BlackBerry Season
Riding a huge comeback, Research in Motion finds itself surrounded by rivals, all gunning for a share of the booming wireless market it created.
By Erick Schonfeld

(Business 2.0) – An hour's drive west of Toronto, inside a 120,000-square-foot building that also houses a leather tannery, Mike Lazaridis's 20-year dream is coming to life. Seven 125-foot-long assembly lines are stamping out wallet-size BlackBerrys—the wireless handhelds now in the hands of more than 1.3 million users worldwide—at a rate of about 230 an hour. Lazaridis, the co-CEO of Research in Motion, gave the go-ahead earlier this year to ratchet up plant production from five days a week to seven. Orders are surging, and so RIM's BlackBerry-making machine does not sleep.

It's no surprise, then, that the 43-year-old billionaire engineer is feeling proud. In his office a few buildings over from the plant in Waterloo, Ontario, Lazaridis is eager to show off what he considers the greatest virtue of his thumb-wheeled wonder: simplicity. Sitting at a table, Lazaridis pries open a BlackBerry's case and begins pulling out parts one at a time—the battery, a green circuit board, a flat metal antenna, the display, and the 34-button keyboard. "Hardly anything inside," he says, grinning. "That's why we get 10 days of battery life. It took us a long time to get this right, to get it simple."

If only Lazaridis could say the same thing about running his company. Just two years ago, investors had all but abandoned RIM, despite the fact that it had come out of nowhere—that is, Waterloo—with one of the hottest products of the technology boom: a device that could send and receive your office e-mail out of your hip pocket. Though it was one of the few bubble-era companies with a viable product behind $150 share price, the ensuing crash left it limping. Eight straight losing quarters between 2001 and 2003 exposed RIM's failings: glitchy products that were launched before they were ready, slow network upgrades, skyrocketing costs. By October 2002, RIM's stock price bottomed out with an all-time split-adjusted low of $4.21.

Throughout all that, though, an odd thing happened: Fanatical customers—from Jack Welch to Oprah Winfrey—kept snapping up $400 BlackBerrys. And the company, which has slimmed down and smartened up, has come roaring back to life. Just as e-mail proved to be the killer app for the Internet, Lazaridis and RIM co-CEO Jim Balsillie believe it's serving the same role for today's wireless data networks operated by Cingular, Sprint, Verizon, and others. BlackBerry sales jumped 158 percent during RIM's most recent quarter, while the company took home $55 million in profits on enviable 50 percent gross margins. Sweetest of all to Lazaridis, BlackBerry shipments currently outpace—by a factor of three to one—those of the other red-hot handheld on the market today: PalmOne's Treo 600 smartphone, which comes equipped with a RIM-licensed keyboard and can handle e-mail almost as well.

And that's where things again get complicated—and downright dicey—for RIM. Palm isn't the only company trying to shove the BlackBerry to the sideline. Microsoft and Hewlett-Packard are jumping into the fray with handhelds that pack a cell phone, organizer, digital camera, media player, Web browser—and, of course, e-mail—into one device. Software startups, such as Good Technology, are selling applications that let corporate customers push workers' e-mail to any handheld they choose. Meanwhile, the company is caught up in a legal morass: Last year it lost a patent-infringement suit that, if RIM loses on appeal, could siphon off a portion of its profits. (See "RIM's Patent Gnat," page 136.)

Lazaridis and Balsillie aren't just sitting on their hands. Their ultimate goal isn't necessarily to make BlackBerry the dominant consumer gadget, but to make the BlackBerry service the dominant standard for wireless e-mail, no matter what type of hardware it runs on. (After all, the reason people keep buying BlackBerrys is that they handle one thing—e-mail—so much better than any other device on the market.) In September the company did come out with its answer to the Treo: the 7100t, which has the sleek look and big screen of a smartphone, but a modified keyboard for e-mail that RIM hopes will convert a greater share of cell-phone buyers into BlackBerry addicts. (See photo, page 138.) But its bigger push has involved aggressively licensing its software to cell-phone and handheld companies like Nokia, PalmSource, and Sony Ericsson. The faster RIM can sign up manufacturers and carriers to get BlackBerry e-mail into as many handhelds as possible, the better the chances that it can hold off its rivals. "RIM's future lies not in producing hardware but in getting its e-mail out to the widest possible user base," asserts Satjiv Chahil, a former Apple executive who sits on the board of handheld-software maker PalmSource. So the race is on—not just to step up production in Waterloo but to put a stamp on wireless e-mail, everywhere.

