When a winning platform is losing its dominance, management might refuse to change its once-winning strategy, and make a fatal sacrifice along the way.
The most tragic example of a strategy tax is probably the BlackBerry Messenger (BBM): while RIM, the BlackBerry maker, has made a series of horrific mistakes in response to the arrival of the iPhone – going from the top of the world to total collapse within a few years – it was fortunate to stumble into a killer app. The serendipitous success of BlackBerry Messenger provided RIM with an opportunity to thrive in the smartphone world as a services company. Alas, BBM was sacrificed, in favor of yet another failed attempt to rescue the failing BlackBerry device business.
“Are you going to kill phone calls with this?”
When my wife and I first became parents, in 2017, a lot of our conversations moved to WhatsApp. One of us was usually with the newborn baby, and the other couldn’t tell if the baby was sleeping, in which case a phone call might wake him up. Texting was a safe bet.
WhatsApp did not yet exist in 2003, when BlackBerry employees Chris Wormald, Gary Klassen and Craig Dunk – all three with infant children at the time – reached a similar conclusion. What started as a side project – building a BlackBerry app that mimics the success of messengers by Yahoo and AOL – led to the insight that messaging is so much more compelling on a device that’s always in your pocket. They were the first to come up with the “delivered” and “received” annotations, and quickly realized that mobile messaging could disrupt phone calls. And this wasn’t just relevant for new parents – From the book “Losing the Signal”:
Wormald realised the power of BlackBerry Messenger (BBM), which was still being tested internally, when he gave his wife and mother BlackBerrys during a trip to Disney World with his three children in early 2005. As Mr Wormald sat on a ride, a man in the vehicle ahead pulled out his mobile and negotiated loudly with his wife about where they would meet next. “The magical moment was interrupted,” Mr Wormald says. A minute later, Mr Wormald felt his pocket buzz. He pulled out his BlackBerry. It was his mother: Meet me at the ice cream stand. He discreetly replied he would be over soon, put the device away, and turned his attention back to the ride. After five days of BBM messaging in Florida, his mother wanted a BlackBerry. “She didn’t even own a mobile,” says Mr Wormald. “She was hooked. If you had asked me then, ‘Are you going to kill phone calls with this?’ I would have said yes.”
Working evenings and weekends, the BBM trio figured out a way to get an executive to sponsor the project: they secretly loaded the app on the BlackBerry phones used by co-CEO Mike Lazaridis, his family members, and – most importantly – his assistant, Abby Gilhula. Once BBM became the way to communicate with Gilhula, the entire company quickly adopted BBM.
RIM was able to overcome the carriers’ concerns – about BBM enabling free and unlimited communication – and eventually launched the messaging app in 2005. It was an instant hit.
While BBM was popular in North America, it was transformative in international markets: with its low latency and data usage, BBM was not only an alternative to metered text message service, but also – as the team discovered early on – to costly phone calls. Especially in poorer countries.
BlackBerry also pioneered the privacy aspects of instant messaging: BBM was end-to-end encrypted, and users were identified through unique PIN numbers. From Losing the Signal:
If users chose not to reveal their identity, it would be impossible to know who they were. It was an irresistible tool for teenagers in conservative countries to communicate with friends and romantic interests away from the prying eyes of parents. In Dubai, young women embroidered their PIN numbers on flaps inside their burqas, turning themm out discreetly to encourage men they fancied to BBM them [...]
Venezuelan president Hugo Chávez called his BBM and Twitter accounts “my secret weapon.” In the United Arab Emirates, sheiks paid upward of $10,000 for a phone with a “golden PIN,” a device that carried an auspicious series of numbers and letters, such as 777. BBM users ran businesses and news services through BBM; in Bahrain, journalist Muhannad Sulaiman Al Noaimi sent daily summaries of breaking news and press releases to about 40 percent of the country’s seventy-eight thousand BlackBerry customers. BBM was a powerful communications tool, even revolutionary, for millions of people.
The amazing product-market-fit enabled new use cases to be found, and resulted in explosive growth: three years after its initial launch, BBM had 4 million users at the end of 2008; that number grew to 28 million in 2010, and over 60 million BBM users by the end of 2011.
