- Failure to anticipate the changes wrought by innovation and quickly adapt to them has been fatal for many TMT companies over the decades.
- Research in Motion’s intransigent strategy and subsequent fall from grace in the wake of the iPhone has been a text book case of the mechanics of failure in the face of innovation.
- RIM’s unfortunate experience may be repeated by many entrenched players across the TMT landscape, as the Smartphone revolution was just an early skirmish.
The TMT industry is in the midst of massive paradigm shift that will destroy old paradigms and set the landscape for the next 25 years. I have written about this incessantly – most recently, here, here and here. While we like to focus on the birth of the next Phoenix, it is also instructive to consider the death of the older bird.
Why do tech companies die? I’m inclined to the line of thinking offered by McKinsey’s Dick Foster in “Innovation: The Attacker’s Advantage” and advanced by HBS’s Clay Christensen, in “The Innovator’s Dilemma,” both of which described mechanics by which many an industry stalwart has come a cropper. Liberally paraphrasing and condensing, the big idea is that market leaders may be unable to appreciate the potential of innovation because of their attachment to the more established paradigm. The TMT sector is littered with good examples, from Wang Laboratories faith in the stand-alone word processing system to Eastman Kodak sitting on its pile of digital imaging patents to protect its profits from photographic film. Research in Motion’s disaster of a 4Q12 report strengthen the case for its inclusion in the next book on the topic.
Several years back, I got a rise out of many colleagues with a cheeky assertion that the Blackberry was the “Wang Word Processor of the New Millennium”, but the better analogy may be Nextel. A decade ago, a Motorola made Nextel push-to-talk phone was de rigeur for blue collar workers, but eventually, all of the competing platforms added push-to-talk functionality as well. While Nextel asserted that its push-to-talk was faster and better, Verizon and AT&T’s push-to-talk were good enough. Nextel was already hemorrhaging market share when it was taken out by Sprint. Not long ago, Blackberries were as ubiquitous at the average financial conference as Nextel had been at construction sites. These days, the analyst next to you is more likely to have an iPhone, or even an Android of some ilk, than a Blackberry, and the email access is perfectly adequate to their needs (Exhibit 1). Unfortunately for RIM, there is no apparent suitor to play Sprint to their Nextel.
Things happen quickly in tech, and management that pauses to enjoy the view from a lofty valuation or read its own press clippings is setting itself up for failure. On June 29, 2007, the day the iPhone launched, RIMM shares closed at $66.66 (adjusted for a split), up 20% from the previous day’s close and a Forward P/E of 32.6. Almost a year later, the stock peaked at $147 with a similar forward P/E multiple of 33.83, with the Blackberry platform in full expansion mode. At the time, there were industry observers who correctly sized up the vulnerability of RIM’s leadership in the business mobile segment to the iPhone. Certainly Google saw the potential in the touchscreen smartphone, having snapped up Android in 2005 and pushing to have an alternative platform in the market by 2008. With faith that email would carry the day, RIM tried to go it alone, stapling touchscreen functionality onto its Blackberry OS in a series of poorly designed and poorly received products. By 2010, When its share price had begun to retreat, RIM acquired platform software company QNX and rushed products based on its OS to market.
Of course, Research in Motion was not the only company set on its heels by the iPhone. Motorola was basking in the afterglow of the RAZR phenomenon, and had nothing new in the pipeline when Apple offered its relatively bulky, but beautiful and oh so much more functional vision to the market. Erstwhile world smartphone leader Nokia executed its “slow follower” strategy so perfectly, that it was forced to embrace Microsoft in humiliation after admitting that its own response to iOS would never make it to market in time. As the dust settles, three platforms remain and the jury is still out on Microsoft’s ability to make a go of it from its distant number three position.
All of this is now in the rearview mirror, and the real question for investors is whether or not RIM can still craft a silk purse from its sows ear. Unlike Nokia, which ditched its internally developed Symbian and Linux based smartphone projects in favor of a partnership with Microsoft, RIM restated its commitment to its proprietary Blackberry software program while simultaneously opening the door to “partnerships and joint ventures, licensing, and other ways to leverage RIM’s assets and maximize value” for their stakeholders. While the company’s balance sheet and cash flows are a testament to the staying power of the email service, plummeting unit sales in a product category with notoriously short life cycles is a very bad omen that service revenues could follow.
While scandal plagued Nortel fell into disarray for very different reasons than its fellow Canadian champion RIM, its management showed similar hubris in holding to its “full line communications technology provider” strategy, even when it became clear that its dwindling resources couldn’t support a competitive presence in all of the markets that it wanted to pursue. When the dust settled, the company was sold out of bankruptcy for parts, with its portfolio of patents its most valuable asset. We hope that the departure of founding co-CEOs Mike Lazaridis and Jim Baslillie portends a new humility at RIM, and that new CEO Thorsten Heims can execute a sharp turn out of a strategic trajectory that has proven beyond ineffective.
Looking ahead, I think that the circumstances behind Research in Motion’s struggles will become commonplace across the TMT landscape, as the powerful combination of mobile platforms, wireless broadband, and fast, cloud-based applications lay waste to traditional business models. From the PC value chain, to channelized TV distribution, and on to enterprise data center IT vendors, businesses are beginning to cope with the leading edge of comprehensive change. History suggests the surviving companies will be those that acknowledge that it is coming and make plans to prosper in a new world. The companies that are in denial or that believe that they can build walls to keep out the storm will be at risk.
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