Lessons from Blackberry’s failure

I recently read Losing the Signal by Jacquie Mcnish and Sean Silcoff.  It’s a fantastic read if you want to learn how to avoid mismanaging your market position.  Below are some of the passages we learned from.


Blackberry had no security equal.  “No other phone maker operated its own in-house network, a rapid, encrypted, and tightly sealed system ensuring reliable high-speed traffic.”


Blackberry started in digital ads.  “It was late 1989, five years after Lazaridis and Doug Fregin founded RIM. Their inaugural Budgie communicators never took flight because businesses didn’t share the designers’ excitement about the bulky digital advertising system. At the time RIM was surviving by designing electronic components in a berth above a Waterloo bagel store.  Cash was so low that Barnstijn was sometimes paid in RIM stock.”


Blackberry was before its time.  “Similarly, it would take years and hundreds of millions of dollars of investment in wireless data research and many wrong turns to convince the market that wireless data was a worthwhile service.  Mobile data ventures of all sizes were foundering because portable communicators were too expensive, slow, or complex. In the early 1990s, when less than 5 percent of North Americans owned a cellphone, mobile messaging remained a sci-fi fantasy.“


The founders had very different styles.  “Under Brock’s leadership, no one had titles, and employees pitched in to solve problems. In return Brock sent flowers to wives when husbands worked weekends; hired babysitters if a parent employee was needed after hours. When Balsillie arrived, he asked for the title executive vice president and made it his business to tell other managers how to do a better job.”


There were many losers in the data space.  “Apple abandoned Newton in 1998.  Simon passed away in 1995.  Three years after Clinton’s promise of a new communication era, the wireless data highway was going nowhere.  Carriers and product makers charged too much for mobile devices that conveyed tiny amounts of data at mulishly slow speeds.”


Blackberry won by focusing, not building a do-it-all PDA.  “To chase this dream, RIM would develop a signature wireless product. That product, Lazaridis was convinced, was a mobile message device. Not the expensive and awkward Newtons and Simons that belly-flopped, but a small, simple, inexpensive device that did one thing well: send and receive device messages instantly.”


Best demo ever.  Holding the Bullfrog aloft, he tapped out a short message that was relayed to a nearby computer. “It worked. We got through it. Everyone clapped and cheered,” Lazaridis recalls. After that day, the prototype never worked again.

Blackberry almost died because it was dependent on one supplier.  “I think we’re dead,” he said. “They’re going to pull the plug on Mobitex. We have two weeks.” Balsillie got the “dead” part. Products designed for Mobitex generated the bulk of RIM’s sales: software, modems, and the Bullfrog. RIM was so committed to the network that a new project was underway to make a more sophisticated two-way pager. Balsillie was cautious about developing another device after Bullfrog’s poor debut. Costs were rising faster than sales; it would be reckless to make another big bet. Hobbs’ call changed the stakes. This was no time for caution. RIM had to convince BellSouth that RIM had a game-changing product.


Do less.  “Early wireless data innovators failed because they crammed multiple office tools into book-sized devices. The products were battery and bandwidth hogs and a headache to operate. Tapping out messages with a stylus was unreliable and time-consuming. Keyboards were small and difficult to manipulate. What these device designers misunderstood was that most professionals already had office computers, faxes, cellphones, pagers, and personal digital assistances. They didn’t want more technology. They wanted convenience.  The paradox of success, Lazaridis wrote, was that handled devices did not need more functions; they needed fewer. “We must maximize adoption by minimizing complexity” of a powerful, reliable, and simple device that filled the mobile text message gap.”


Doing only messaging allowed for other benefits.  “A single AA battery lasted nearly a month, and its larger screen was easily navigated with a trackwheel, a concept Lazaridis borrowed from a VCR remote control. As for the keyboard, the answer was not ten fingers, but two thumbs.  Even the clumsiest typist would be comfortable with the device because the small screen above the keyboard allowed users to monitor accuracy.”


User experience is paramount.  “the keys sit on a piece of metal known as a dome, rather than plastic, the industry standards; that way, users would feel a crisp “click” every time they pressed a key, just as they did on a regular keyboard, rather than “mushy rubbery feel, like a TV remote control,” says Griffin. It was more expensive and RIM’s manufacturing team pushed back, “but Mike said, ‘No, the interaction with the device is important here,’” Griffin said.”


People didn’t realize they wanted mobile email.  “Handheld wireless e-mail was a breakthrough product nobody knew they wanted. Instead focus group research revealed there was no burning desire by participants to quickly read or reply to electronic messages. If they needed to reach colleagues urgently, a phone call would do.”


