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International Business Machines Corp
When tech giants fall, they rarely get up again. Onetime titans such as Digital Equipment, Compaq, Lucent, and Palm went cold and then were ignominiously acquired. Xerox (XRX) and Nokia (NOK) have limped along for years. Kodak just filed for bankruptcy protection. Only two tech companies have bucked the trend: Steve Jobs’s Apple (AAPL) and Lou Gerstner’s IBM (IBM).
The lessons of those exceptions are legendary. When Jobs returned to Apple in 1997, he winnowed its product line, replaced most of the board, and expanded into new markets such as music players. After arriving at IBM in 1993, Gerstner slashed more than 100,000 jobs, killed its uncompetitive OS/2 PC operating system, and began a massive shift from hardware to consulting.
The message was different when, under shareholder pressure, the board of BlackBerry maker Research In Motion (RIMM) finally replaced co-Chief Executive Officers Jim Balsillie and Mike Lazaridis with COO Thorsten Heins on Jan. 22. “I don’t think that there is some drastic change needed,” said Heins, a former Siemens (SI) executive, in his first conference call as RIM’s new boss. Staying the course, however, will be a challenge, and investors have already registered displeasure. After Heins’s comments, RIM’s stock fell more than 8 percent. RIM declined to make him available for this story.
The current plan is for RIM to continue investing in both hardware and software, scrapping its aging BlackBerry operating system for one called BlackBerry 10 based on software from a company acquired in 2010 and used to run nuclear plants. So far, the outlook isn’t encouraging. The PlayBook tablet, RIM’s first device based on an early version of the new operating system, has been a flop. And as RIM reboots in tablets, Apple’s iPad is dominating the first major new corporate hardware market in years. Veeva Systems co-founder Matt Wallach, who has sold pharmaceutical sales software for 14 years, says 95 percent of his customers are equipping employees with iPads, and the other 5 percent are considering it. “The iPad’s success in the enterprise means that RIM is dead, at least in pharma,” Wallach says.
To succeed against Apple, which reported more than twice as much in profits last quarter ($13.1 billion) as RIM did in revenue ($5.2 billion), the BB10 phones will need to do far more than match the quality of iPhones and Android devices. They’ll have to roll out some groundbreaking features—“and that’s a herculean task,” says Matt McCormick, an asset manager at Bahl & Gaynor in Cincinnati.
Of course, it’s possible that RIM could regain its position as a top choice for app makers, consumers, and corporate buyers. The Waterloo (Ont.)-based company still generates healthy cash flow and has 75 million subscribers worldwide. Its executives point to BlackBerry’s dominance in emerging markets such as South Africa and Mexico. The company plans to introduce a line of gadgets based on BB10 in the second half of this year, Lazaridis said last month. “We’re excited and confident in our future,” says spokeswoman Tenille Kennedy. “We’re willing to have shareholders judge Thorsten and RIM on its performance.”
Still, history shows that it would be difficult to stage a comeback. “Once you become a dinosaur, it’s hard to catch up,” says Richard J. Moroney, chief investment officer of asset management firm Horizon Investment Services. RIM’s stock price remains about 10 percent above its level at the end of 2011, a year in which the company lost three-quarters of its value. And its share of the smartphone market tumbled to 11 percent in the third quarter of 2011 from 21 percent two years earlier, according to Gartner (IT).
RIM might fare better if it were allied with a larger company, but the list of potential suitors is short. Microsoft (MSFT) is busy building its own operating system and focusing on its partnership with Nokia. Samsung once seemed like a possibility: It has a thriving smartphone business but is reliant on Android software from Google (GOOG), which bought a competing handset maker, Motorola Mobility (MMI). A Samsung spokesman said the company isn’t interested. With a market cap of about $8 billion, RIM is likely too pricey for private equity firms to swallow.
Breaking up the company is another possibility proposed by RBC Capital Markets analyst Mike Abramsky. He suggests that RIM could increase shareholder returns by dividing itself into a handset business and another that manages the BlackBerry service, including e-mail, security, and the popular instant-messaging program BBM. Heins told analysts that “I will not in any way split this up or separate this into different businesses.”
Heins has said that he is open to another potential lifeline: licensing the company’s new operating system. Given the threat from the Motorola-Google tieup, Samsung might be interested in building handsets based on BB10. But so far BlackBerry’s ecosystem doesn’t have the support it needs from developers who build popular apps such as Angry Birds, says Adnaan Ahmad, an analyst at Berenberg Bank in London, and that severely limits the appeal.
Finally, RIM could give up the dream of being a mobile hardware powerhouse and instead exploit its reputation for running reliable, secure networks by selling that service to companies using other types of smartphones. It’s already taken a step in that direction, launching a service in November called Mobile Fusion that corporate IT departments can use to manage the growing number of Android- and Apple-compatible smartphones and tablets securely.
For a generation of loyal BlackBerry users who’ve spent their professional lives punching out messages on their “CrackBerry,” such a move might seem unthinkable. It is, however, a path successfully followed by IBM, which dominated the PC industry from 1981 until the early 1990s. Lower-priced manufacturers such as Compaq and Dell (DELL) eroded its market share and sent IBM’s stock plunging. Rather than fight the tide, Gerstner refocused the company on the more profitable software and services industries. In 2005, after he’d retired, IBM sold its PC unit to Lenovo.
So far, it looks like Heins wants to avoid bold moves. His stay-the-course rhetoric has compounded the disappointment among some investors, who note that Heins lacks a strong background in mobile software (he spent 23 years at a network equipment maker) and that he ran RIM’s operations during a time when the company was widely criticized for operational missteps. “Here you’ve got an insider, whose counsel is still Lazaridis, who was involved in many of the decisions of the past four years,” says Berenberg’s Ahmad. “All he needed to say was, ‘We are open to options,’ to give investors an idea of flexibility. But there wasn’t much of that.”
The bottom line: RIM’s best option might be to rethink its dependence on consumer hardware and focus on enterprise software.