard to combat, it’s often too late.”

RIM has much to proud of. They invented the smartphone. Not Palm with the Treo, a result of the Handspring acquisition; not Microsoft with Windows Mobile; not even Nokia with EPOC, the OS purchased from Psion via the Symbian clusterf#^k, the Nokia+Motorola+Sony Ericsson joint venture.

RIM started as a pager company and evolved into the best everyday device, offering unparalleled Exchange connectivity, seamlessly and wirelessly running the Holy Triad of email, contacts. and calendar services. For years, I’ve been a happy BlackBerry user and have wholeheartedly encouraged family members and friends to join the “CrackBerry” fold.

But then two modern platforms, Android and iOS, upended the status quo and caused deep trouble for RIM, Palm, Nokia, and Microsoft. Initial denials and sneers notwithstanding, the elders had to do something.

Palm was swept up by HP.

Microsoft and Nokia finally decided to get married.

RIM kept insisting its platform was best-of-breed and would continue to do great things. Last year, the company finally decided to switch horses. They acquired QNX and started the difficult, dangerous process of moving its smartphones to a new OS. Just as Nokia osborned its Symbian devices while waiting for the Windows Phone rescue, RIM kept bragging about future QNX-based “superphones” and a tablet, also running on QNX, that would be “three to four times faster than the iPad”.

But, as RIM execs just told us — again — the transition to the new superphones will take longer than expected. As for the killer tablet, it still misses a native email client and, because of a paucity of native apps, it will have to resort to an emulator running Android tablet apps on the QNX-based Playbook. (A clear message to would-be PlayBook developers: Go Android.)

In the optimistic scenario, QNX BlackBerries and PlayBooks will be ship-ready — really! — by September 2011. Carriers, distributors, developers, enterprise customers, and consumers who had deserted the platform will return in droves, and the RIM execs who have insisted that their achievements are underappreciated will finally be vindicated. See what Lazaridis said to the NY Times last April:

“Why is it that people don’t appreciate our profits? Why is it that people don’t appreciate our growth? Why is it that people don’t appreciate the fact that we spent the last four years going global? Why is it that people don’t appreciate that we have 500 carriers in 170 countries with products in almost 30 languages?”
He wrapped up with “
I don’t fully understand why there’s this negative sentiment, and I just don’t have the time to battle it.

The execs are partly right: RIM is an amazing success story. And the company is still profitable with about $3B in cash.

But, unfortunately, they’re also dangerously wrong. RIM has been an amazing story, but its leaders have been in denial for too long, they have failed to recognized how two from-stratch platforms were able to move much faster than the incumbent, with its need to preserve the past while trying to build an incompatible future at the same time.

Furthermore, there’s the company’s culture. Every software developer I know who’s either worked with RIM or has considered doing so, dismisses the company as not just arrogant but tone-deaf. RIM thinks they “get” software and applications developers, but their top management doesn’t. Ex-employees, with the usual caution for the opinions of departed workers, say similar things: ‘’Research In Motion’s collapse can be traced straight to the top of the company.’’

We’ll soon find out what shareholders decide to do — besides running away.

JLG@mondaynote.com

RIM: The inmates have taken over the asylum

by Jean-Louis Gassée

Once upon a time, the Blackberry was the king of smartphones. After a succession of Psion PDAs and Palm devices, I loved my Blackberry, it was the perfect PIM (Personal Information Manager). Email, contacts and calendar functions worked well together — and Exchange integration was the killer Enterprise feature. It even made phone calls! On Verizon, that is.
Year after year, RIM kept improving its product and expanding its worldwide distribution. The Blackberry became de rigueur, addictive, justifiably earning its Crackberry nickname.
Shareholders weren’t disappointed either. Between February 1999 and June 2008, RIM stock gained $143/share, a rise of 7,793%:

But, on the same chart, we see RIM lost 11.23% of its value in one session, this past Friday March 25th.

Why?

As often, the answer is a combination: underlying trends + a trigger event.