Help menus mean you’re failing.  “Lazaridis didn’t want a help menu-the device should never be that complicated.”


People hated email, until Blackberry.  “Fabian and Balsillie knew this to be true from watching tapes of focusing groups several months earlier: When moderators described e-mail, viewers grew heavy-lidded. But once focus group participants actually handled the device, every-thing changed. “It takes BlackBerry a few days to grown on you,” Balsillie said.”

Hire young and hungry, not experienced.  “Balsillie told sales VPs Fabian and Don McMurry to spike resumes from cellular and computer industry veterans. No jaded old-timers: Balsillie wanted young recruits, brave pioneers – “wireless e-mail evangelists.” McMurry tested interviewees by tossing a pen at them. “Sell it back to me,” he said.”


The sales team was aggressive.  “PageWriter customers racked up massive monthly data bills, and the device’s capacity for exchanging messages didn’t compare to BlackBerry. “Hey do you get e-mail on that?” Klimstra would ask. “How would you like e-mail on your hip for way cheaper and in a smaller package?” McRoberts went further: in presentations, he began flinging the device against walls. “It just became my thing,” he says – an icebreaker to impress skeptical executives twice his age. To their amazement, it never broke through McRoberts sometimes had to chase down dislodged batteries.”


They sold from the top down.  “The CIO end run was a unique strategy, making BlackBerry the first IT product ever sold from the top down, pushed by senior management onto their IT organizations.  Inevitably, many big companies preferred to stick with the likes of Oracle, Microsoft, or IBM, blue-chip technology suppliers that wouldn’t embarrass the CIO.”


Security was key to the enterprise sale.  “RIM’s in-house network gave the company the ability to guarantee the safe passage of every message.  RIM designed its BlackBerry system to ensure every e-mail was automatically encoded by an encrypted code when sent. On arrival the message was decoded before appearing in the recipient’s in-box. Every company or organization that acquired a RIM server received customized encryption keys that authenticated and decoded e-mails.  Once it could demonstrate and fully explain BlackBerry’s security features, RIM’s relationship with the CIO community changed. Before long, CIOs were allies, not enemies.”


Mobile email was the killer app.  “While two-way paging’s moment in the spotlight would be fleeting. With two-way paging, customers could trade messages, check stock quotes, and send text messages to phones, “but that wasn’t what people wanted to do,” says former BellSouth executive Neale Hightower. What worked was putting corporate e-mail in their hands.”


The founders argued in private.  “We didn’t contradict each other in from of anybody. It was pretty much the understanding we had. We could close the door and talk, but we made sure we were a unified force in the organization,” says Lazaridis.”


Patent trolls were an issue.  “The two men formed NTP to hold stranded patents. The skeletal company was part of a growing breed of patent trolls whose primary business was to sue businesses allegedly infringing on their rights.   Time was the friend of patent plaintiffs. The faster complex cases traveled through courts, the less time defendants had to prepare, and to educate and convince a judge and jury that they had not breached the patents. Patent fights snowballed in the Information Age. Computing and communication advances arrived with such velocity that U.S. patent applications increased fourfold in the decade ending in 2010.”

Patent troll strategy.  “NTP’s lawyers were veterans of the Rocket Docket. In an impatient court district and before an untrained jury, they understood that cases were seldom won or lost by launching into weighty technology examinations. There wasn’t enough time and the risks of jury confusion were high. A more effective tactic was attacking the credibility of defense witnesses. If they could rattle RIM’s founder they might win over the jury.”


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


An options scandal hurt.  “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.  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 iphone had way more power.  “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.  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 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 competition, Rim needed a full Web browser.”


The CEO pushed his teams hard.  “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.”


Iphone crushed AT&T’s network.  “Bandwidth conversation 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 not conversation, rather, it was bigger, faster wireless highways.“


Apple, a lost patent dispute, and options scandal.  “Apple, one of Silicon Valley’s most successful companies, was starting to outsmart RIM in the mobile world. A patent war defeat and options scandal had cast a cloud on its management. And the personal relationship between Balsillie and Lazaridis was unraveling. RIM was developing a leadership problem at a time it most needed a strong management team.”


