BlackBerry against the world: powerful forces are at work against RIM, but it's counterattacking.

Located on the humdrum outskirts of Waterloo, Ontario, mobile communications giant Research In Motion's sprawling complex more closely resembles a suburban outlet mall than the headquarters of one of the world's most innovative corporations. But within the understated, nondescript facility where RIM churns out BlackBerry wireless email devices for the world's overworked masses, co-CEOs Mike Lazaridis and Jim Balsillie are waging a battle royal.

At stake in this fight for mobile market dominance is RIM's $14.7 billion market valuation, 20 years worth of product development and the freedom to sell its iconic devices in the United States. For nearly four years, RIM has been in the crosshairs of a U.S. patent infringement lawsuit that, in the first quarter of 2005 alone, cost the company $4.5 million in legal fees. In the meantime, competition to lure mobile consumers is mounting. From deep-pocketed stalwarts such as Microsoft to scrappy upstarts like Santa Clara, Calif.-based Good Technology, a growing number of vendors are vying for a slice of today's nascent mobile market with offerings of alternative email messaging technologies.

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It's a perfect storm of increasing competition and market volatility that industry observers say is forcing Lazaridis and Balsillie to rethink the very strategy--and device--that ushered RIM into market leadership in the first place, an assessment that Balsillie prefers to downplay as simply the company's ongoing evolution.

RIM's meteoric rise has all the makings of a feel-good success story. Started in 1984 by Lazaridis, a Turkish immigrant and a talented engineer, RIM began its foray into wireless messaging technology by taking on an outsourced project for mobile systems supplier Ericsson. In 1992, Lazaridis successfully lured Harvard Business School graduate and skilled negotiator Balsillie to the fledgling company as co-CEO, lending his unique brand of salesmanship to Lazaridis' technical wizardry. Over the next seven years, the two worked tirelessly to turn a bulky prototype into the BlackBerry's sleek and user-friendly current incarnation. An order from BellSouth for $50 million worth of wireless email devices got the ball rolling in 1997. That same year, RIM went public. Then in 1998, RIM began working with branding strategists in preparation for the official launch of the BlackBerry in January 1999. Today, over 50,000 organizations and 3 million subscribers count on BlackBerry, dubbed 'crackberry' for its addictiveness, to receive and deliver email messages on the spot. Now, the company has $1.3 billion in annual revenues.

Not everyone, however, lauds RIM for its innovation. In 2001, NTP, a privately held patent holding company based in Arlington, Va., sued RIM, claiming its wireless email system infringed on eight NTP patents of Thomas Campana, a now-deceased inventor. According to NTP's lawyer, Campana created a wireless communications system "about five years before RIM developed its wireless email technology."

Although RIM reported in late June that it more than doubled its first-quarter profit, and raised its second-quarter sales outlook, RIM's shares fell nearly 5 percent in what analysts described as ongoing investor concern over the company's legal battle with NTP and growing competition. Nevertheless, Mike Abramsky, director of software and wireless global research at RBC Capital Markets in Toronto, says that in the long run, legal woes and rivals are "not going to destroy RIM's franchise and advantages in the market."

Since the launch of NTP's suit in 2001, RIM and NTP have been entrenched in a no-holds-barred patent row. NTP won a 2002 jury trial and later an injunction, stayed pending appeal, to halt U.S. sales of RIM's wireless email devices. RIM appealed that decision, but a federal appeals court later upheld the ruling that RIM infringed on NTP's patents. Eager to put an end to the conflict, RIM agreed to a $450 million settlement in March of this year but talks unraveled in June. The case now sits with a Virginia district court, which is expected to rule on whether the proposed settlement is enforceable.

Meanwhile, the U.S. Patent & Trademark Office has rejected all of the claims made by NTP in seven of eight patents for a wireless email system. The rulings were part of a re-examination in which rejections are quite common, says Louis Hoffman, a patent attorney at Hoffman & Zur in Scottsdale, Ariz., which represents patent holding companies that are owned or controlled by inventors or their families. The final NTP patent is currently under review by the U.S. Patent & Trademark Office, thus creating a peculiar set of circumstances given that RIM has already asked a lower court to uphold the NTP settlement on patents that may be found invalid.

