Exclusive: John Chen’s simple plan to save BlackBerry

Share

John Chen started his career like a lot of young engineers do: working the dreaded "third shift." Fresh out of college, Chen found himself on the floor of a mainframe computer assembly facility in southern California from 10 p.m. until 6 a.m., debugging machines and fixing manufacturing problems. In the dead of night, while the engineers and designers slept, "you were basically left alone with millions of lines of code, and schematics coming out everywhere," he tells Report on Business magazine during a series of exclusive interviews in late January and February. "It forced me to go through it the brute force way. You learn everything line by line, wire by wire."

Thirty-five years later, Chen is back on a third shift of a different sort, as the new chief executive officer of BlackBerry Ltd., following long-time co-CEOs Mike Lazaridis and Jim Balsillie and their short-lived successor, Thorsten Heins. Chen sees a lot of parallels between his first job and his latest. "This is like the third shift, sitting there, by myself…and trying to figure out where the problem is," says Chen, who was swept in last November when Fairfax Financial Holdings Ltd. abandoned its takeover of the company and instead led a $1.25-billion refinancing (all currency in U.S. dollars). "It could be devastating—you could be wrong. You could be working on a problem in circles and looking at the wrong places. But it could be really cool too."

When Chen joined BlackBerry, it was bleeding customers, employees, revenue, cash and share value. An all-in bet on a new operating system called BlackBerry 10 had failed, prompting BlackBerry to put itself up for sale. The company formerly known as Research In Motion, which had pioneered the $350-billion-plus smartphone industry, seemed destined to disappear.

Chen, by nature, is drawn to a puzzle few believed could be solved: finding a sustainable path forward for the iconic Canadian company as the BlackBerry smartphone—the signature product around which the whole company was built—continues to lose market share and sink further into irrelevance.

When Fairfax CEO Prem Watsa met with Chen early last October at a luxury resort in Napa Valley to discuss the opportunity, "John said, 'I don't need a job.' But…he [also] said, 'This is an icon in the business and it really needs to survive. It doesn't need to die,'" says Watsa. "And that's what intrigued him."

Although short sellers, potential suitors and a myriad of naysayers had largely given the company up for dead, Chen saw overlooked potential—including an admired secure corporate network business that could thrive in an era of hacking and spying; a device business that still has a strong presence in many emerging markets; and a global market of millions of users who prefer to use an actual keyboard rather than a touchscreen version.

Investors soon learned Chen was a catch, albeit an expensive one: He began the job with $85-million worth of restricted stock (he also has the use of a company jet to fly him to and from California, where he will continue to live). Aside from Steve Jobs's famous fix at Apple, Chen led arguably the most successful turnaround in Silicon Valley in the last 20 years: He right-sided flailing database software specialist Sybase Inc., steadily created shareholder value at the firm, and then sold it to SAP AG for $5.8 billion in 2010. Chen, one of the first Asian-Americans to head a major U.S. company, sits on the boards of the Walt Disney Co. and Wells Fargo & Co.; he's also a key power broker in Sino-American economic relations.

Chen knows BlackBerry's core market well—Sybase has supplied both the company and its rivals—and he has zeroed in on winning back its core "enterprise" (i.e., corporate and government) users. He has moved quickly and sure-footedly in his first 100 days, striking a manufacturing deal with Taiwan's Foxconn Technology Group that off-loads much of the company's financial risk and overhauling the senior management team, recruiting a group of experienced executives he knows and trusts. When Mark Wilson, a former Sybase marketing VP, e-mailed to congratulate him on the BlackBerry job, Chen immediately wrote back, asking if he was interested in working for him again. "I was a bit taken aback," says Wilson, who was happily employed as chief marketing officer at Avaya Inc. "I get a lot of calls for jobs and always say no." Two months later, he was senior vice-president of marketing at BlackBerry. "I think it's a challenge, for sure," Wilson says. "But I wouldn't be here if I didn't think we could do it."

The initial buzz, which has lifted the stock by about 50% since Chen's appointment, does not mean a turnaround will be easy, or even achievable. "His job number one right now is to stabilize the revenue stream," says independent analyst Jack Gold. He cautions that if BlackBerry's enterprise customer base shrinks much more, "they're going to have a real problem." Says Chen: "I'll tell you, there are pain points every day." But he's jazzed by the challenge. "If this could be done, it would put a statement in the world. I think it's a pretty big deal if we could save BlackBerry."