The response to the iphone was a complete failure.  “Virtually every one of the first batch of about 1 million Storms shipped needed replacing. Many of the replacements were being returned as well. The Storm was a complete failure, and he wanted RIM to pay. “You’re going to make us whole on the money we’ve spent fixing your Storm product problems,” Stratton told Balsillie, “or we’ll revisit our whole supplier relationship with you. This is your responsibility. We expect you to step up because this is your fault, not ours.” Verizon wanted close to $500 million from RIM.”


AT&T couldn’t handle the iphone.  “By 2009, users of the network-hogging iPhone were squeezing the carrier to its capacity, reducing overall network reliability for all customers. Consumers took to social media to complain about the lousy service and Consumer Reports ranked AT&T worst for dropped calls. The mobile carrier’s CEO, Ralph de La Vega, further rankled customers by warning he would have to start jacking up prices or cap data use. “


Blackberry’s failure became Google’s opportunity.  Ten months later, Google announced it wouldn’t make a smartphone at all; it would license its operating system, Android, for free to any handset maker that wanted it. There wasn’t much interest initially.  Google ended 2010 with the top-selling smartphone platform in the United States and worldwide, featured on nearly 80 million smartphones in dozens of countries, up from less than 1 million two years earlier. Much of that could be traced to the opening RIM left when it failed to give Verizon an effective rival to the iPhone two years earlier. “If Storm had worked, Verizon would never have done Droid,” says Balsillie. “When we didn’t do the job for Verizon, they gave the keys to the kingdom to Google.”  RIM had failed to deliver an Apple killer when its top customer needed it or a 4G phone when Verizon wanted it. The consequences would come to haunt RIM at its darkest hour.”


Blackberry was losing share; it’s OS was terrible.  “Android siphoned away market share and became the world’s leading smartphone platform. RIM’s share of Verizon smartphone sales dropped to 14 percent in the last three months of 2010, from 60 percent a year earlier according to internal RIM data; the drop was pronounced at Sprint (from 63 percent to 22 percent) and T-Mobile (from 60 percent to 18 percent) as well.”


Internationally, RIM did well.  “Overall, RIM’s numbers told a different story. Total revenues in the twelve months ended February 26, 2011, were up 33 percent year-over-year, reaching $19.9 billion, as sales outside the United States, Canada, and Great Britain more than doubled to $8.5 billion from the prior year. Globally, BlackBerry was still hot. Much of the world’s wireless telecommunications infrastructure was at least a decade behind North America, western Europe, and advanced Asian countries. Carriers in countries like Indonesia, Brazil, and South Africa weren’t investing in 4G –  most didn’t even have 3G. With its stingy use of precious bandwidth, BlackBerry was ideal for these networks, just as it had once been for North American and European carriers. RIM developed a cut-rate BlackBerry phone called Gemini, which worked well on pre-3G networks and sold for under $200. “The Gemini singly drove all of RIM’s global growth in 2009 and 2010 was by far the best-selling BlackBerry of all time,” says Balsillie.  From Jakarta to Johannesburg, Riyadh to Rio de Janiero, BlackBerry became a sensation.”


Blackberry Messenger was a sensation abroad.  “The most compelling feature driving BlackBerry sales in the developing world wasn’t wireless e-mail but another application that had not been included with devices since the mid-2000s: BlackBerry Messenger.  If you had asked me then, ‘Are you going to kill phone calls with this,’ I would have said yes.” BBM messages used little data and arrived instantaneously, making the service a welcome alternative to costly voice calling and text messaging services, especially in poorer countries.  In Dubai, young women embroidered their PIN numbers on flaps inside their burqas, turning them out discreetly to encourage men they fancied to BBM them, according to a senior RIM executive.”


Blackberry did not get on the 4G train.  “Samsung had already launched a 4G phone and iPhone was months away from the upgrade. Lazaridis’s prophecy that 4G phones would quickly drain batteries was technically correct. But nobody seemed to care.  RIM was a one-product company struggling with a damaged brand image and an outdated product.”


Products got cheaper, and Blackberry couldn’t adapt.  “With cheap Androids flooding the market, he warned that his company, controlled by Aboumrad’s father in law, billionaire Carlos Slim, would shift much of its business to the Google platform unless RIM slashed its prices.  Balsillie concluded that RIM’s hardware business would never recover.”


The take away. “In the technology sector failure is often a precondition to future successes, while prosperity can be the beginning of the end. If the rise and fall of BlackBerry teaches us anything it is that the race for innovation has no finish line, and that winners and losers can change places in an instant.”


Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures.  Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.com.  We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue.  We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions.  We can commit in 3 weeks and our check is $1mm to $4mm.  Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.