RIM's path to prominence began in classic tech-startup fashion—with a founder dropping out of college. In 1984, just shy of receiving his bachelor's degree in electrical engineering from the University of Waterloo, Lazaridis left school and started an engineering outfit with best friend Doug Fregin. Research in Motion's first project: creating teleprompter software that ran on a PC. The two spent so much time holed up in the basement during the holidays that Fregin's mother called down to ask, "Are you finished? You're going to miss Christmas."

Fregin stayed on—today he's RIM's vice president for operations—and Lazaridis kept landing work. By the time Balsillie, a Harvard MBA and former Ernst & Young accountant, joined the company as co-CEO in 1992, RIM had 10 employees and several hundred thousand dollars in sales. And Lazaridis was already selling the underpinnings of the business that followed—a "protocol converter," or software that relayed messages between corporate computers and wireless paging networks. By 1996, realizing that he could link those paging networks to the Internet, Lazaridis hit on the means of getting e-mail to users untethered from the computer. Thanks in part to a group of Intel engineers who helped devise a low-power chip, Lazaridis soon had the makings of a device that could pull it off. Balsillie, meanwhile, carried a wood prototype to meetings with investment bankers.

When the first BlackBerry came out in 1998, it worked only on paging networks such as BellSouth's Mobitex—precursors of today's cellular data networks. The first versions, naturally, resembled pagers, and came with a miniature "qwerty" keyboard—to this day, a vast improvement over a mobile phone for thumbing out e-mail messages. Each time a message hit your e-mail inbox at home or work, it would be instantly relayed to your BlackBerry, its arrival announced by a satisfying buzz. For people who hated being chained to a desk but craved nonstop communication, the BlackBerry lived up to its "crackberry" nickname.

Investors went even crazier for it. After listing on Nasdaq in February 1999, RIM's stock rocketed from $12 to $156 by March 2000. Six months later, after the initial tech-market crash, capital markets briefly reopened—and the company raised $600 million in a follow-on offering, one of the last big public offerings of the boom. "Had we been a day later," Balsillie says, "I don't know if the thing would have ever closed."

Cash in hand, RIM began an enormously costly overhaul of its business—one that set the stage for the market battle it faces today. The company plowed much of its capital into designing BlackBerrys that could communicate over the new cellular networks that were replacing paging networks, since they could carry both voice calls and data traffic. RIM also refined its server software to help corporate IT managers centrally administer the devices for their workers. Finally, it transitioned from buying network airtime and selling directly to consumers toward selling primarily through carriers. The logic was simple: Reorient the business around the carriers, since they owned the networks, could distribute RIM's products, and could handle billing and other services that were pushing the company's costs skyward. "It's the carrier, stupid," Balsillie says.

At the same time, the company was also spending to build a proprietary fortress: its own server software and a network operations center in Waterloo from which to relay e-mail to BlackBerrys through the carrier networks. Lazaridis and Balsillie hoped this strategy would protect RIM's high-margin hardware sales (which still account for 68 percent of its revenue) and push it into additional sales of the service through mass licensing. The ultimate goal: to make the BlackBerry the dominant standard for wireless e-mail—not by controlling the device's operating system, as Microsoft did with PCs, but by controlling the flow of data between corporate computers and the carriers.

A disastrous start to 2002 nearly derailed the plan. With sales already flattening because of the bust, the new line of BlackBerrys—sold first through T-Mobile in Europe—flopped: The e-mail software was slow, applications from partners needed debugging, and coverage wasn't reliable. "Customers were confused," Balsillie says. The added benefits, such as a phone and a browser, didn't offset the hassles. "It was like giving people a car with a better stereo but worse suspension," Balsillie adds. "This was by far our biggest gut check." By October, RIM's stock had bottomed out and the company was on its way to a $130 million loss for the fiscal year.

