The Willing Partner
Research in Motion’s stock has climbed 800 percent in three years, thanks to a strategy of licensing its hugely successful BlackBerry email software to Nokia and Motorola.
The Case: Corporate customers have loved Research in Motion’s BlackBerry since its 1999 launch. But as the popularity of the device increased, so did the number of the company’s critics, many of whom believed Research in Motion was too small to maintain its dominance. When the company began to license its software in 2002, many saw this move as a drastic change in course. Instead, it was an object lesson in smart partnering.
Research in Motion
FY 2005 revenues: $1.35 billion
Number of e-mails sent across North America that go through RIM’s data center each day: 100 million
In November 2002, Research in Motion (RIM) and Nokia announced a licensing arrangement allowing Nokia to offer its customers the ability to receive e-mail using RIM’s BlackBerry software. The news perplexed industry watchers. For the three years before the deal, only RIM’s devices could connect with the company’s enterprise server, so that RIM owned both parts of the market for wireless e-mail: the devices and their software. RIM, in fact, seemed to own the very notion of that market.
The BlackBerry was the hardware equivalent of a killer app, the now overused term popularized in the 1980s to describe a piece of software so attractive to users that they feel they cannot be without it. Every new technology needs a killer app to establish its acceptance; for wireless e-mail, the BlackBerry filled that need. As businesses started to deploy the device to an increasingly mobile–and pressed – workforce, BlackBerry emerged as a critical tool for businesspeople.
Why, then, would RIM make its proprietary software available to others? Why would the company partner with a massive competitive threat such as Nokia? To many observers outside RIM, these decisions signaled a major shift in the company’s business model. But to those inside RIM, they stemmed from a strategy the company had always followed.
RIM’s case highlights a business problem that countless technology companies have had to deal with: when a company creates a revolutionary product whose software becomes critical to the establishment of a market, it has to figure out whether to keep its software all to itself or license it in an effort to make its technology the industry standard.
Building the Platform
RIM has, throughout its history, followed two imperatives: make the best possible proprietary device for wireless e-mail and follow whatever course will increase the size of that market. Started in 1984 as a firm that built electronic devices for other companies, RIM signed its first deal with General Motors, to deliver a networked display system that scrolled words across LED signs in GM factories. The idea behind what eventually became the BlackBerry system dates to 1989, when RIM worked on an outsourced project for Ericsson. As RIM focused more on wireless data, it started manufacturing its own devices. Pager companies like Motorola had tried to combine e-mail with pagers, but none of the devices achieved much success. By the early 1990s, even PC-based e-mail had yet to take off, and many in the telecommunications industry saw wireless e-mail as a product that people did not really want or need.
RIM proved the viability of this market in stages. First, it received an order in 1997 from BellSouth for $50 million worth of wireless e-mail devices. BellSouth was offering a pioneering service intended to allow data transmission in applications like inventory tracking for rail transport. Its so-called Mobitex network used Ericsson technology, but it still needed a supplier to build a hardware component for consumer use. The opportunity gave Research in Motion a critical test network for its device.
The opportunity also convinced RIM that it ought to seek out a larger market for its new device, known within the company as PocketLink. In 1998, RIM began working with a California-based branding agency called Lexicon. One Lexicon strategist thought the gadget’s keyboard resembled the seeds of a berry; the BlackBerry launched in January 1999. Instead of employing a stylus and handwriting recognition software, the device used a small, thumb-operated qwerty keyboard. But as impressive as its physical design was, the truly remarkable thing about the BlackBerry was that RIM provided everything needed to make it work: the device itself, the software that made it run, the servers that routed e-mail from the wired network, and the airtime that RIM leased from mobile-phone carriers. “As first mover in the market, we had an opportunity to build a brand around a new category,” said Dave Werezak, vice president of RIM’s Enterprise Business Unit.
By mid-1999, months after the BlackBerry launch, RIM also began selling BlackBerry Enterprise Servers, mostly to corporate clients. These servers were installed in customers’ IT departments and allowed BlackBerry users to send and receive e-mail from almost anywhere. Furthermore, the servers, which worked with RIM’s integrated e-mail management system, allowed for the coördination of wired and unwired e-mail, so that customers could use their BlackBerries to access the e-mail accounts they used at the office.