Although it could take years before a resolution is reached, Balsillie says he's flabbergasted by this latest roadblock. "I cannot for the life of me understand why somebody would say that's not enough money. I'm at a loss on that one," he says.

But perhaps even more astonishing to CEOs everywhere is just how vulnerable today's corporations are to patent infringement lawsuits. Kevin Cameron, president of Glass, Lewis & Co., a research firm focused on investment risk assessment in San Francisco, says the problem stems from a "famously understaffed" U.S. Patent & Trademark Office that simply "doesn't have the great resources" or "highly skilled Silicon Valley engineers" to properly assess patent applications and flag conflicts. As a result, he says, patents are issued far too liberally, a predicament that has given rise to "patent trolls"--companies that neither make products nor provide services but instead purchase patents with the sole intention of suing other companies for patent infringement. The practice has prompted companies such as Microsoft, Intel and IBM to call for drastic reforms in U.S. patent law, and Congress is currently examining legislation introduced by Congressman Lamar Smith (R-TX) this past June to improve the quality of patents issued by the patent office.

Although Balsillie is quick to volunteer RIM as "a poster child for [patent] reform." Hoffman warns that CEOs are often too quick to label holding companies such as NTP "patent trolls." "Thomas Edison, for example, had 1,100 patents and I'd wager that not very many of those he sought to commercialize," says Hoffman, noting a pervasive attitude among today's business leaders to "allow companies the freedom to do whatever they want, inventors be damned."

Uninspired to take sides, some companies are simply hedging their bets. Finland's Nokia, a mobile phone maker behemoth, recently obtained a licensing agreement from NTP for use of five patents. Nokia inked a deal with RIM in 2002 to license its email technology, but held off on introducing its BlackBerryenabled 6820 handset in the U.S. for fear of becoming entangled in litigation. Nokia now plans to make the devices available in the U.S. in the fall.

Good Technology also didn't waste any time reaching a patent-licensing agreement with NTP. In turn, NTP agreed to invest an undisclosed amount in the wireless email software maker and young RIM rival. The odd pairing, says Danny Shader, Good's CEO, was prompted by the desire to "put dollars into innovation and not litigation."

Mobile technology providers and patent-holding companies aren't the only ones to make strange bedfellows. Like desperate cast members on an episode of TV's Survivor, countless companies are forming strategic alliances to stay in the game. Good recently enlisted Sprint and Cingular, two of the nation's largest carriers, to resell its GoodLink wireless email messaging software to cellphone customers. Good has also positioned itself as a third-party software developer for Microsoft's Windows Mobile operating system. The email messaging service was made available on two phones, from Audiovox and Motorola, in August. And plans are already in the works to make GoodLink compatible with email systems based on IBM Lotus Notes and Domino.

Eluding the Category Killer 

So far, Good has signed up 6,500 corporate customers on 120 carriers in more than 60 countries. Although merely a fraction of RIM's customer base, Shader says Good is "barely scratching the surface" of a burgeoning mobile industry. If Shader seems cocky, it's perhaps because he's witnessed firsthand how easily even the mighty can fall. Shader was recruited to run developer relations at Netscape Communications, only to watch the dot-com darling lose its 90 percent market share--and a ferocious browser battle--to rivals, including Yahoo, Microsoft and Google.

Not that Good is likely to unseat RIM anytime soon. Following a rash of recent announcements, analysts say Microsoft currently poses the greatest threat to RIM's reign. For starters, in July, Motorola and Microsoft announced plans to transform Motorola's Razr slim phone into a BlackBerry-like pocket-size device called Q. Scheduled for release in early 2006, Q promises to combine voice, data and multimedia on a Microsoft Windows mobile operating system. By uniting BlackBerry-type functionality with a widely popular platform, John Jackson, a wireless analyst at research firm Yankee Group, says that Q could deliver the flexibility and freedom of choice that RIM's proprietary software can't offer. What's more, Microsoft has worked hard to expand its global reach: 40 device makers now ship Windows Mobile products with 70 mobile operators in 48 countries around the world. "The Microsoft-Motorola solution is really going to hold RIM's feet to the fire," says Jackson, adding that Q could have "category-killer potential."

