Research in Motion: Compromise BlackBerry Security, or Give up Emerging Markets?

Abstract

In 2010, Research in Motion's BlackBerry offered its corporate clients the ultimate in smartphone security. All messages were encrypted before leaving the device and then were routed through a series of Network Operating Centers located in Canada. This made it difficult for government officials or private parties to eavesdrop on BlackBerry calls, texts, or e-mails.

Sound security was one of the strategic advantages of the BlackBerry over other wireless devices. Customers were confident that their sensitive communications could be kept private anywhere in the world. As a result, the BlackBerry was the device of choice for military and other government, medical, and corporate clients.

However, some governments were concerned about BlackBerry's security features, claiming that they made it difficult for them to protect their citizens from criminals and terrorists, particularly after the Al Qaeda attacks in the United States on September 11, 2001, and the terrorist attacks in Mumbai, India, in 2008. In the past, law enforcement and intelligence agencies that wanted to monitor the communications of suspected criminals could perform a wiretap on a landline phone, or they could intercept the mail.

The BlackBerry was the most visible symbol of the decreased power of governments to track the communications of their citizens and foreigners. Indeed, the 2008 Mumbai attacks had been orchestrated using BlackBerrys. At the same time, the dramatic expansion of BlackBerry adoptions, particularly by government and institutional users, was undoubtedly fueled by the stability and security of the service in comparison with other communication providers in the wake of the 9/11 attacks.

In early August 2010, this tension between privacy and national security came to the fore after regulators in the United Arab Emirates threatened RIM: either provide a way for the UAE government to monitor the communications of BlackBerry smartphone users, or the UAE would cut off all BlackBerry service beginning October 11. The stated rationale for the request was to intercept terrorists and other criminals, but there was reason to believe that the UAE also wanted the capability to crack down on political dissidents.

RIM initially refused the UAE's demand, responding that it would be impossible to circumvent its security system; even RIM was not able to access its customers' data. Analysts wondered whether the UAE government's desire to transform the UAE into a global business hub would prevent it from following through on its threat. RIM customers worried that either the security of their data would be compromised, or they would lose some of their BlackBerry functionality. On October 9, 2010, two days before its deadline, the UAE dropped its threatened ban. It was not revealed what agreement was reached between the United Arab Emirates and Research in Motion and what role, if any, the Canadian government played in resolving the dispute.

As disputes with other countries continued, it became evident that RIM had made concessions. For example, on January 11, 2011, RIM agreed to implement internet filtering in Indonesia to block pornography, the first time it did this in any country. Then, on January 14, 2011, RIM reported that it had given the Indian government tools to monitor instant messages and public e-mail services, but not corporate e-mail. Yet the Indian government had subsequently indicated that this was not enough: they wanted access to corporate data as well and imposed a March 31, 2011 deadline.

RIM had some tough choices to make as it tried to decide how to respond to the increasingly strident government demands, especially from countries that did not necessarily possess the same respect for human rights as Canada. What would be the cost of tailoring its service country by country? Could RIM afford to lose its business in developing markets, such as UAE and India? How would RIM's customers throughout the world react if RIM compromised the security they had come to expect? The Apple iPhone and Google Android were in hot pursuit of BlackBerry customers, and RIM could not afford a misstep.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1: Worldwide Smartphone Sales to End Users by Operating System, 2008

(Thousands of Units)

Company

2008 Sales

2008 Share

2007 Sales

2007 Share

Growth 2007-2008

Symbian

72,933.5

52.4

77,684.0

63.5

-6.1

Research in Motion

23,149.0

16.6

11,767.7

9.6

96.7

MS Windows Mobile

16,498.1

11.8

14,698.0

12.0

12.2

Mac OS X

11,417.5

8.2

3,302.6

2.7

245.7

Linux

11,262.9

8.1

11,756.7

9.6

-4.2

Palm OS

2,507.2

1.8

1,762.7

1.4

42.2

Other OSs

1,519.7

1.1

1,344.0

1.1

13.1

Total

139,287.9

100.0

122,315.6

100.0

13.9

Note: The “Other OSs” category includes sales of Sharp Sidekick devices based on the Danger platform.

