Error Message - RIM Fights Back

With confidence in the BlackBerry platform waning and calls for a management shake-up growing louder, the last thing Research In Motion Ltd.

Error Message - RIM Fights Back

With confidence in the BlackBerry platform waning and calls for a management shake-up growing louder, the last thing Research In Motion Ltd. co-CEOs Mike LAZARIDIS and Jim BALSILLIE needed last week was a network meltdown that left subscribers across five continents with spotty access to email for more than three days. It was perhaps a further bit of bad luck that the source of the outage was traced to RIM's European headquarters in Slough, a dreary suburb of London that also happened to be the setting of the BBC TV series The Office, a sitcom about the pitiable lives of employees of a second-rate paper company toiling beneath a hapless manager played by Ricky Gervais.

Though RIM, based in Waterloo, Ont., is no Wernham Hogg (the name of the fictional paper firm in the TV series), the scramble by Canada's tech superstar to diagnose, correct and explain the biggest network outage in its history left many observers shaking their heads. The disruptions began on Oct. 10 and immediately impacted users in Europe, the Middle East, Africa and South America. RIM said the following day that the problem had been resolved, only to suffer more disruptions that eventually found their way to North America. The company later revealed that it had suffered a core switch failure in its network operations centre (a sort of central sorting facility for BlackBerry email), and that its backup systems had failed, too.

By the time Lazaridis appeared in a low-tech Web video (standing before a drab beige background) to issue a rare apology on Oct. 13, critics had already characterized RIM's response to the crisis as inadequate. "The worldwide outages we experienced last week were unfortunate," Lazaridis told a crowd of developers earlier this week at a BlackBerry conference in San Francisco, where RIM unveiled its new, next-generation BBX mobile platform. He added that RIM is studying what went wrong and is focused on "making this right" with customers.

That will no doubt include RIM's wireless partners, who deal directly with BlackBerry subscribers. Several are demanding compensation for their customers (RIM has offered US$100 worth of applications that BlackBerry customers normally must pay for), while analysts warn that RIM's reputation for reliable and secure email services--a big advantage of the BlackBerry platform in an age of slick touchscreen devices like the iPhone--has taken a major hit. "You have to wonder if this will cause some BlackBerry customers to start switching to other phones like Apple's," says Ronald Gruia, a telecom analyst at consulting firm Frost Sullivan. "The timing is absolutely awful."

More ominously, the massive outage, RIM's fifth disruption in five years, has handed further ammunition to those who argue the company has lost its way. While Balsillie and Lazaridis have called for patience until a new line of BlackBerry "superphones" comes out next year, it's not just disappointed analysts and bloggers they need to worry about. Angry investors are calling for drastic changes--and some say they're prepared to force RIM to listen to them.

Bob Walker, the vice-president of Vancouver's Northwest & Ethical Investments, is one RIM investor who has seen enough. He says the time has come for RIM to do something decisive to restore shareholder confidence following a nearly 55 per cent drop in RIM's stock price over the past year. "Things have gone south with the technology issues that they've experienced recently," he told Maclean's. "Clearly, there is a need for the company to demonstrate that it's taking meaningful action to address both governance and management concerns that have been raised."

Last June, Northwest & Ethical suggested weakening the grip of Lazaridis and Balsillie on the company through their positions as both co-CEOs and co-chairs of RIM's board (the two men are also RIM's two biggest shareholders, controlling a combined 10 per cent of RIM's outstanding stock). The proposal was to be voted on at RIM's annual meeting in July, but was withdrawn after RIM agreed to strike a committee of independent directors to study the issue and present its findings by the end of January. Though Walker still wants to see the results of the study--RIM has argued that giving Balsillie and Lazaridis both titles helps it secure business in foreign countries because it's seen as more prestigious by some governments--he says he would now add his voice to those calling for immediate changes. RIM did not respond to a request seeking comment before Maclean's went to press.

RIM remains a profitable, growing company and has more than US$1 billion of cash on hand, but its market share has been flagging in recent years. The latest numbers from research firm ComScore Inc. show RIM with just 19.7 per cent of the key U.S. smartphone market in August, down from 24.7 per cent in May. Meanwhile, devices running Google Inc.'s Android software now comprise 43.7 per cent of the market, compared to 38.1 per cent in May, while Apple remained essentially flat at about 27 per cent.

The culprit, for the most part, is a lineup of BlackBerry smartphones that appear increasingly long in the tooth, and delays in getting newer versions to market. While Balsillie and Lazaridis have acknowledged that RIM did not react quickly enough to the iPhone, they stress that the transition to the new BBX platform, based on technology acquired when RIM bought Ottawa's QNX Software Systems last year, will allow RIM to "leapfrog" the competition when it comes to capabilities. At this week's developer's conference, Lazaridis showed off BBX by running a variety of graphics-intense video games and other consumer and business-oriented applications on a PlayBook tablet. They included an eye-catching photo viewer that displayed pictures as prints falling gently on an endlessly scrolling table. "We're taking the power of QNX, open standards and the best of BlackBerry to build a powerful platform," Lazaridis told the audience. Barring any hiccups, the new OS is expected to be extended throughout the BlackBerry lineup beginning in 2012. "The RIM transition to QNX will almost need to be flawless," says Gruia, who added that it may also be time for some new blood in RIM's senior ranks. "Longer term, they need a fundamental change in vision and strategy to achieve a sustainable competitive advantage."

Staying focused will be a tough task amid mounting distractions. In September a small Toronto merchant bank called Jaguar Financial began vocally agitating for sweeping changes at RIM, including a new management team and the sale of part of the company. In an interview with Maclean's, Vic Alboini, Jaguar's CEO, claimed he has enlisted support from 12 institutional shareholders that collectively hold an eight per cent stake in RIM, and plans to approach the board this week. Jaguar, which attempts to profit by taking stakes in troubled or undervalued companies and then forcing changes, two years ago helped to throw a wrench in a planned $550-million deal between HudBay Minerals Inc. and Lundin Mining Corp.

Alboini declined to say how big a stake Jaguar had in the BlackBerry-maker or reveal the names of the institutional shareholders he claims to have brought on board. Security regulations require shareholders who acquire or have control over 10 per cent of a company's shares to disclose their holdings to regulators. (Jaguar has had some recent troubles of its own. Alboini is scheduled to appear before the Investment Industry Regulatory Organization of Canada next spring in relation to allegations that he and two others "failed to create and maintain a culture of regulatory compliance and that Alboini demonstrated a disregard for regulatory compliance" at a ?rm called Northern Securities Inc., where he is also CEO. In a statement on Jaguar's website, the firm says Alboini plans to "refute the allegations.")

Despite all the noise, observers say there's unlikely to be a big shakeup at RIM any time soon. Kevin Restivo, a telecom analyst at IDC Canada, says that despite RIM's depressed stock price, it's doubtful the company will become a takeover target until it becomes clear whether the transition to QNX is successful. As for the thorny question of Lazaridis and Balsillie, Restivo argues that they should be given credit for growing RIM's business across the globe, and that there's no guarantees that a new management team would fare any better in what's become an ultra-competitive market in recent years. "In many ways, they are the company," he says.

Maclean's October 31, 2011