The trigger event was RIM’s release of its latest quarterly numbers. On the surface, the results looked reasonable. 14.9 million units shipped versus 14.2 million in the spring, $5.5B in revenue and $934 million in net income, up 32%.
The bad news start with unit growth, it is out of sync with the rest of the industry where percentages are more in the 50% to 100% range. For reference, Apple’s iPhone unit sales grew by 93% from 2009 to 2010. More recent Android devices grew even faster.
Then, RIM’s guidance (Wall Street argot for forecasting games) for the following quarter is weak: revenue flat or dropping, between $5.2 and $5.6B. Rote explanations follow, from lower average prices, lower gross margins, to investment in the development and launch of new products, and supply-chain disruption stemming from the March 11th earthquake in Northeastern Japan.

Not a word of competition from Android-based handsets or iPhones.

Which gets us to the underlying trend: we now live in an App world.

RIM reigned at a time when your Blackberry came with everything you needed. Suitably placated, the IT gent configured your Exchange connection and off you went. I was one such user when I bought my first iPhone and kept carrying both devices. Remember 2007: Dear Leader telling us we didn’t need native apps, Web 2.0 software was perfectly adequate. But even then, browsing the Web on an iPhone was such a superior experience to what the Blackberry provided.
Then, in 2008, the App Store opened; iPhone Exchange integration became useable and I let go of my Blackberry.
Coincidentally, when you look at the stock chart comparing Apple, Google and RIM, 2008 is also the year when, after reaching its all-time peak, RIM started its descent:

If you look at the worlds of Android and iOS apps, RIM’s achievements look modest by comparison. By November 2010, the Blackberry App World offered about 15,000 apps. This isn’t much compared to the hundreds of thousands claimed by Android and iOS.
I won’t get into details such as which apps work on which Blackberries, how to pay for and how to install those. Suffice it to say, even if you put the number of apps aside, on the sole ease of use criterion, the Blackberry App World isn’t competitive.

Blackberry smartphones were great products, RIM’s management has achieved strong carrier distribution around the world. But competitors now have better devices and better app stores.

As this loss of competitive edge became more apparent, RIM’s management had to explain their plans to increasingly skeptical Wall Street analysts and media.

Things didn’t go well.

In RIM’s case, management consists of two CEOs and three COOs. I checked here, it’s true. Lately, neither CEO hasn’t made much sense when describing RIM’s future.

Interviewed by Bloomberg Businessweek in September 2010, Jim Balsillie says this:

“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.”

The other CEO, Mike Lazaridis, isn’t doing much better. Last December, he was on stage at the D-Dive Into Mobile conference, interviewed by Walt Mossberg and Kara Swisher. See the video here, and an Endgadget liveblog here. The liveblog should be read from the bottom, as the format dictates: successive entries are pushed at the top. But you can read in any direction, it won’t matter as Lazaridis sounds quite free with logic.

Yes, there’s always the danger of quoting someone out of context, or of catching an individual at a bad time. I know these two executives have built RIM into a worldwide industry leader, they deserve respect for such an achievement. Look at RIM’s history, getting there wan’t easy — or spotless.

Still, last week, RIM’s other co-CEO kept going. See the earnings call transcript, edited by Business Insider, where Balsillie keeps speaking in tongues:

I’m just not interested in these sort of religious application tonnage issues. I really think we put that issue to bed. And if you think the whole world’s going to want to develop for Gingerbread, fine. Do I think that’s going to happen? Then why is there a different environment for a tablet? And you know about the performance issues and you know about the app volume issues, cause it’s tough. And that’s why QNX matters.

That’s why people are saying, Is this stuff going to go more in the browser and HTML 5 and more native? These are going to be strong trends. But if you want these app players for different VMs — and don’t forget we have 25,000 BlackBerry 6 apps. So, at the end of the day, we believe this is going to be about performance. It’s going to be about enterprise greatness. Things like multi-threaded capability, symmetric multiprocessing. We believe it’s about an uncompromised web. We believe it’s about enterprise security. True multitasking, not with suspension — and that matters because you’re going to want to run these things in the background.