Also upping the ante is a free upgrade to Microsoft's Exchange server that is designed to push email directly from Microsoft Outlook to a Windows-based mobile device. In the past, corporations had to rely on additional middleware from vendors, including Good, RIM and Intellisyne, to ensure real-time access between the server software and handheld devices. However, Microsoft's Exchange server upgrade allows businesses to bypass this middleware, thereby slashing server infrastructure costs. "Microsoft has got RIM in its sights and clearly sees it as a vendor to beat," says Ken Dulaney, vice president of mobile computing at research firm Gartner Group.

Staying On Top

Despite RIM's much-ballyhooed battle against hi-tech titans, Jackson of Yankee Group says this isn't the first time industry observers have prematurely sounded RIM's death knell. "People have been foretelling the demise of RIM for a couple of years now," he says.

In fact, RIM expects to have its BlackBerry software running on a version of Q in the future, having signed a licensing agreement with Motorola a year ago. And the company is currently in discussions with Intel to possibly use its Centrino technology to provide BlackBerry users with Internet connectivity via wireless hot spots. But it's RIM's wheeling and dealing with some of the world's most powerful handset makers and carriers that analysts say signals a possible life-saving shift in the company's strategy.

For years, RIM acted as a one-stop shop where corporate clients would have to purchase a combination of BlackBerry Enterprise Servers, proprietary email messaging software and BlackBerry devices in order to send and receive email. That all changed, however, in November of 2002, when RIM began licensing its technology to cellphone makers like Nokia, Samsung and Motorola. As of this summer, HTC, T-Mobile and Sony Ericsson joined the list of vendors selling devices featuring RIM's wireless service called BlackBerry Connect. Meanwhile, RIM has signed on 100 new carriers to sell BlackBerry devices and services, a figure that Balsillie expects to reach 175 by year's end.

By granting other companies access to its BlackBerry email messaging technology, RIM is opening itself up to previously untapped markets and fresh sources of revenue. The challenge for RIM, however, rests in nurturing these newfound alliances and convincing vendors that its licensing model is here to stay. After all, despite taking significant steps to license its software, 70 percent of RIM's $1.3 billion revenue still comes from selling hardware. In fact, Dulaney of Gartner says that RIM has shipped more than 700,000 PDAs globally in the first quarter of 2005 alone, a 75 percent spike from a year ago. "RIM has got to do some heavy soul-searching about where this company is going," warns Dulaney, adding that if RIM continues to have too many irons in the fire, it could cause confusion among vendors as to whether RIM should be considered a "friend" or "enemy."

Then there's the specter of litigation overshadowing potential licensing agreements with device makers and carriers. "A lot of companies are somewhat hesitant to license [technology] from RIM for fear of receiving NTP's wrath," says Kevin Burden, a program manager of mobile devices at research firm IDC.

As for Balsillie, he says he's unfazed by the jockeying for market dominance among today's industry stalwarts and aggressive newcomers--nor is he willing to concede that RIM's ongoing legal battle with NTP is having any negative impact on the company's growth. Instead, Balsillie says that in these tumultuous times, RIM remains focused on the business "fundamentals" upon which it was built. "Everything's the same as it was 14 years ago; there's just three or four more zeroes on everything," he says. The company is clearly not ready to raise any white flags over its homely Canadian headquarters.

RELATED ARTICLE: RIM Market Share

U.S. PDA Shipments In 2Q 2005

The RIM BlackBerry and Microsoft Windows CE platforms are steadily taking over the U.S. PDA market as sales of Palm OS decline.

Palm OS              27.2%
Microsoft licensees  24.8%
RIM                  40.6%

Note: Table made from pie chart.

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Source: Gartner Group