Why Microsoft Might Finally Acquire RIM

In the past, I have argued that a Microsoft acquisition of Research in Motion (RIM) was unlikely and unwise. Still, stuff happens in the space-time continuum — circumstances change, new dynamics come into play — that cause one to revisit earlier assumptions and to reconsider possible outcomes.

Such is the case for my thoughts about a union between Microsoft and RIM. I no longer view it as an unlikely scenario. Considering what has been happening in the industry, and in light of the daunting challenges Microsoft and RIM face in the mobile marketplace, a marriage of convenience, if not one of amorous intent, could be in the cards.

Let’s first consider Microsoft’s circumstances. The company has failed utterly and repeatedly in its bid to establish a dominant mobile platform. Its smartphone licensees are defecting in droves, running into the welcoming arms of Google’s Android proselytizers.

Microsoft’s share of the smartphone operating-system market is plummeting like sales of The Knack’s follow-up albums. Microsoft’s latest silver bullet in this market is called Windows Phone 7, but a technical preview of that software, now undergoing lab testing at wireless operators, suggests Microsoft hasn’t cracked the code. A consensus is building that Windows Phone 7 is several years too late and several hundred-hundred million dollars short of where it needs to be.

At the same time, Microsoft might be coming to the grim realization that it isn’t the consumer-electronics behemoth it sees when it looks into the Redmond funhouse mirror. Microsoft’s perception of itself, as a company that actually understands and intuitively anticipates the desires of consumers, has been unmasked as abject delusion.

Fortunately, Microsoft might be gradually coming around to reality, recognizing that it must play to its strengths, not to its weaknesses. Its strengths are in enterprise markets, from SMBs upward. That  has been increasingly obvious to many people, except to certain denizens of Microsoft’s boardroom and to a few habitues of its executive suites.

Regrettably, though, Microsoft’s mobile offerings for the enterprise, even in terms of integration with its own server-based products, are sorely lacking in nearly every respect. Microsoft has failed at mobile, and it has disregarded one of its key constituencies in the process.

Meanwhile, we have RIM. Despite not having quite the corporate breadth of, let’s say, Nokia, RIM has the benefit of market focus and an established enterprise franchise that won’t vanish overnight. RIM could remain independent and stay the course. It could retain a solid core of its enterprise customer base — especially in certain vertical markets that require the centralized control, compliance, security, and back-end integration that BlackBerry products and technologies provide — but it will see some market-share erosion at the hands of Google’s Android and even Apple’s iPhone.  If RIM had more resources at its disposal, it might be able mitigate that erosion, if not stop it.

RIM might not want to entertain a union with Microsoft — scuttlebutt suggests it has resisted Microsoft’s entreaties before — but it might be more amenable to considering a compelling proposal now. Watching what’s happening to Nokia — a death of a thousand cuts amid a river of piranha, after losing its strategic bearings in a predatory jungle — cannot be edifying viewing for the chieftains at RIM. At one time, Nokia had acquisitive interest in RIM, and now Nokia is fighting, apparently without success, to remain relevant.

To be sure, RIM would not accept just any Microsoft offer. Maybe now, though, it  would not slam the door on the right offer. What might that be, though, and would Microsoft be willing to entertain it?

With more than $37 billion (and counting) in cash reserves, Microsoft has the means at tis disposal to pull off a RIM purchase involving a combination of cash and stock. RIM now has a market capitalization of $29.58 billion. Microsoft would have to pay a premium of at least 30 percent, probably more, to complete a deal. A $40-billion offer, with the right inducements, might suffice.

Clearly, that’s a lot of coin. We’re not talking about a simple, low-cost tuck-in acquisition with a modest risk profile. This would be a big deal, larger than any acquisition Microsoft has done. Until now, Microsoft’s biggest deal involved aQuantive, an online-marketing concern it bought for more than $6 billion in 2007. If Microsoft were to buy RIM, it would involve a transaction orders of magnitude greater than its purchase of aQuantive.

Indeed, the acquisition of RIM would be a scary proposition for the potentates in Redmond. It would be an off-the-scale move, a sharp deviation from Microsoft’s past practices and strategic playbook. But, as the saying goes, desperate times call for desperate measures. Microsoft, I believe, is very desperate. It could immediately realize revenue and profitability from RIM’s product portfolio and business model, which are more lucrative by far than anything Microsoft could offer in the mobile realm. Synergies with complementary Microsoft products and services also ought to be taken into account.

Critics might scoff, perhaps justifiably, citing two factors that argue against a deal (aside from the prohibitive price tag, which we’ve already discussed). First, they would point to technology-integration issues, arguing that Microsoft would struggle to convert RIM’s BlackBerry platform to Windows.

My response: Who says that needs to happen? RIM already integrates well with Microsoft applications and back-end systems. and Microsoft has been rewriting its mobile operating systems, practically from scratch, recently. It’s starting all over again with Windows Phone 7, which is receiving mixed reviews.