**************************

John Chen cuts a modest profile as he arrives at a company showroom in Building C in Waterloo, one of the many facilities BlackBerry has put up for sale. It's a snowy Wednesday in early February, and he's in town for a few days after spending much of his first three months travelling, visiting customers and suppliers (for long overseas trips, he chooses to fly commercial). Wearing a navy blazer and no tie, he sports a black knapsack—and a $2,000 Porsche-designed limited edition BlackBerry Z10 smartphone on his belt. He's reserved and calm but also chatty, breezily confident and drily charming.

Like many former "CrackBerry" addicts, Chen converted to an Apple iPhone years ago, switching back when he joined BlackBerry. It took him a while to get used to the BlackBerry 10 operating system, but now, "I never use the iPhone any more," he says. "The iPhone now feels like a toy. I don't think you'll find [I'm] the only person saying it.'"

A credible cheerleader-in-chief, the 58-year-old Chen likens the challenge at BlackBerry to the one he tackled at Sybase. The circumstances are indeed similar.

Chen had already established himself as a bona fide success when he joined Sybase in 1997. Despite modest origins (he grew up in a one-room apartment in Hong Kong after his parents fled newly Communist China), Chen set his sights on an Ivy League education while he was in high school. He got into the prestigious Northfield Mount Hermon preparatory school in Massachusetts for his senior year, one of only three students of Asian origin. That "forced me to assimilate into the culture and to learn English," he says. Chen fondly recalls his first year in the U.S., although on Thanksgiving he awoke to discover his dorm was deserted, the power was off and the cafeteria was shut. It was like a foreign-student version of Home Alone. "There were enough vending machines around" to keep him from going hungry on the long weekend, he says.

After earning engineering degrees at Brown University and the California Institute of Technology, Chen joined mainframe maker Burroughs Corp. in 1979 (which later merged with another company to become Unisys). This is where he worked the third shift. It wasn't long before he noticed one of his Asian colleagues kept being passed over for promotions. He asked his superior why, "and he made it very categorically clear that Chinese engineers are 'not presentable.' When I got home, I pulled out the Webster's dictionary to look up what 'presentable' means." The racism of the putdown hit hard, and "I decided that I had to go conquer that," he says. He credits his determination for putting him on the career fast-track. To polish his presentation skills, Chen took courses with a local TV anchor and joined Toastmasters. He soon became plant manager—overseeing his former superior—and eventually rose to vice-president.

Chen left in 1991 to lead the turnaround and eventual sale of server-maker Pyramid Technology Corp. to Siemens AG. He stayed on, moving to Germany but growing frustrated by the industrial giant's bureaucratic culture. By 1997 he was ready for a change. Chen was rumoured to be Larry Ellison's pick to lead Apple during Oracle's brief run at the then-struggling computer maker ("I can't comment," Chen says). Instead, he joined Ellison's competitor, Sybase, becoming president (and later CEO). Ellison told him he was making a mistake.

Sybase had been an early leader in the electronic database market in the 1980s, but by 1997 it was a chronic money-loser, shedding revenues and what little market share it had left to Oracle, IBM and Microsoft. Sybase had a reputation for buggy software, for being out of touch with its customers and for failing to adapt to changes in its market. Instead of addressing its core challenges, Sybase went on an acquisition binge that did little to help.

Analysts didn't think Chen could turn the tide. Even Sybase director and Silicon Valley veteran William Krause had his doubts. "I was skeptical of John at first because I thought he was too much of an operating executive," says Krause. "He didn't seem to spend much time thinking about long-term strategy and creating a vision for what the company might look like five or 10 years down the road. But he incrementally found his way there, which is his style." Ultimately, "John proved me wrong."

Chen began by slashing jobs, returning Sybase to profitability and promising to stop chasing business where the firm wasn't competitive or had lost money.

Sybase remained a preferred supplier to certain sectors, notably Wall Street banks, but it had otherwise lost the database war to Oracle. So Sybase expanded into the underserved Asia-Pacific market, eventually becoming a leading player there. More important yet was Chen's decision to own a market that barely existed in the late 1990s: mobility. "I really think that's where the world is going," he said in August, 1999.

Today, Chen's move to embrace mobility looks visionary. But it was born out of circumstances he inherited. Chen knew Sybase couldn't grow unless it found new markets it was uniquely qualified to conquer. Database software for the fledgling mobile market was too small an opportunity to interest Sybase's much larger competitors. "I backed into it," Chen says. "I asked the right questions at the time, not knowing it was so transformational."

