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The Squeeze On BlackBerry


Mike Lazaridis and James L. Balsillie, the co-CEOs of Research in Motion Ltd. (RIM) (RIM), have plenty of reason to feel on top of the world. After 20 years spent in the quiet university town of Waterloo, Ont., developing technology to deliver wireless e-mail, their BlackBerry gizmo is an outright phenom. What the iPod is to mobile music lovers, the BlackBerry is to workers on the go. For the fiscal year ending in February, company sales should more than double, to $1.35 billion, as net profits soar from $52 million to around $300 million and the number of global BlackBerry subscribers leaps from 1 million to 2.5 million. The stock price has quadrupled in the past year, to $84. Amid all the hoopla, the chief executives calmly explain that they never doubted that they were on the right track. "We beavered away for years," says Balsillie. "We never knew when the market was going to pop, but we never worried much that it would eventually happen."

Now companies across the tech industry are marshaling their forces to squash the BlackBerry. The rivals include Nokia (NOK), Dell (DELL), Hewlett-Packard (HPQ), palmOne (PLMO), Good Technology, Seven Networks, a passel of Asian device makers, and, yes, Microsoft (MSFT). They're all jostling for a foothold in one of the few tech markets positioned for powerful growth. In the U.S. alone, researcher Yankee Group estimates, the market for corporate wireless e-mail totals 35 million workers. This means that a mouthwatering 90% of the market remains untapped. "This category is just getting started, and people don't want RIM to own it," says Danny Shader, CEO of Good Technology Inc., a startup that offers e-mail services on a broad range of devices and operating systems at a lower price than RIM.

Mounting competition is leading the two Canadians to shift their strategy. Rather than focus on defending the supremacy of the BlackBerry as an e-mail machine, they're adjusting to a world in which the vast majority of handhelds for e-mail and more will be made by their competitors. RIM's gambit is to stake out leadership in software and services while protecting its hardware niche. The goal is to turn the BlackBerry service into the leading standard for corporate workers on the move.

With this shift, RIM's founders are attempting to sidestep the trap that snared Apple Computer Inc. (AAPL) a generation ago. Like RIM, Apple helped usher in a new industry by creating a superior soup-to-nuts product with the Macintosh computer. Yet as Apple discovered, fast-growing computing industries eventually divide into hardware and software markets. Innovation races ahead on both fronts, usually far too fast for a single company to control it all. Apple didn't license its software to other players -- and ended up a niche player. RIM is pulling away from the Apple model and focusing more on software and services to stay on top. "It's encouraging that RIM is moving aggressively while it's early," says Scott Anthony, a partner at Innosight LLC, a Watertown (Mass.) consulting firm.

TICKLISH TASK

The groundwork for RIM's strategy is coming into place. The company has established ties with more than 70 phone carriers around the world that offer BlackBerry subscriptions to corporate customers and pay BlackBerry between $5 and $10 per subscriber to direct the flow of data between devices and networks. At the same time, RIM has licensed its BlackBerry messaging software to a host of competitors, including PalmSource, Nokia, and Motorola (MOT). The company has also worked to widen its scope beyond e-mail, hammering out agreements for mobile data services and news from the likes of Bloomberg Financial Markets, SAP (SAP), and PeopleSoft (PSFT). For instance, an SAP program allows salespeople to tap into corporate networks on their BlackBerrys for account and order information. The goal is to keep broadening these mobile offerings -- a key for expanding RIM's market for server software and subscriptions. "It's the right strategy," says David Nagel, president and CEO of PalmSource Inc., which is developing software that allows RIM to sit on top of the PalmSource operating system (PSRC).

The first results of RIM's transition will start to be seen over the next few months. Around a dozen handsets using RIM's licensed technology are scheduled to roll out. They include a pricey full-keyboard phone from Nokia, the i500 Palm-powered smartphone from Samsung, and Motorola's MPX Pocket PC with a novel sideways keyboard.

Still, navigating this shift is one tricky job for Balsillie and Lazaridis. They must balance their need to cooperate with key customers of RIM's software and services against their desire to compete with the same companies in e-mail devices. At the same time, there's the risk that as e-mail becomes a standard feature on all sorts of phones, the divisions between RIM and the rest of the mobile-phone world will fade away. Ron Garriques, chief executive of Motorola's cell-phone division, says that phones with keyboards, while a small slice of the market today, are "becoming more interesting over time."

Perhaps the greater challenge is in software. RIM's developers in Waterloo must come up with the world's best systems to handle global corporate communications on every type of mobile machine. "Right now, people love BlackBerry because of the experience," says Yankee Group analyst Eugene Signorini "Can [RIM] replicate that on other devices?"

Adding to the uncertainty, RIM is embroiled in a bitter patent dispute with NTP, a small, privately held firm in Arlington, Va., that holds a number of patents. NTP first filed a complaint in the U.S. District Court for the Eastern District of Virginia in November, 2001. Last year the court ruled in NTP's favor, a decision RIM appealed. A ruling is expected soon. Separately, the U.S. Patent Office is reviewing NTP's claims. Analysts say that if RIM loses, the court could force it to pay a licensing fee to NTP for eight years until the patents expire. The court last year set a royalty of 8.55% of U.S. sales, which would cause 2006 earnings to drop by 18%, estimates Michael Urlocker, an analyst at UBS.

As Balsillie sees it, the new strategy will turn RIM into a company led by high-margin software and services within the next few years. But with every passing month, that shift is looking like a longer haul. Why? Even as RIM pushes toward services, it's racking up stupendous growth in hardware. In September the company unveiled a new $200 smartphone, the 7100. A departure from the traditional Pop Tart-size BlackBerry, the 7100 looks more like a traditional telephone and competes directly with palmOne Inc.'s Treo. Sales of all of RIM's handsets, affectionately known as "crackberries" for their addictiveness, are expected almost to triple in this fiscal year. This would drive hardware revenue to 76% of the total in the 2006 fiscal year, up from 58% last year.

Even in an industry where collaboration between competitors is grudgingly accepted, RIM's aggressive pursuit of two distinct businesses may spark dust-ups with competitors. And staying ahead in both hardware and software remains a major challenge. For RIM, it's a risky strategy of brinkmanship. But these Canadians are just as convinced as ever that they're on the right track.

By Heather Green in Waterloo, Ont., with Cliff Edwards in San Mateo, Calif., and Roger O. Crockett in Chicago


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