But I’m out of the religious war on tonnage, which I’m delighted.

… (Lots of repetition.)

I think it’s very important to understand that this idea of “no compromise” matters. And this idea that you can pick whichever one you want.

RIM is scrambling to gate a tablet to market “before it’s too late’’.

First, for its tablet, the PlayBook, the company needs an OS. Luckily, RIM lives close to one of the great Canadian universities with strong Computer Science and Mathematics programs: the University of Waterloo. QNX was invented there, a very good operating system for embedded applications. Last year, RIM buys QNX from Harman Industries.
Next, hardware. Multi-core ARM SOCs are aplenty and Asian suppliers are at the ready to build hardware to your specs.
Now, we need apps. And for apps we need a development system, specifically one running on QNX.
This is where the madness really starts: the Native SDK, meaning the programming tools required to write high-performance QNX apps in C or C++, isn’t ready for the coming April 19th launch. According to Mobile Beat, “The company has a limited version of its BlackBerry Tablet OS Native Development Kit that will be in open beta by this summer.”

As an interim measure, RIM offers a number of other solutions, called ‘‘app players’’. These are emulators or, if you will, a kind of virtual machine. The app players run existing applications, and new ones can be developed using the tools from the emulated platforms.
So, you have app players for games, for HTML5 apps, Adobe Air and for Blackberry Java used on the company’s smartphones. This is complicated and not developer-friendly, leading Jamie Murai, an experienced app developer, to write RIM a strongly worded open letter. To the company’s credit, the head of Developer Relations, Tyler Lessard, responded quickly and honestly. But Lessard couldn’t really solve the basic problem: as Murai explained in great and vivid detail, developing for the PlayBook can’t compare favorably to the competition, to Android or iOS.

But wait, there’s more.

You’ve noted the curious “application tonnage” phrase in Balsillie’s utterance above. Justifiably, RIM is worried about getting enough applications on the PlayBook. No apps, no sale, as Robert Scoble succinctly explains.
Where do we turn to?
Apple is out of question, but Android is open. Let’s go Android and make their 200,000 apps run on the PlayBook. Problem solved, we have “tonnage”.
This is serious madness, in two ways.
If Android apps do run on the PlayBook, why bother writing for QNX? The PlayBook becomes an Android tablet and QNX no longer matters, right?
In response, Balsillie treats us to more contorted language:

And if you think the whole world’s going to want to develop for Gingerbread [a version of Android], fine. Do I think that’s going to happen? Then why is there a different environment for a tablet? And you know about the performance issues and you know about the app volume issues, cause it’s tough. And that’s why QNX matters.

Android apps will run slowly, [so far inexistent] QNX native apps will be faster.
Why?
Because the Android apps are running inside another app player, another emulator. As a result, performance will suffer. This could be a useful stopgap measure: you buy a PlayBook and go to the Android Market for your app needs. Killer QNX apps will arrive later — assuming developers are committing to the ecosystem.
But, no.
We now move to the second part of the madness: the “going to the Android Market” part is false. It is a deliberate attempt to mislead.
The Android apps won’t work directly into the app player. The developer, not the user, will need to “quickly and easily” port their apps to run on the tablet OS, according to RIM. The same developer will also need to repackage, code sign and submit their apps to the Blackberry App World for approval.
There is more: the PlayBook app player will only run Android 2.3 (Gingerbread) apps. These apps are designed for smartphones, not tablets. According to Google, for tablets you need Android 3.0 (Honeycomb).

RIM succeeded because word of mouth, not advertising, sold the Blackberry. Proud users begat more proud users. What will happen when users “share” the true value of the “running Android apps” claim?
No one could fault RIM for the “iPad surprise”. After decades of misbegotten tablets, no one was prepared for the rise of the new genre.
Reacting quickly, not wanting Apple to gain too much of a market stronghold makes business sense. But launching what is clearly an immature product and trying to compensate for a dearth of applications with a misleading claim of compatibility with the wrong version of Android is insane.