His mobility strategy was largely based around a company called iAnywhere—based out of Waterloo, oddly enough—that made lightweight database software that could run on laptops. Sybase had picked up iAnywhere in its 1994 acquisition of Powersoft Corp., but had been more interested in a different product made by Powersoft. With his technical background, Chen realized iAnywhere's software could be adapted to even smaller mobile devices. Soon Sybase was on Palms and BlackBerrys, dominating a market that, while small, kept growing at a pace far exceeding the main database market. By 2010, mobility represented one-third of Sybase's forecasted revenue of $1.2 billion; it was a key draw when SAP agreed to pay $65 a share—13 times the value around the time Chen became CEO.

Chen may have been an accidental visionary, but he had no doubts about how to pursue the vision. Krause says Chen "didn't take kindly to feedback, constructive or negative....He likes to do things his way, and that's both a strength and a weakness." It's an observation Chen doesn't dispute, but he adds that its veracity "depends on the time. If I'm in the mode of seeking ideas and advice, I'm very receptive. If I am already in execution mode, I'm not really that receptive. Because I am a believer that you could design something to death, and you would have not only missed the market, you would actually miss getting anything done."

**************************

Chen had an informed opinion about BlackBerry when Watsa first called him in September, at the recommendation of colleagues whom the two men had in common. Chen had already been asked by other potential bidders (he won't say who) to kick the company's tires after it launched its strategic review in August.

His conclusion: BlackBerry was on a "pretty poor" trajectory and couldn't generate enough cash to fix its problems. But some of the strategic errors it had made could be fixed with time, and the company had a lot of assets that could benefit from investment.

Chen's first priority is to instill confidence in employees and customers, which starts with reiterating that BlackBerry is no longer for sale and has enough cash—thanks to the refinancing, asset sales, a big tax refund and cost savings—to survive past the next several quarters of expected losses. But he is blunt about the state BlackBerry is in. He likens his task to that of an emergency room doctor: The job is to save the patient, not to focus on the circumstances that led him to the ER. But his diagnosis is also full of sharp observations about his predecessors' mistakes.

The company, he says, had a chronic problem with overpromising and underdelivering. There were quality issues and, internally, a lack of the sort of accountability and co-ordination required to make bold fixes. Deadlines would come and go without consequences. "I realize that the company has some credibility gaps," he says. Wireless carriers told him, "'We'd love to help you out, but there are some things that you have to get done right,'" Chen says. "They always complain about us being late or, somehow, somewhere in the middle of this, redefining what the features are."

When Balsillie and Lazaridis led the company, it fiercely held to its practice of charging service-access fees to carriers for every BlackBerry subscriber—fees its competitors didn't charge, and which yielded more than $1 billion a quarter in revenue at one point. The vast majority flowed to the bottom line. On Heins's watch, BlackBerry caved to pressure from carriers and reduced the fees, promising investors it would replace the lost revenue with new offerings for customers. Service revenue fell sharply and is now deteriorating by about 15% from quarter to quarter, which Chen figures will continue for at least another two quarters.

The move to change the service-fee formula bewilders Chen—he likens it to someone quitting his job hoping a better one will come along, then wondering why he can't afford rent. "I would never have done that," he says. "The disruption of the service-access fees was a mistake."

Another big issue was a deep schism within the company over whether BlackBerry should focus on consumers or its core enterprise customers. "There are a lot of opinions in the company and they're not necessarily lined up," says Chen. "I can't really say if the focus on the consumer is the right thing versus enterprise, or vice versa. But I know we need to pick somewhere to start."

For Chen, the answer is obvious: The company has an installed base of more than 80,000 enterprise customers that not only provide BlackBerry phones to their employees, but manage those devices via BlackBerry servers installed on their premises, which relay messages over BlackBerry's secure network.

These customers account for 80% of revenue. Nevertheless, the pre-Chen BlackBerry became so obsessed with trumping Apple and Android that the company allowed its lucrative enterprise business to wither. It decimated its enterprise sales force and was slow to adopt changes that would have allowed its large customers to use BlackBerry software and servers to manage whatever smartphones its employees used, BlackBerrys or not. The lack of a "cross-platform" offering until recently allowed so-called multi-device management upstarts to benefit from the growing "bring your own device" trend and steal enterprise customers from BlackBerry. Worsening matters, BlackBerry relied heavily on increasingly disinterested carriers and distributors to sell its products, and was not talking directly to its big customers enough. "[A majority of] enterprise customers who use us as the backbone have never heard from us," Chen says.

