Contrite BlackBerry co-CEOs go into damage-control

TORONTO Thu Oct 13, 2011 4:23pm EDT

Blackberry smartphones are pictured in this illustration photo taken in Berlin, October 13, 2011.  REUTERS/Michael Dalder

Blackberry smartphones are pictured in this illustration photo taken in Berlin, October 13, 2011.

Credit: Reuters/Michael Dalder

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TORONTO (Reuters) - Research In Motion's co-CEOs have apologized to millions of BlackBerry customers for a four-day outage that has tarnished RIM's image and set back its drive to catch up with Apple and other smartphone rivals.

The system-wide failure, which began on Monday, left tens of millions of frustrated BlackBerry users on five continents without email, instant messaging and browsing.

The executives - Mike Lazaridis and Jim Balsillie - made an unusual joint appearance at a news conference on Thursday in an apparent attempt to contain the fallout from a crisis that came at a particularly inopportune time for the company.

RIM, whose share price has tumbled this year, is already reeling after a series of profit warnings and product missteps.

The service disruption could cost the BlackBerry maker millions of dollars in compensation to customers who lost service. Experts say it could also damage the BlackBerry's reputation for reliability, one of its chief selling points.

"We still believe that most of RIM's value is in the network and messaging business and this could crimp that value," Wedbush analyst Scott Sutherland said.

"I want to apologize to all the BlackBerry customers we've let down," Lazaridis said in opening the conference call. "Our inability to quickly fix this has been frustrating."

The Canadian-based company said it had fixed the root cause of a global disruption in BlackBerry services and was working to clear a huge backlog caused by the outage.

Though there was no independent confirmation of RIM's claims, BlackBerry users around the world said on Thursday afternoon that service appeared to be returning to normal.

The outage - and RIM's sluggish communications with its customers - have fanned rising dissatisfaction with Lazaridis and Balsillie.

Even before the latest outage, critics were seeking a shake-up at RIM, saying the top managers have let the company fall too far behind Apple and other rivals in a rapidly changing market.

The session was only the second call that RIM has held since the crisis began on Monday, and it was the first in which the chief executives fielded questions from the media.

Public relations specialists have wondered why it took the company so long, saying its response to the crisis has been slow and poorly communicated.

"I think a statement of empathy that wouldn't cost anybody anything could have been made within hours," said Allan Bonner, a leading public relations crisis management consultant in Toronto.

"They're doing crisis response the way they're designing their software these days -- it's outdated, slow and not being well-received by their customers," said Gene Grabowski, senior vice president at Levick Strategic Communications.

The company did not say for certain whether it would compensate customers. When Balsillie was asked about it, he said: "That is something we are now turning our attention to and that is something that we plan to come back to these customers on very, very soon."

Spain's Telefonica and other network providers have already said they would compensate customers over the lost service, and analysts expects operators to seek to recoup those losses from RIM.

If RIM were to pay back all affected carriers and customers it could knock between 3 and 5 cents off earnings per share in the quarter ending in late November, according to BMO Capital Markets analyst Tim Long. That would amount to a reduction in profit of between $15 million and $26 million.

ONE MORE OBSTACLE

The outage puts one more obstacle in the path of the Canadian smartphone maker as it looks to reverse a festering loss of market share in the United States that many analysts fear will spread to RIM's growth markets overseas.

RIM released a batch of updated touchscreen phones in August as a holding measure until a major launch next year of a line of BlackBerry smartphones operated by the software that now powers its PlayBook tablet.

The transition is considered crucial to its turnaround efforts and its best hope of catching up with Apple's iPhone and devices powered by Google's Android.

On Thursday, the shares had slipped 1.1 percent to $23.60 by mid-afternoon on the Nasdaq. The stock has lost two-thirds of its value since a peak near $70 in February.

MALFUNCTION

The service disruption both highlights the special features offered by BlackBerry in terms of security and at the same time shows it is vulnerable to massive failures.

RIM is unique among handset makers, as it compresses and encrypts data in its own system before pushing it to BlackBerry devices via carrier networks. Apple and others rely on carrier networks to handle all routing and delivery of content.

RIM said it had determined that the outage - the most extensive in the company's history - was caused by a malfunctioning switch at a data center in Slough, England, and the subsequent failure of a backup to operate properly.

That triggered a massive reservoir of data that jammed up other data centers, spreading the disruption to most regions.

Lazaridis said it would take some time to pinpoint why the switch and back-up both failed, setting off the crisis.

Michael Howard, a principal analyst with Infonetics, a networking equipment market research firm, said the outage indicates RIM needs to expand the capacity of its network.

"Anybody who knows how to build backup builds resilient data centers and resilient networks," he said. "I'm sure they are going to change the way they store and change their data."

Still, RIM is hoping consumers hooked on its proprietary instant messaging system and executives who rely on its secure email service forget the latest hiccup.

Marie, a 28-year old Canadian BlackBerry user who did not want to give her surname, said RIM's problems were of little concern as she eyed the various BlackBerry handsets on display at the Gitex Shopper in Dubai, which claims to be the Middle East's largest electronics fair.

"They can get it fixed - everything that has technology has its flaws - it's not the end of the world," she said.

(Additional reporting by Euan Rocha and Pav Jordan in Toronto, Jim Finkle in Boston, Peter Griffiths in Slough, England, and Georgina Prodhan in London, Tarmo Virki in Helsinki and Matthew Smith in Dubai; writing by Frank McGurty)

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