Those whom the gods would destroy, they first render mad…

JLG@mondaynote.com

The OS Doesn’t Matter…

by Jean-Louis Gassée

Once upon a time, operating systems used to matter a lot; they defined what a computer could and couldn’t do. The “old” OS orchestrated the use of resources: memory, processors, I/O (input/output) to external devices (screen, keyboard, disks, network, printers…). It’s a complicated set of tasks that requires delicate juggling of conflicting constraints, and every OS handled them differently—or not at all. In those days, the OS was married to the hardware and only a handful of “wizards” with Electrical Engineering degrees—and a deep understanding of circuitry—understood (and invented, and protected) the arcana of OS construction.

Over time, the secrets of these illuminati leaked out. About 20 years ago, the OS lost its mystery. We had learned enough about writing an OS kernel that it became a college-level topic and a Christmas break hack.

Today, there’s only one operating system: Unix. (Okay, there are two, but we’ll get to that.) This is why I contend that the OS doesn’t matter—or that we need to take another look at the word’s content, at what we mean when we say ‘Operating System’.

When RIM decides to go with QNX for its upcoming tablet, the PlayBook, tongues wag. After calling its Blackberry OS the “best of breed” (a tired markitecture phrase), RIM is surrendering to reality: The “proven OS” foundation proved to be unfixable. Because of the layers of software silt that had accumulated over the years, the edifice couldn’t be modernized. Better to quit and make a fresh start. QNX is based on a Unix OS for embedded applications that dates back to 1982(!) when it was first released for the Intel 8088 microprocessor.

The same thing happened at Apple…twice. The Apple ][ OS (or lack thereof, purists will say) couldn’t be brought up to modern standards, so the Macintosh had to be built on a fresh foundation. The original Mac OS foundered on its own beachhead and was replaced by OS X. Based on the Mach kernel, OS X is another Unix derivative, co-authored at CMU by Avie Tevanian. Mr Tevanian improved the system during his tenure as head of software at NeXT and was instrumental in convincing Apple that their purchase of NeXT would breathe new life into the company.

Open the Terminal application on a Mac and what do you see? A noble and worthy Unix “shell”, a program that geeks use to interact with the OS. Terminal uses the bash shell (for Bourne Again Shell. Created by Brian Fox, bash is based on the sh shell, which was invented by Stephen Bourne. Unix mavens love their word-play acronyms).

And now we have the Apple iOS, an OS X derivative that uses bits from the same kernel.

Regard Palm. The sine qua non of handset makers saw that their PalmOS couldn’t be fixed, so they pressed the restart button and created WebOS, a Linux derivative.

Android? It’s based on a Linux kernel. Nokia’s MeeGo? Ditto.

The list goes on. We have the spiritual children of Unix living inside the Cloud, powering the millions of Linux servers running at Google, Facebook, Amazon…

The only exception is Windows. Initially built on top of DOS, Microsoft painstakingly added version after version, always striving for backward compatibility while, at the same time, adding new features. It didn’t always work well (who wants to remember Windows Me and Vista?) but it worked well enough because Microsoft never gave up. They fixed mistakes that they claimed didn’t exist, and now we have the well-respected Windows 7. (Inevitably, critics will say that Microsoft wouldn’t have gotten away with such a tortuous path if it weren’t for its vigorously enforced monopoly.)

Windows will live on — in a PC industry now at a plateau. But otherwise, in the high-growth Cloud and smartphone segments, it’s a Unix/Linux world. We need to look elsewhere to find the differences that matter.

The technical challenges have migrated to two areas: UI (User Interface, or the more poetic—and more accurate—UX, for User Experience) and programming tools.

Now that all “system functions” are similar, the game for hardware and software makers is to convince the user that his/her experience will be smooth and intuitive. Your device will walk on water (with the programmer right under the surface), catch you as you fall, make sure you don’t get your feet wet.

For the developer, what we now call the OS must supply ever-growing expressive power—think a fife versus a twelve-keyboard organ. To wield that expressive power, the programmer needs software tools. The industry uses acronyms such as API (Application Programming Interface), IDE (Integrated Development Environment) or phrases such as Application Frameworks. They define the rules and conventions—which ideas are allowed and how to express them—and the software tools that programmers need to develop an application.