Service versus Platforms
It’s common for a dominant platform company to grow by building applications for its platform: When Microsoft built its Office (services) business, it had great synergies with Windows (platform). The adoption of Office strengthened the Windows moat, the Windows moat allowed Microsoft to sell more Office and expand the suite of applications, and so the flywheel kept spinning.
The same was true in BlackBerry’s case: The success of its messenger application (service) helped BlackBerry sell more phones, and the growing number of BlackBerry (platform) customers fueled the growth of BlackBerry Messenger.
That positively reinforcing flywheel can be brilliantly successful – as it was for Microsoft during the 1990’s, or for early-2000’s BlackBerry – which is probably why it’s so hard for management to respond to changes in the market.
When a paradigm shift takes market share away from the previously-dominant platform, it would make sense to disintegrate it from the still-dominant service; the service can horizontally expand into newer platforms, thus maintaining its leadership. While it sounds logical, it certainly wasn’t the direction Steve Ballmer took as CEO of Microsoft, when Windows was losing ground upon the arrival of the Smartphone – as Ben Thompson was highlighting in real time during the early days of Stratechery:
The solution to the secular collapse of the PC market is not to seek to prop up Windows and force an integrated solution that no one is asking for; rather, the goal should be the exact opposite. Maximum effort should be focused on making Office, Server, and all the other products less subservient to Windows and more in line with consumer needs and the reality of computing in 2013.
Devices are vertical, services are horizontal; source: https://stratechery.com/
The trouble for Microsoft in the devices layer is that they only know horizontal domination. When there was nothing but PC’s, the insistence on one experience no matter the hardware worked perfectly. However, a Dell and an HP are much more similar than a tablet and a web page, for example, each of which has its own input method, user expectations, and constraints. A multi-device world demands bespoke experiences, not one size fits all. Microsoft simply doesn’t seem to understand that, and the longer they seek to “horizontalize” devices the greater the write-offs will become.
However, look again at that picture: there remains a horizontal layer – services – and it’s there that Microsoft should focus its energy.
RIM too, had a horizontal layer – namely, BlackBerry Messenger – and that’s where it should have focused its energy, when BlackBerry devices were going obsolete in favor of iPhones and Android phones; sadly, that is not what RIM chose to focus on.
BlackBerry’s Turnaround Hopes
The rise of iOS and Android app stores, in 2008, enabled the rise of rival instant messaging services – such as WhatsApp – in the following years; unlike BBM, they were horizontal cross-platform services. One incredible case was Kik, which was developed by former RIM employee Ted Livingston. Failing to convince his superiors to expand BBM into non-BlackBerry devices, Livingston left RIM in 2010 to develop his own cross-platform messaging service. After offering to drop it if BBM went horizontal – an offer which RIM executives were not interested in – Livingston launched Kik Messenger in April 2010, and signed 1 million users within two weeks. RIM’s response – instead of realizing the huge potential for a cross-platform messaging app – was to sue Kik, and kick it off the BlackBerry app store. As if by shutting it down, something would prevent hundreds of other rivals from launching similar apps.
Co-CEO Jim Balsillie did get it though. He realized what his hardware engineer partner, co-CEO Mike Lazaridis, refused to admit: the failures of the BlackBerry Storm touch-phone and PlayBook tablet were an indication that the company stood no chance against Apple. Balsillie was forming a vision around leveraging BBM’s success into a thriving software services business. If Stratechery had existed in 2010, I imagine Ben Thompson would have applauded Balsillie’s plan.
BlackBerry Messenger was supposed to replace existing SMS services, under a new SMS 2.0 brand. The telecom carriers agreed, hoping to ride BBM’s popularity and defend their declining text revenue; RIM, meanwhile, was hoping to generate a new revenue stream, with opportunities to upsell more cross-platform services.
Balsillie, thrilled about new prospects of success, made this a strategic priority for RIM; he acquired Live Profile, a messaging startup with iPhone and Android apps used by 15 million users in 2011, which was supposed to integrate with BBM to form a cross-platform network. A second acquisition was a cloud storage startup, as Balsillie planned to offer a premium “digital locker” service for SMS 2.0 customers to store photos and songs.