Businesspeople were soon addicted to “push e-mail” (so called because new messages are sent directly to the device, rather than requiring a user to request them from a server), and RIM decided to alter the way it sold BlackBerry, in an effort to increase the size of the market. For the first year and a half that the BlackBerry was on the market, RIM leased airtime from carriers for the transmission of data. But in June 2000, it decided to switch course and instead let carriers sell the BlackBerry service directly to customers. In the new arrangement, RIM received up to 20 percent of carriers’ fees. With thousands of the carriers’ salespeople pushing RIM products, the service quickly spread globally: in 2002, RIM sold 360,000 devices; in 2004, it sold 2.3 million.
Just as RIM was sewing up the market for wireless e-mail, events outside its walls were helping to make that market vastly richer. By 2002, a new nonvoice international wireless standard, the General Packet Radio Service (GPRS), had emerged. Up until then, BlackBerry data traveled largely on the data-only Mobitex network, which didn’t offer as much coverage as the new network. GPRS uses existing GSM (Global System for Mobile Communications) radio base stations and converts wireless data into standard Internet packets, enabling interoperability between the Internet and the GSM network at up to 10 times the speed of prior systems. The increased speed of data transmission and the convergence of voice and text data were attractive to both carriers and handset makers (who could offer data and voice in a single device). By the time RIM announced its agreement with Nokia, a new age had dawned: e-mail could now be sent and received on cell phones. With the hardening of the GPRS network, handset manufacturers could offer data-transmission software supplied by RIM.
The Logic of Partnership
From November 2002, when RIM began licensing its technology to cell-phone makers like Nokia, to May 2005, the company’s stock rose more than 800 percent. But even as the company grows, critics continue to warn of looming “BlackBerry killers.” RIM is sometimes depicted as the strong first mover that will later get crushed by a large player. As early as 2000, analysts predicted that PDA manufacturers and cell-phone makers would soon provide push e-mail functions that would make BlackBerry technology obsolete, and in April 2005, the Wall Street Journal listed a number of wealthy companies – both those making e-mail devices and those making network software – that were all nipping at RIM’s heels. “Awakened by RIM’s achievement, tech giants and hungry upstarts are responding with an arsenal of gear aimed at cracking the BlackBerry’s stronghold,” the Journal wrote. One month before, the Economist cited a pessimistic analyst who said, “Business-model transitions are always fraught with challenges.”
It is that notion – that RIM has abandoned its strategy by loosening its proprietary grip on wireless e-mail – that most frustrates executives at the company, who contend that from the beginning, RIM’s goal was to build a middleware platform for mobile e-mail that was compatible with multiple devices, applications, networks, and protocols and that spanned the globe. “We’ve always wanted to go there,” says chairman and co-CEO Jim Balsillie, “but the question was, Would anyone go with us?” Balsillie, who has run RIM with Mike Lazaridis in a rare joint arrangement since 1992, says that the answer, at first, was no. “[There] was really a lack of interest, in the rest of the market, to work with us until we became a standard.” As Balsillie sees it, RIM’s licensing effort signals that it is the market, not RIM, that has changed. “There was no interest in partnering with us until we became successful,” he says.
Of course, RIM did become successful, and as it did, it made overtures to handset makers, proposing partnerships. By the middle of 2002, Nokia and others finally became receptive when they saw that the new GPRS network would be strong enough to support cell phones that could send and receive e-mail. When Nokia approached RIM, says Balsillie, “Our attitude was, ‘Great, beautiful, love it.’” By March 2003, RIM was calling its new licensing model BlackBerry Connect. After the Nokia deal, others fell in line, including deals with Siemens, Motorola, and HTC.
Welcome to the DMZ
RIM partnered with handset makers largely because it believed partnerships work well for companies with industry positions like its own. Balsillie compares that position to a demilitarized zone, one he says facilitates convergence between traditionally separate parts of the telecommunications and hardware industries. But like the strip of land between North Korea and South Korea, RIM’s DMZ is also a buffer between two sides: the handset makers and the wireless carriers. “We are a middleware. And that’s a really useful place to be. A lot of people seem to be agreeing with us by buying our products and partnering with us,” says Balsillie.
RIM believes its status as first mover has allowed it to pioneer functions necessary in this middle ground, such as wireless data transmission and security. “If someone wants to be the middleware platform DMZ [like RIM], then I would think you would have to replicate the whole equation. You can’t just pick and choose parts,” Balsillie says. The DMZ role, he argues, requires you to please a number of parties: individual customers, corporate IT departments, handset manufacturers, operating-system makers such as Palm, and carriers all over the world. By the end of 2005, RIM will have signed on some 200 carriers – some profitable, others not – so that its services will be available everywhere in the world that its customers plan to be.