Eventually, though, RIM fixed the problems and carriers began to trust the company. They liked the double-digit sales growth, the celebrity cachet of the product, and the fact that RIM wasn't trying to bypass them to sell directly to corporations. AT&T Wireless initially sold BlackBerrys only through its direct corporate sales force but now offers them on its website and in about 700 retail stores. "This is a brand-new category for us that two years ago barely existed," says Jeff Bradley, senior vice president for business data services at AT&T Wireless. Scott Ballantyne, a marketing vice president with T-Mobile, adds, "It's addictive. You give one to people and they don't want to give it back. Nobody does e-mail better than BlackBerry."

That may be, but more and more companies are coming close—and some observers believe that RIM's proprietary model is doomed. For instance, Good Technology, based in Palo Alto, sells wireless e-mail software that works with a variety of operating systems and handhelds, thus weakening the BlackBerry's "us-or-nothing" grip on the market. (See "The Good Alternative," page 140.) Good's software works on the Palm and Microsoft Pocket PC operating systems and can be used on the Treo 600, Hewlett-Packard's iPaq, and even RIM's older BlackBerrys. While the BlackBerry carries its own applications for contacts, calendar, and other functions, Palm and Pocket PC devices have thousands more. The BlackBerry's word-processing program, eWord, comes from a company called DynoPlex. "Good has a word processor too," says Good CEO Danny Shader. "It's called Microsoft Word."

If you believe that handheld users value standards and functionality over simplicity, Good's cross-platform support makes sense. "This business is no different than the computer business," Shader says. "The handheld is the next laptop. The industry will tear down anyone who tries to go it alone." And increasingly, Shader's pitch is finding converts. Forrest Jenkins, the telecommunications business manager for Scana, a regional energy company based in Columbia, S.C., recently switched his executives from BlackBerrys to Good-powered Treo 600s because the software had "more the look and feel of what they are used to with [Microsoft] Outlook."

Beyond Good, it could go from bad to ugly for RIM. Dell, for instance, is rumored to be launching a phone version of its Axim line of electronic organizers—all running Good's software. "Dell can offer the hardware component at a far lower price, which is the Dell model," says Needham & Co. analyst Charlie Wolf. And since two-thirds of RIM's revenue comes from hardware sales, Dell's entry would surely squeeze its margins. Dell already resells both Good's software and the older line of pager-based BlackBerrys. Kirk Neibert, a senior marketing manager at Dell, denies the smartphone rumor, but admits, "We'd rather sell an Axim than a BlackBerry."

It's no wonder, then, that Balsillie has scrambled to sign deals with 60 carriers in 30 countries—the main engine of RIM's current growth. The new 7100t emerged from carriers' requests for a device that would appeal to a broader consumer audience. So RIM designed a unique phone keypad for it that features two letters for each key, and software that helps figure out which word you're typing. Functions like those, as well as the price—$199 with a T-Mobile service plan, starting in October—should help RIM convert more phone diehards over to BlackBerry e-mail. "Underneath, this is still a BlackBerry," Lazaridis says. "We just changed the form factor."

The company has also begun licensing its technology to other hardware manufacturers, including Motorola, Nokia, Samsung, Siemens, and Sony Ericsson, to develop cell phones that can receive e-mails from the BlackBerry service. Alliances with software makers PalmSource and Symbian could also help make RIM even less dependent on hardware sales.

That's why Lazaridis and Balsillie fume at the suggestion that the BlackBerry is somehow closed to other technologies. They point to all the partnerships they've inked, all the networks the BlackBerry can operate on, and all the e-mail and business software it supports—including Microsoft's Exchange, IBM's Lotus Notes, and BEA's WebLogic. And they've embraced the Java programming language, so that anyone can write applications on top of the BlackBerry.

As more applications are written for the BlackBerry, it will only be easier to take the device to its next phase—as the must-have computer for mobile corporate users. For example, at Flight Options, a jet-sharing company in Cleveland, Ohio, the 1,000 pilots live in 191 cities but rarely visit headquarters. They all carry BlackBerrys, which have become the company's mobile dispatchers. Flight schedules and other data are updated through the BlackBerrys every 15 minutes. Pilots fill out forms digitally, then they're off. "You can't get away from it," says Tim Montie, program manager for the company's fleet of Cessna Citations. If he had to choose between giving up e-mail or the custom flight application? "Easy," he says. "I'd give up the-mail."

That's the great thing about killer apps: They can always lead to many more.

SURGING SALES ENDED AN EIGHT-QUARTER LOSING STREAK.

Sources: Bloomberg; Canalys; Palmone; RIM