Source: Gartner (March 2009)

Exhibit 2: Worldwide Smartphone Sales to End Users by Operating System, 2009

(Thousands of Units)

Company

2009 Units

2009 Share

2008 Units

2008 Share

Symbian

80,878.6

46.9

72,933.5

52.4

Research in Motion

34,346.6

19.9

23,149.0

16.6

iPhone OS

24,889.8

14.4

11,417.5

8.2

MS Windows Mobile

15,027.6

8.7

16,498.1

11.8

Linux

8,126.5

4.7

10,622.4

7.6

Android

6,798.4

3.9

640.5

0.5

Web OS

1,193.2

0.7

NA

NA

Other OSs

1,112.4

0.6

4,026.9

2.9

Total

172,373.1

100.0

139,287.9

100.0

Exhibit 3: Worldwide Smartphone Sales to End Users by Operating System, 2010

(Thousands of Units)

Company

2010 Units

2010 Share

2009 Units

2009 Share

Symbian

111,576.7

37.6

80,878.3

46.9

Android

67,224.5

22.7

6,798.4

3.9

Research in Motion

47,451.6

16.0

34,346.6

19.9

iOS

46,598.3

15.7

24,889.7

14.4

Microsoft

12,378.2

4.2

15,031.0

8.7

Other OSs

11417.4

3.8

10432.1

6.1

Total

296,646.6

100.0

172,376.1

100.0

Source: Gartner (February 2011)

Exhibit 4: Research in Motion Financial Highlights, 2009

(in thousands of U.S. dollars, except per share amounts)

U.S. GAAP

February 28, 2009

March 1, 2008

March 3, 2007

Statement of Operations data

Revenue……………………………………………

$11,065,186

$6,009,395

$3,037,103

Gross margin………………………………………

$5,097,298

$3,080,581

$1,657,802

Research & development and selling, general and administration………………………………………

2,180,399

1,241,310

774,095

Amortization……………………………………….

194,803

108,112

76,879

Investment income………………………………….

78,267

79,361

52,117

Income before taxes………………………………..

2,800,363

1,810,520

858,945

Provision for income taxes………………………….

907,747

516,653

227,373

Net income………………………………………….

$1,892,616

$1,293,867

$31,572

Earnings per share………………………………….

 Basic………………………………………..

$3.35

$2.31

$1.14

 Diluted………………………………………

$3.30

$2.26

$1.10

Operational data (percentage of revenue)

Gross margin……………………………………….

46.1%

51.3%

54.6%

Research and development………………………….

6.2%

6.0%

7.8%

Selling, marketing and administration……………..

13.5%

14.7%

17.7%

Balance Sheet data

Cash, cash equivalents, short-term investments and investments…………………………………………

$2,238,847

$2,343,996

$1,412,878

Total assets………………………………………….

$8,101,372

$5,511,187

$3,088,949

Shareholders' equity……………………………….

$5,874,128

$3,933,566

$2,483,500

Exhibit 5: Research in Motion Balance Sheet, 2009

(United States dollars, in thousands)

As at

February 28, 2009

March 1, 2008

Assets

Current

 Cash and cash equivalents

$835,546

$1,184,398

 Short-term investments

682,666

420,709

 Trade receivables

2,112,117

1,174,692

 Other receivables

157,728

74,689

 Inventory

682,400

396,267

 Other current assets

187,257

135,849

 Deferred income tax asset

183,872

90,750

4,841,586

3,477,354

Long-term investments

720,635

738,889

Capital assets

1,334,648

705,955

Intangible assets

1,066,527

469,988

Goodwill

137,572

114,455

Deferred income tax asset

404

4,546

$8,101,372

$5,511,187

Liabilities

Current

 Accounts payable

$448,339

$271,076

 Accrued liabilities

1,238,602

690,442

 Income taxes payable

361,460

476,328

 Deferred revenue

53,834

37,236

 Deferred income tax liability

13,116

-

 Current portion of long-term debt

-

349

2,115,351

1,474,431

Deferred income tax liability

87,917

65,058

Income taxes payable

23,976

30,873

Long-term debt

-

7,259

2,227,244

1,577,621

Shareholders' Equity

Capital stock

 Authorized – unlimited number of non-voting, cumulative, redeemable, retractable preferred shares; unlimited number of non-voting, redeemable, retractable Class A common shares and an unlimited number of voting common shares Issued – 566,218,819 voting common shares (March 1, 2008 – 562,652,461)

2,208,235

2,169,856

Retained earnings

3,545,710

1,653,094

Additional paid-in capital

119,726

80,333

Accumulated other comprehensive income

457

30,283

5,874,128

3,933,566

$8,101,372

$5,511,187

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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