BlackBerry: Too Reliant on Network Effects in the Face of Better Products
Network effects don’t defend against significantly better products (or: you still have to create value for the user).
BlackBerry was an early winner in the mobile phone business, providing a fast, secure, and multi-functional mobile phone with a built in operating system that was itself a platform for app developers. When a new mobile user switched to BlackBerry, they enhanced the value of Blackberry’s platform (direct network effects) by becoming an additional node on the network. BlackBerry’s chat app, BBM, worked only on the BlackBerry network and allowed users to chat easily with others on the same platform.
BlackBerry also enjoyed indirect network effects as a platform. Additional BlackBerry users served as an extra motivator for app developers to do the hard work of building a custom mobile application for BlackBerry’s mobile OS. This process was not a simple one, as BlackBerry’s parent company Research In Motion (RIM) did not spend much time building tools that made the platform particularly easy for developers to build for.
When the iPhone and Android platform were introduced to the market, BlackBerry was slow to respond, believing among other things that their network effects created high switching costs for the users. At the time RIM believed:
- Users preferred physical keyboards
- Users valued security and push email over other UI features
- That their customers were corporate buyers
Unfortunately for RIM, all three of those assumptions eventually proved to be false. The added value of the extra screen space in the phone, and its ability to convert itself into any kind of keyboard (international) — or vanish — turned out to be of greater value than the ability to type with a physical key press.
Users did value security and push notifications, but not more than style, speed, and apps. Apple and Android worked to make their platforms easily available to third party developers with advanced developer tools and lots of resources for learning to apply the code to the new platform. As a result, developers would choose to develop applications for iPhone or Android, but not for Blackberry, or at least not until later, despite the fact that at the time BlackBerry had a larger user base.
Finally, RIM misread their user base. As mobile phones became more affordable they became, increasingly, individual purchases instead of corporate purchases. Which meant that obscure and technological features like security and encryption did less to sway the purchaser than games and high quality graphics.
The story of BlackBerry’s decline is similar in many respects to the story of MySpace’s decline — both were entrenched businesses with network effects working in their favor. The weakness in both cases exploited by the new entrant was in providing a product that was significantly preferred by the end user.
Network effects businesses are ultimately made defensible by the users themselves, and if the cost of switching is sufficiently smaller than the increased quality of a new product, network effects businesses such as BlackBerry can find themselves in a negative reinforcing spiral: as users leave the platform, the platform becomes less valuable to the remaining users, and to the developers or other third parties that derive value from the breadth of the platform.
Once this cycle begins, it can accelerate quickly and be very hard to stop.
Thank you for your post, Jason. While I agree Apple and Android-based devices beat BlackBerry on the basis of their indirect network effects, I disagree that BlackBerry had strong network effects to begin with. On the direct side, although BlackBerry Messenger (BBM) only worked on BlackBerry devices and thus created a closed “network,” it is not clear that the network “effect” was meaningful. That is, people did not buy BlackBerry phones so that they could use BBM. On the indirect side, BlackBerry made minimal efforts in building a 3rd party developer ecosystem and people certainly didn’t buy BlackBerries for the small handful of 3rd party apps that existed. Instead, they bought BlackBerries because they were the most technically superior smartphones (until the iPhone) that were prized by corporations and consumers alike. The technical superiority was established with the best batteries (that lasted almost a week – amazing by today’s standards!), the best keyboard (at least until touchscreen devices were improved), the best email application, the best Internet interface, and the most secure communications architecture (via the Network Operations Center, which connected to mobile carrier and corporate networks). In short, BlackBerry sold a premium hardware product as opposed to a network or a platform.
The genius of Apple and Android, of course, was in creating a platform around what was previously just a hardware purchase. BlackBerry failed to do so. As the platform became an increasingly important purchase criterion for both individual and corporate smartphone buyers, BlackBerry’s competitive advantage eroded. Eventually BlackBerry lost even its technical superiority – for instance, the same Network Operations Center that was considered the most secure communications architecture in the mid-2000s is now considered an insecure single point of failure outside the control of its users (http://blogs.reuters.com/great-debate/2013/11/12/what-we-learned-from-the-blackberry-era/).
It is interesting to consider scenarios where things would have ended differently for BlackBerry. The first and most obvious scenario is if BlackBerry had encouraged 3rd party app development earlier on. If it had done so in the mid-2000s, perhaps it could have actually established indirect network effects and blocked out Apple from successfully entering the market.
The second scenario is if BlackBerry had produced phones with the Android OS earlier on. BlackBerry has clung to only producing phones with its proprietary OS. Now that it has already lost the battle, it is finally considering producing Android-based phones en masse (http://www.cnbc.com/2015/08/20/why-blackberry-could-ditch-its-own-os-for-android.html). Perhaps if BlackBerry had adopted the Android OS shortly after it had begun exhibiting network effects, BlackBerry could have evolved into a key hardware partner for Google and the key competitor to Apple, much as Samsung has become.
The third scenario is if the mobile internet had developed differently. At present, the supermajority of mobile activity is on mobile apps – rather than visiting Facebook.com on their mobile web browser, users just log in through the Facebook app. This is why app ecosystems are so critical to the value of smartphones. However, in an alternate universe, consumers could have done everything they do on smartphones via mobile browsers using HTML5 technology. At various points over the last several years, many smart technologists have argued that HTML5 websites should displace apps as the primary medium of mobile activity. Indeed, the debate still rages: http://www.itworld.com/article/2912880/mobile/has-the-native-vs-html5-mobile-debate-changed.html, https://www.mobilesmith.com/html5-vs-native-debate-is-over/. If HTML5 had developed more rapidly and consumers could indeed access games, entertainment, productivity applications, etc. through the mobile web as seamlessly as they can through mobile apps, perhaps Apple’s and Android’s app ecosystem wouldn’t be as important. In such a world, consumers would decide what phone to buy based purely on technical superiority, just as they did in the mid-2000s. Perhaps BlackBerry could have competed more effectively in this alternate universe.
Great points AP! A small side note on BBM. Although I agree that BBM was definitely not the feature that kept corporate clients coming back, it was definitely a key feature for the consumer market. BBM created strong communities that kept its members from switching to HTC or other smartphones because of the tremendous value of being able to contact friends and family through BBM. This was still happening at a time when texting was expensive, mobile internet connection was slow, and whatsup still didn’t exist. It was the easiest and most inexpensive way to communicate.
Maybe RIM’s best play would have been to open up BBM to any device in order to become the ubiquitous communication platform?
BlackBerry’s network effects did not defend RIM against Apple very well, but perhaps they could have if they had been stronger. As AP mentioned, if BlackBerry had capitalized on its leading market share by strengthening its indirect network effects (via stronger 3rd-party developer/app support) and locking in users with high switching costs (in the form of platform-specific apps), perhaps the market would look quite different today.
On HelloSof’s points, I do agree that BBM was a key feature for users. However, I don’t think that opening up BBM to all devices would have saved BlackBerry. BBM alone generated no revenue for RIM, and opening it to non-BlackBerry devices would have removed one of the only few switching costs that existed for BlackBerry users who wanted to defect to iPhones.