RIM braces for 'the big reset'

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It was still Frosty Friday, with free frozen treats for hundreds of employees at Research In Motion Ltd.'s campus of squat, concrete buildings in Waterloo, Ont., despite financial results that sent shares of the former high-tech darling plunging.

"I guess we can still afford ice cream, eh?" one older employee said as he strolled by two young workers heading towards a trolley with an umbrella of RIM blue-and-white in the company's parking lot.

For the young interns eating their chocolate-dipped ice cream, the taste was bitter-sweet. Like thousands of young programmers and computer engineers in Canada, they've been dreaming of landing a full-time job at RIM, the creator of the BlackBerry and the gold standard for technology in Canada.

But now, "I assume there will be nothing," one of the young engineers said about the prospects for full-time employment, as the other nodded. They had found out, via Facebook, that the company is planning layoffs.

Long the economic engine of the Waterloo region - and of Canada's tech sector - RIM is suddenly flagging badly in the smart phone wars, losing ground to rivals Apple Inc. and a slew of devices running Google Inc.'s Android operating system. That reality was brutally clear in Thursday's announcement that the company's revenue projections are plummeting, profits are under serious pressure, and jobs losses are on the way.

RIM's long run as a favourite among investors and financial analysts is ending with a thud, as well, as the stock plunged 21 per cent on Friday to close at $27.24. Phillip Huang at UBS Securities dubbed RIM's next phase as "the big reset" as it attempts to recapture is former stature.

The tense atmosphere around RIM headquarters is part of a broader tableau of fear and frustration, as the potential impact of RIM's decline is dissected in boardrooms and cafeterias across Canada.

"We are so critically dependent on them," said Thomas Keenan, a University of Calgary professor with a high-tech focus. "You kind of need a cheerleader, you need somebody that you can rely on [to help foster other entrepreneurs] It's like you can't have an ecosystem without some big fish."

For the young engineers whose careers depend on that ecosystem, the prospect of lucrative post-graduation employment at RIM is suddenly precarious. One employee said the firm was being understandably more cautious with hiring and scrutinizing new hires more carefully, as RIM weathers a brutal transition.

Many employees find it fascinating to see the public obsession with RIM's troubles. They see the characterization of a Canadian technology company locked in a losing battle with rivals such as Apple and Google as unfair, since those titans simply have more marketing power and sway over popular opinion. RIM is continuing to innovate, employees say, and working hard through a transition period as new products are slated to be launched.

"Everyone's got enough work to do that they're keeping busy. We're just soldiering on," one employee said. "But there is an air of uncertainty."

That uncertainty is being fed by the increasingly negative views from the analyst community. Friday, Kris Thompson at National Bank Financial lowered his target price to $25 (U.S.).

"We believe the smart phone sector is moving into a new paradigm of lower margin pricing as Android handsets attack the high-, mid- and low-end market segments," he wrote in a note to clients. "We do not expect [RIM's]gross margins to rebound."

Mr. Thompson believes that Google's Android operating system is the bigger threat. While Apple sent RIM's margins down about 5 per cent when it introduced the iPhone, Android's presence in the mobile market has sent RIM's market share down to between 35 and 40 per cent, from above 50 per cent three years ago. "We'd avoid this stock until there is some evidence that a sustainable turnaround is achievable," he noted.

Jarislowsky Fraser Ltd., RIM's sixth-largest shareholder, has sold half of its position. Stephen Jarislowsky, the company's chairman, said there is just too much competition in the mobile market now. Because of that, smart phones have become a commodity, and he said it is hard for anyone to be a market leader with that type of product.

In the RIM parking lot, there is acknowledgment that RIM has had a couple of stumbles, that the two co-CEOs in charge of the company, though brilliant, have not exactly portrayed a unified image of a sleek, innovative company to the public. And the company has also failed to bring much new technology to market in the past year - with the exception of the Torch touch-screen phone, which has been a success, and the PlayBook. But the tablet device launched full of glitches and has largely been considered a disappointment.

For employees, it's too early to tell where the axe may fall. "We're still unsure," said one RIM engineer.

But anxiety over RIM's future ripples through the entire Kitchener-Waterloo area, which has blossomed into a technology hub, and organizations have benefited not only from close contact with RIM, but from the company's generous donations.

No one in the thriving tech ecosystem around the region thinks the company is about to shrivel up and quit. Indeed, there may actually be some short-term benefit from RIM layoffs. There are about 2,000 unfilled tech jobs for developers and programmers in the region.

"We're hiring another 100 developers, so if they slow down their hiring a little, we're happy, to some degree," says John Baker, president and CEO of Desire2Learn Inc., an e-learning company based out of an old industrial loft space in the area. "But there's a lot of concern, for sure, in terms of their health as an organization."

Brian Hurley also faces an internal conflict in his judgments on the RIM slowdown, Mr. Hurley's Ottawa company, Purple Forge, develops smart-phone applications for third-party users. He has seen demand plummet for applications based on the BlackBerry smart phone, compared with those for the Apple iPhone and Google's Android. In fact, the loss of the RIM platform would simplify his life.

Yet as a Canadian, he knows it would be terrible for the country. RIM, he says, is "the headwater" for a lot of Canadian innovation and company start-ups. Canada needs its large tech companies, and RIM is one of the last bastions.

With reports from Paul Waldie