RIM’s neutrality, of course, does not protect it against other companies that would like to run the DMZ. Two of the most cited potential BlackBerry killers are Microsoft and Good Technology, the upstart privately held software vendor that has more than 5,000 organizations paying for its rival GoodLink system. For its part, Microsoft is introducing new versions of its mail server and PocketPC software that include support for push e-mail, BlackBerry style. Some say that Microsoft has a lock on so many corporate servers that with these additions, it will easily be able to move customers to a free Microsoft-run wireless platform next year. The DMZ is also flooded with other well-armed competitors, among them Seven, Intellisync, and Visto.
Part of what saves RIM from despair is that while its position in the market may be neutral, its customers’ feelings about its product are not. As RIM corporate-marketing vice president Mark Guibert explains, “Our customers became such raving, evangelical fans of the technology that the brand grew very virally and became very strong.”
That kind of loyalty and enthusiasm has worked not only at the level of the individual user, but also at the level of the corporation. “We should never underestimate the brand of RIM. Fortune 500 companies have a definite preference for RIM,” says Albert Chu of PalmSource. The software company worked with RIM to develop BlackBerry Connect for Palm OS, which allows PDAs equipped with Palm’s operating system to access BlackBerry wireless services. “We clearly want to enable any solution that our customers want; if our customers want wireless push e-mail, we want to make sure we have that enabled for our platform. If RIM is the best brand out there, then we want to make sure that there’s a RIM/BlackBerry solution on the Palm OS.”
Another way RIM protects itself is by partnering with the kinds of companies that could pose major threats. RIM denies that its partnership arrangements have anything to do with self-protection: “We are not partnering with companies because they are competitors,” says Guibert, but “because that is what we do really well.” Motive, however, is unimportant. The result of these arrangements is that RIM has given big companies a reason to want BlackBerry to stick around.
RIM’s small size has helped its dealings with prospective partners. According to Balsillie, when Nokia came calling in 2002, it didn’t see RIM as a competitor. (RIM has a market valuation of $12.4 billion; Nokia has more than $15 billion in cash. Nokia sells more than 100 million cell phones a year; RIM has fewer than three million subscribers.) “Nokia’s got a lot of worries; RIM’s not one of them. I am sure of that,” Balsillie says.
Growing in a Growing Market
Today, more than 42,000 BlackBerry Enterprise Servers have been installed worldwide, and almost three million people subscribe to the BlackBerry service in some form. That’s up from a million in January 2004, thanks largely to RIM’s recent success in Europe. By this summer, Nokia, HTC, T-Mobile, and Sony Ericsson will all have products featuring BlackBerry Connect. Siemens is offering a device with BlackBerry Built-In, an additional form of licensing that uses RIM’s Java-based applications as well as the push-based wireless services of BlackBerry Connect. This spring, RIM settled a patent dispute with NTP, an intellectual-property holding company, for $450 million; in doing so, it successfully resolved concerns about its future expansion in the United States. According to Ken Dulaney, an analyst for IT research company Gartner, RIM shipped more than 700,000 PDAs globally in the first quarter of 2005, a 75 percent increase from a year earlier.
Still, RIM has its skeptics. When the company announced in April that during the fourth quarter of fiscal 2005, it received 66 percent of its revenue from handhelds and 14 percent from software, some contended that it did not have its heart in licensing deals. But that 14 percent represented $57 million – a nice bump up from the $5 million that software licensing contributed in the fourth quarter of 2003. Dulaney predicts that RIM’s hardware business will not survive long term against competition from Asian manufacturers. But he also points out that RIM’s revenues are boosted by individual user fees of about $10 per month, and he projects that the company will have five million users by year’s end. “Today, RIM is measured by its BlackBerry devices,” he says. “To survive, RIM has to be measured by seats installed.” Balsillie, for his part, says it is not clear – or important – whether future revenues will come mostly from licensing or from sales of handheld devices.
Of course, Balsillie’s actions indicate that he does care where future revenues come from: RIM, through its partnerships, is tying its fate to that of the wireless e-mail industry as a whole, an industry that has grown and is projected to keep growing exponentially. Between 2002 and 2005, the number of users more than doubled – from 14.6 million to 30.8 million. Most of this growth has been in the corporate sector, but future growth is projected to include consumer markets as well. “It’s a rapidly, dramatically expanding market, so I am hardly fretting,” says Balsillie. “If the market is going to 3X, and our market shrinks somewhat, who cares? It’s all about enabling the market and driving it forward. It’s all about that. Oh yeah, for sure. Without a doubt.”