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Kara Holm: Canada has learned the wrong lessons from BlackBerry’s demise

Commentary

Last year was bad one for “bad” founders. Samuel Bankman-Fried was convicted of fraud and WeWork, founded by Adam Neumann, declared bankruptcy. North of the 49th parallel, a film adaptation of the early days of Research in Motion (RIM) demonstrated that the rot in startup culture transcends time and national borders.

BlackBerry (2023), directed by Matt Johnson, is set in the late 1990s and early 2000s and recounts the rise and fall of RIM. It is now streaming as a three-part series on CBC Gem.The movie also reveals patterns of behaviour all-too-typical in some entrepreneurial founders that, while they may have helped propel innovation, are now coming to their full fruition 20 years later. Examples include the colossal business, moral, and legal failures of Adam Neumann’s WeWork, Samuel Bankman-Fried’s cryptocurrency exchange FTX, Elizabeth Holmes’s medical start-up Theranos, and Charlie Javice’s student loan company Frank.

On one hand, BlackBerry is one of Canada’s most well-known success stories. According to some reports, at its peak, the Waterloo Ontario-based RIM controlled 50 percent of the global mobile phone market—an astonishing achievement. But how was this accomplishment realized?

For those unfamiliar with RIM’s story, brilliant engineers and co-founders Mike Lazaridis and Doug Fregin are unable to sell their vision for an internet-connected phone that would enable users to send emails on the move. These “hackers” team up with a “hustler,” the investor and business savant Jim Balsillie, and together create the smartphone as a new market category. The engineers overcome technological hurdles to address the problem of data usage for the phone carrier, enabling hundreds of thousands of devices to operate without crashing the network, making the new style phone viable.

After achieving staggering sales results through complete domination of the smartphone category, RIM is blindsided by an Apple-driven shift in the phone carrier market with companies like Bell, Telus, and Verizon changing their focus from selling minutes towards the selling of data. In a dramatic scene, a phone company executive tells Balsillie: “You know what the problem with sellin’ minutes is? There’s only one minute in a minute.” This evolution of the carriers’ business model converted RIM’s early market advantage—low data stress on the networks—into a liability.  

BlackBerry portrays the engineers as idealists, committed to the design and integrity of the product. Balsillie is presented as a ruthless driver of growth at any cost. BlackBerry suggests that both these attributes were integral to RIM’s phenomenal success. At one point early in the story Balsillie says: “How long to build a prototype of the phone?… A prototype, a shell I can wave around in the meeting. It can be a complete piece of sh*t!”

In this telling of events, Balsillie is accessing the power of “fake it until you make it” to secure distribution for a product that had potential but was still largely conceptual. At the sales meeting, it takes both Balsillie’s vision and Lazaridis’s technical understanding of the phone carrier’s business to make the sale. 

Later in the story, Lazaridis is confronted by client demand for a product that looks like the new iPhone—i.e. a BlackBerry model that does not have the signature physical keyboard. On the spot he “invents” a new product, the ill-fated BlackBerry Storm. RIM then must move the production of the phone to China to meet the delivery deadline, resulting in an inferior product that does not meet the quality standards that made RIM famous. 

Early-stage founders are often selling an idea rather than a finished product. But as we see in the film, more established companies can also get caught in the “faking it until you make it” trap to remain relevant as new competitors emerge. In both cases, the consequences can be disastrous. 

At the time when BlackBerry’s dominance was threatened by the iPhone, combined with the shift in the carrier market’s revenue model, RIM also found itself in trouble with the U.S.-based Security and Exchange Commission and the Ontario Securities Commission for backdating stock options. The stock options were allegedly backdated to help RIM grow its workforce with generous compensation packages that would attract the top global talent to Waterloo. Did Balsillie think the end justified the means? He must have at the time. One has to wonder if in hindsight he felt it was worth it, as both the company and its senior executives subsequently faced charges. Ultimately the issue was settled by paying significant fines to the OSC and SEC, as well as providing restitution to the company. 

RIM never recovered, losing market share and value. Today, the company has 0 percent of the mobile phone market. Since the events described in BlackBerry, the company has been struggling to find its place in the market, pivoting to focus on security and moving away from hardware. The next chapter for BlackBerry will be decided by incoming CEO John Giamatteo, replacing John Chen who left in November 2023 after 10 years at the helm of the company.

BlackBerry shines a light on a longstanding problem with startup and business culture that pre-dates the cases of business failure making headlines today and transcends international borders. While the success of RIM helped to make Canada a global technology leader and strengthened Kitchener-Waterloo’s position as an innovation hub, it did not make Canada an easier place to start or build a business.