Lazaridis, working tirelessly to catch up with Apple, was reluctant to give up on the BBM exclusivity – a key selling point of the BlackBerry devices – and the two agreed to present it for discussion with the board of directors.
BlackBerry’s Hang-Up
Here comes the sad part: by the time Balsillie put the pieces together for his services strategy, RIM board of directors had already lost its patience. The stock price dropped 90% (!) from February to September of 2011. Under immense shareholder pressure, the board hired external consultants, who didn’t appreciate the potential of a service offering, and recommended against SMS 2.0; instead, their models showed that marketing spend on the PlayBook tablet and upcoming BlackBerry 10 phone would increase profits.
That’s the kind of thing Excel spreadsheets are bad at: they couldn’t capture how much BlackBerry devices sucked at this point, and failed to predict the explosive nature of a global consumer network.
Balsillie went ballistic, screaming at the consultants in front of the other directors. I suppose CEOs should know how to control their temper in the face of disagreements, but I can understand Balsillie here. I myself almost started screaming as I was reading about this board meeting.
To resolve the conflict, Balsillie and Lazaridis agreed to step down as co-CEOs and leave it in the hands of COO Thorsten Heins to heal the company. Balsillie assumed that Heins would carry forward the SMS 2.0 vision; after all, the strategy was in place, deals with AT&T (US) and Telefónica (EU) were signed, and the acquired companies were integrating their products.
But Heins, who previously managed BlackBerry’s hardware division, saw things differently. During his first board meeting as CEO, Heins mentioned that the SMS 2.0 project was shutting down. He explained that opening BBM to other phones’ users would hurt the differentiation of BlackBerry’s devices, and jeopardize the company’s hardware revenue.
Balsillie couldn’t hear that; he explained that the logic was flawed. It was actually the other way around: BBM was no longer compelling customers to buy a BlackBerry phone; customers were leaving because BBM was only limited to other BlackBerrys, and they couldn’t text their friends who were on Android or iPhone.
Balsillie stormed out of the meeting, immediately resigned from the board, and sold all of his RIM shares; the SMS 2.0 team was disbanded, with its resources repurposed toward a new flagship phone – BlackBerry 10 – which was also a failure. Shocker, I know.
It wasn’t until mid-2013 that Heins acknowledged the mistake, and shipped a cross-platform version of BBM. It was too late though. RIM let the opportunity slip away. A few months later, Facebook announced the acquisition of WhatsApp for seventeen billion dollars. That could have been BlackBerry Messenger, if only RIM hadn’t sacrificed it – as strategy tax – in another hopeless attempt to sell phones that consumers had no reason to buy. WhatsApp was sold for over three times the $5B market cap BlackBerry1 had at the time.
In his famous book, Only The Paranoid Survive, Intel’s legendary CEO Andy Grove explains why the inertia of success can be extremely dangerous when a company is hitting a major inflection point:
Senior managers go to where they are by having been good at what they do. And over time they have learned to lead with their strengths. So it’s not surprising that they will keep implementing the same strategic and tactical moves that worked for them [...]
I call this phenomenon the inertia of success. It is extremely dangerous and it can reinforce denial.
When the environment changes in such a way to render the old skills and strengths less relevant, we almost instinctively cling to our past2…
In our case, Balsillie acknowledged the new environment, but he was pushed out by Lazaridis and Heins – along with RIM’s board of directors – who were clinging onto BlackBerry’s past. Just like Steve Ballmer remained in denial about the decline of Windows dominance, and held onto the tight integration strategy with the Office application suite.
I propose the term “Platform Hang-Up”, to describe a situation where a platform is losing control over the market, yet management refuses to change its previously-winning strategy, and insists on limiting its successful service in hope of propping up the declining platform.
As they navigate the AI paradigm shift, some of today’s leading tech companies might fall into the platform hang-up trap; it’s a bit early to speculate, but I imagine I will be linking back to this article as the AI race develops.
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This was a read fantastic. Thank you.