What risk would Microsoft incur by replacing Windows Phone 7, which doesn’t have an installed base, with RIM’s BlackBerry OS? I don’t see powerful arguments against the move. The cost of the transaction is a bigger impediment.
But, one might argue, what about Microsoft’s hardware licensees? What would Microsoft do about them?

Perhaps you’ve noticed, but Microsoft is losing their formerly loyal patronage. HP has bought Palm, and will begin using webOS in its mobile devices, while HTC, Motorola, and scores of others increasingly are adopting Google’s Android as their smartphone operating system. I don’t see many smartphone vendors anxiously awaiting the release of Windows Phone 7. They’ve moved on, and Microsoft knows it. What’s more, Google is giving away Android to licensees, making it all the more difficult for Microsoft to sell its smartphone operating system to handset manufacturers. Google changed the business dynamics of the OS-licensing game.

More than at any time I can recall, Microsoft is considering the merits of an integrated platform, one that involves a tight fusing of device hardware, operating-system software, uniform user experience (including a sleek, universal browser), a focused developer program, and a unified means of delivering and monetizing applications and content.

I am not saying Microsoft will buy RIM. The price alone is enough to dissuade it from doing so, and there are valid concerns about corporate integration and assimilation, about being able to get everybody moving in the same direction, about precluding needless and distracting internecine warfare and turf battles. There are good reasons, in fact, not to do such a deal, only a few of which I’ve touched on here.

But there’s desperation in Redmond. It’s palpable. Microsoft views mobile success as absolutely integral to its continued growth and prosperity. But Microsoft is no longer confident of its golden touch, especially in mobile computing, and it is more inclined to look beyond its doors for answers. RIM already has the sort of business Microsoft would like to own, with the potential for further synergies stemming from integration with Microsoft’s enterprise product portfolio and its cloud-computing strategy.

Consequently, I must revise my earlier opinion. I can no longer dismiss the possibility of Microsoft acquiring RIM.

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4 responses to “Why Microsoft Might Finally Acquire RIM

  1. I can’t help but feel that if MS bought RIM, they’d be getting an OS that’s unimaginative and unexciting when compared to most of what else is available on the mobile market. The iPhone and Android phones are both such enjoyable user interfaces when compared to the Blackberry interface. The Berry look and feel is getting old and staid. My take, despite the desperation I agree Team Redmond very certainly ought to be feeling, is that MS doesn’t have a win by annexing the once and still mighty RIM. I believe that if RIM doesn’t get serious about building a better and faster user experience, they start losing market share, even in their traditional corporate stronghold.

    For MS to make it in the mobile market, they have to score with Windows Phone 7. I love W7 on my laptop, so I have a hope they can translate that user experience I enjoy so much to a handheld, without it seeming like they tried to cram an entire computer UI into a phone. Despite early mixed reviews, perhaps MS can execute clever marketing and broker some unbelievable deals with carriers to get market penetration.

  2. Thanks for the comment, Ethan.

    Like Microsoft, RIM is refreshing its smartphone operating system. Of the two vendors, in my view, RIM will do a better job with its renovation project.

    RIM doesn’t have to make the BlackBerry more elegant than Apple’s iPhone or turn it into the successor to Google’s Android as the object of affection for hipster geeks. What it must do is modernize its antiquated operating system and deliver a real mobile browser. If it does that, I believe it will hold most of its core business market. It might even claw back some ground from a fragmented Android. We will have to see. The jury, being the marketplace, can’t render a verdict until the evidence has been presented.

    As for Microsoft, I just think it’s completely lost in this market. It is lost, and it has neither a compass nor a GPS to get it back on track.

    Back in the day, when Microsoft was a feared and respected juggernaut, sage observers said that it always got things right by the time it delivered a third iteration of a product.

    That’s no longer true, though, is it? And it certainly isn’t true in mobile computing and smart phones, where Microsoft has repeatedly missed the target, usually by a wide margin. I don’t think Windows Phone 7 will buck the trend.

  3. I think it would be a disaster if Microsoft bought RIM. Considering how Microsoft handled the Danger acquisition, I would hope that at least some one in their “strategic initiatives” division would feel twice shy about buying another mobile phone maker.

    I agree with you though, that Microsoft just might be desperate enough to try to put it on the table, but it will not end well for either side.

    And I believe RIM’s Balsillie and Lazaridis would never go for such a deal, unless it leads to them taking partial control over Microsoft. Those two are quite ambitious, and they can feel Microsoft’s vulnerabilities in mobile land.

  4. Jonathan,

    You make good points on both counts.

    Microsoft has not done an acquisition this big, and its Danger debacle is duly noted. If Microsoft were to succeed in acquiring RIM, the saga might very well end in tears for all concerned.

    It’s also true that Balsillie and Lazaridis seem disinclined to sell their company. That certainly has been true in the past.

    Both men, however, have pursued other interests in recent years: Balsillie, his Balsillie School of International Affairs and his heretofore unsuccessful pursuit of an National Hockey League (NHL) franchise; and Lazaridis with the Perimeter Institute for Theoretical Physics and his passion for quantum computing.

    I think both can imagine a life after RIM. Even so, they’re probably not keen to sell the company.

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