This is today’s OS. User experience. Development tools.

One last element that is and isn’t the OS: This new creature called an App Store (or Marketplace, depending upon the…OS). In my non-technical view, the App Store must be considered part of the OS totality, part of its gestalt. Applications have always been in a feedback loop with the OS. A program can only do as much as the OS allows it, so it played tricks to create multi-tasking, to allow smooth audio/video playback. These “tricks” were incorporated into the OS (and the hardware—think GPU), which then bred another generation of apps that wanted more, and so on.

The App Store genre, invented or not in Cupertino, is now part of that loop, a killer OS component, one that deserves a Monday Note of its own.

JLG@mondaynote.com

Nokia’s New CEO: Challenges

by Jean-Louis Gassée

Here we are, back from last June’s Nokia science-fiction romp. The company has finally elected a new CEO to replace OPK, Olli-Pekka Kallasvuo. 43-year-old Stephen Elop’s bona fides are in order: As President of Microsoft’s Business Division (since January 2008) he was in charge of the Microsoft Office money machine and was part of the company’s “Leadership Team”. He was well-paid (the 2009 proxy pegged him at $4.8M, excluding longer-term items) and rumor placed him at the top of the short list to succeed Ballmer…

So what possessed Elop to take the Nokia job?

The answer must be that he’s been given the opportunity to make his mark. Having seen Microsoft from the inside, he must have realized that he was being groomed to be no more than a competent caretaker. He might even have decided he wouldn’t get, or wouldn’t want, the big prize, the CEO crown. So, I speculate, he went for the challenges of a turn-around situation.

The goal is clear: Restore Nokia to its former glory as the ne plus ultra of smartphones. But the path to this renaissance isn’t a straight shot—it’s an obstacle course.

Numbers

Mr. Elop’s most immediate challenge lies in Nokia’s financial performance. During the last three years of OPK’s tenure, Nokia lost 75% of its market cap, plunging from $40/sh in 2007 (the year the iPhone came out) to less than $10 today, although with a nice 2% uptick following the CEO announcement:

A more direct way to look at the numbers challenge is a single datum: Today, Nokia gets about €155 ($196) per smartphone, down from €190 last year. In the meantime, Apple gets more than $600 per iPhone. (See the June 2010 Financial Times story here.)

It gets worse when the total average number is considered, smartphones and not-so-smartphones together. That average now hovers around €60, which means Nokia sells very large numbers of low-end phones that yield very little profit. They’re in great danger of being squeezed by the incoming low-end Android horde.

But the numbers are a mere proxy for the bigger trial: The product itself, the smartphone.

Once the category leader, Nokia is now struggling to catch up with HTC, Motorola, Samsung and, of course, RIM/Blackberry and Apple. Pugnacious Nokia die-hards adhere to the company’s sisu, but the market has spoken—and it enunciates more distinctly every quarter. See this Business Insider chart:

Given today’s market turbulence, one can’t help but admire the charter’s ability to “see” as far as 2014—but the trend is obvious. Will upcoming products such as the N8 reverse it? Early reviews are mixed. For Nokia, the N8 isn’t likely to do what the Razr did for Motorola in 2003 or what the latest Droids are doing now. Motorola’s conversion to Android seems to have righted the ship and Sanjay Jah, the Co-CEO in charge of the company’s mobile business, is on his way to leading a self-sustaining entity, one that could finally be spun off as planned.

Software

Today, Nokia pushes devices that use older Symbian S60 stacks, newer Symbian^3 and Symbian^4 engines, as well as a mobile Linux derivative: Meego. Imagine the chuckles in the halls of Cupertino, Mountain View, and Palo Alto. Even with plenty of money and management/engineering talent, updating one software platform is a struggle. Ask Apple, Google, or HP, and the chuckles quickly become groans. Nokia thinks it can stay on the field when it’s playing the game in such a disorganized fashion? More