BlackBerry's quest: Fend off the iPhone

That is where, 70 miles west of Toronto in Ontario, 19 nondescript, low-rise office buildings comprise the headquarters of Research In Motion, maker of the BlackBerry.

RIM is the North American leader in building smartphones, those versatile handsets that operate more like computers than phones. But RIM may have trouble dominating the market's next phase. Once the exclusive domain of e-mail-obsessed professionals, smartphones are now prized by consumers who want easy access to the Web, digital music, and video even more than an omnipresent connection to their in-boxes.

Since the iPhone went on sale last summer, amid long lines of shoppers and media adulation, the contours of the smartphone market have begun to shift rapidly toward consumers. An industry once characterized by brain-numbing acronyms and droning discussions about enterprise security is now defined by buzz around handset design, video games, and mobile social networks.

That means RIM, which has historically viewed big corporations and wireless carriers as its bedrock customers, needs to alter its DNA in a hurry. While business is booming in Waterloo, analysts are raising an important question about RIM's future: can a company that defined mobile e-mail for a generation of thumb-jockeys with bad posture also dominate the new consumer market for smartphones?

"The vultures are circling," says Roger Kay, president of Endpoint Technologies Associates, a research firm in Wayland, Mass. "There is this sense that the RIM franchise is under assault."

In the short term, Apple's noisy entrance into the smartphone market has elevated the visibility of smartphones and enhanced the prospects of most of its rivals. Worldwide, smartphone shipments jumped 60 percent in the last three months of 2007 over the same period the previous year, according to IDC, the tracking firm. Of the two billion cell phones sold last year, nearly 125 million were smartphones--a share that analysts expect to inexorably grow.

RIM added 6.5 million subscribers in its last fiscal year, twice the previous year's amount, and its stock hit the stratosphere, more than doubling in value as investors anticipated the coming Age of the Smartphone. And RIM has already introduced catchy mainstream gadgetry. The BlackBerry Pearl and Curve, two phones aimed explicitly at the consumer market, have sold well, particularly during the holiday season, and now account for a majority of RIM's device sales.

But there are also signs that RIM faces steeper challenges. At the end of last year, BlackBerry had a 40 percent share of the United States smartphone market, down from 45 percent at the end of 2006, thanks largely to the 17.4 percent share the iPhone grabbed in its first six months.

In March, Jobs announced that Apple would take the rare step of licensing Microsoft's corporate e-mail technology, to allow iPhones to connect directly to business computers--a dagger aimed at the heart of RIM's strength in the corporate market. In Apple's quarterly conference call last week, Apple executives said that one-third of Fortune 500 companies were interested in giving iPhones to their employees.

Apple, meanwhile, in an effort to further increase its appeal to consumers, is also expected to introduce a new 3G version of the iPhone in June, which will work on speedier wireless networks and may further attract a new segment of customers to the iPhone in the United States and abroad.

In describing the threat that Apple poses to RIM, Charlie Wolf, an analyst at Needham & Company, describes his wife's entirely common use of the iPhone, which she takes to bed with her each night to browse the Web.

"Some consumers who might have considered the BlackBerry, who don't have the e-mail urgency of a mobile professional, are going to start selecting the iPhone," Wolf says. "This isn't going to stop RIM, but it is going to slow them down."

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