He has a clear sense of what he needs: a direct sales force that speaks one-on-one with customers who have the most to gain from using BlackBerry. These sectors—government and "regulated" industries such as banks, insurance and health care—benefit most from BlackBerry's industry-leading security, and they tend to be home to users who appreciate the efficiency of a physical keyboard compared to a touchscreen.

BlackBerry, in Chen's view, also needs to focus on building out "vertical applications" that are connected to a customer's internal systems and run on the BlackBerry network. The company hasn't offered much in the way of enterprise applications beyond the basics of e-mail, calendar and contacts. "With increasing power in our devices, there's more opportunity for enterprises to do more on mobile devices than before," says John Sims, the company's new president of global enterprise services, a recruit from SAP/Sybase. "It's not an opportunity we've missed, but one we can participate in." The company had few details to offer at press time but promised to start revealing its plans in late February.

Chen has also talked about peddling the company's BlackBerry Messenger instant messaging application as a tool for enterprise users, even though mobile "chat" applications are really the domain of intimate communications among consumers, and generate little revenue. Chen has likewise talked up the ability of his QNX software division to power "machine-to-machine" communications, which is all the rage in IT these days. What that means for the BlackBerry business as a whole is unclear.

Over all, Chen wants BlackBerry to transform itself from being a "mobile technology company" that pushes handset sales to "a mobile solution company" that takes a broader approach to serving the mobile computing needs of its customers. Remaining in the handset business is important—for now, at least. "I think devices are still one component of the solution," Chen says. "The question is, Do we need to be in the device business? That remains to be seen."

Fixing the handset business is key, particularly after the failure of the BlackBerry 10, which exemplified the company's split-personality problem. Keen to win back consumers, BlackBerry led with the all-touchscreen Z10. It was months before it followed with the keyboard-enabled Q10, a device more familiar to the bulk of its customers. Apple and Android users didn't see a reason to switch to another touchscreen device, and the Z10 took too much retailer time to demonstrate, turning off salespeople.

BlackBerry had been keen to update its user experience after being beaten up for lagging the iPhone. But BlackBerry 10 phones were too much of a departure from past devices for diehard users. Gone was BlackBerry's trademark "belt" of five function buttons between the screen and keyboard, including a trackpad and the "back" and "menu" buttons that had become as familiar to users as the space bar. Other familiar features and shortcuts from older devices no longer worked. Frustrated BlackBerry devotees returned the new phones in droves and ordered older BlackBerrys instead. The handset business was already unprofitable; thanks to the BlackBerry 10 flop, now it had become the source of billions of dollars in writedowns. "We missed one step, which was to educate the market up front" about the changes, Chen says. "We [thought] that if we built it, everybody will love it."

The short-term answer to the handset problem is twofold: New BlackBerry phones will continue to use the BlackBerry 10 operating system, but "will have some of the features our power-users love," says Chen. He doesn't want to get into specifics, but company sources confirm that the belt of five function keys will start appearing on BlackBerry 10 phones this year.

More significantly, Chen has acted on an idea that director Timothy Dattels, a senior partner at TPG Capital, brought to the company: to outsource handset production to Foxconn, which assembles Apple products.

The previous management had looked into the idea, but "when I came in, it was kind of stalled," Chen says. He saw the opportunity to do something more: Rather than just partner with Foxconn to develop and make BlackBerry devices (starting with a handset for Indonesian users this spring), he also negotiated a deal whereby Foxconn would manage inventory and assume the associated financial risks. In exchange, BlackBerry would give up some of its profits from device sales. Chen flew to Taipei last fall and had a deal in two weeks.

By largely getting out of manufacturing, BlackBerry can eliminate a lot of fixed costs that rendered the handset business unprofitable as sales fell, and also mitigate inventory risks. The announcement of the deal sparked a jump in BlackBerry stock in December. "He effectively has solved the handset problem in that it won't destroy the company this year," says Jefferies Group LLC analyst Peter Misek.

Is it too little, too late? BlackBerry's share of the smartphone market has dwindled to little more than a rounding error. Its internal strife has allowed rivals to eat into its business. "It would have been great to have [Chen] two years ago," says Misek. "Facing a challenge later on in the process just makes the probability of success much lower."

Watsa, who has the most riding on Chen's ability to deliver, clearly believes the probabilities are on his side. "When John has accomplished the mission he has set out on, it will be one of the greatest turnaround stories, not only in the tech world, but in all business."