Specifically, my experience as a founder—and one shared by many, as borne out by conversations with other Canadian founders—is that finding early-stage funding presents enormous if not insuperable challenges.

As recent events have revealed, due diligence is critical for investors, but lack of access to capital is stifling innovation in Canada and making us less competitive. Canada does not offer the same culture of entrepreneurial support through private or public sources as other countries are committed to providing. Few companies now realize the level of success that RIM experienced in its heyday. Our support of new businesses matters: according to 2021 data from Statistics Canada, 64 percent of Canadians work for small businesses. BDC has reported that there are 100,000 fewer entrepreneurs today than there were 20 years ago.

Ultimately, the BlackBerry story has become ingrained in the Canadian business culture as a cautionary tale alongside other failures like that of Nortel. Perhaps Blackberry’s most significant legacy can be found in the Canadian tentativeness about supporting innovation and our reluctance to celebrate success. That’s a shame. Let’s work to change this and develop ways to help responsible innovators access funding, assuming a reasonable amount of risk and realistic expectations for reward.

I know it is complicated and many new approaches result in unintended consequences, but there are ideas worth considering. Here are a few off the top of my head. Offering a guaranteed living wage or income replacement to founders who are building a new business for a fixed time period; offering tax credits for founders who have failed given that the allowable business investment loss does not consider the “sweat equity” founders have contributed; finding ways to reduce the barriers to accessing early-stage capital, which often requires matching funds and does not value unpaid hours completed by the founder(s); or requiring our charter banks to put a little skin in the game with pre-revenue companies—all could help get more companies off the ground.

There’s no reason Canada can’t be a place where important, innovative things still get built. But that begins at the start-up level. There are a lot of Canadians with big ideas. We must empower them if we want to produce more success stories than cautionary tales. 

‘This policy shift is not economically sound’: Mikal Skuterud on the problems with Ottawa’s immigration increases

Commentary

As Canadian immigration policy and its economic effects receives new policy and political election, The Hub’s editor-at-large Sean Speer exchanged with University of Waterloo labour economist and leading immigration policy expert Mikal Skuterud about, among other things, the link between immigration and Canada’s disappointing GDP per capita growth.

SEAN SPEER: Do we have a sense how much the Trudeau government’s higher-than-historic immigration rates have influenced GDP growth? Is there a back of the envelope rule for the link between population growth and GDP growth?

MIKAL SKUTERUD: The historically high immigration levels Canada is experiencing in this post-COVID era are undoubtedly contributing to GDP growth. The biggest component of the increase are temporary foreign workers and international students whose labour market activity and tuition payments undoubtedly serve to boost the overall size of Canada’s economy. In the most recent quarterly data (2023 Q3) Canada’s GDP is growing at an annual rate (year-over-year) of 1 percent while the population is growing at 3 percent. How much slower GDP would be growing if the population were growing at the pre-Trudeau norm of 1 percent per year is impossible to know with any certainty. The effects of immigration on the economy are highly complex because newcomers are both consumers and producers affecting many sectors of the economy. Recessions are usually defined as two consecutive quarters of negative GDP growth. Whether exceptionally high immigration is keeping Canada out of a recession is impossible to know, but it is a possibility.

SEAN SPEER: Do we have a sense of how much population growth has contributed to falling GDP per capita? If so, should we care if it is a major factor?

MIKAL SKUTERUD: Since we don’t know how higher-than-usual population growth is contributing to GDP growth, there’s no way to know with certainty if and how much high immigration rates are the cause of falling of GDP per capita. Nonetheless, it is worth considering what current GDP growth would be under the “null hypothesis” that heightened immigration is having no effect on GDP per capita growth, either positive or negative. To do this, first note that the growth rate in GDP per capita is roughly the difference in the growth rates of GDP and the population. In the most recent data, GDP is growing at 1 percent and the population at 3 percent, so GDP per capita is falling at an annual rate of 2 percent.

If Canada had maintained its permanent and temporary immigration inflows at their 2000-2015 norms, its population would be growing at roughly 1 percent instead of 3 percent. With a population growth rate of 1 percent, GDP would have to be falling at an annual rate of 3 percent for GDP per capita to be falling at the rate of 2 percent that it is actually falling at in the most recent data. Do we believe that Canada’s GDP would be falling at a rate of 3 percent if it had maintained its immigration rates at the historical norm? The last time Canada’s economy contracted at a rate of 3 percent annually (before COVID) was in the depths of the 2008-2009 financial crisis, and before that in the depths of Canada’s exceptional recession in the early 1990s. Although these types of “counterfactual” questions are impossible to answer with certainty, I’m not seeing any economic developments inside or outside Canada that make me believe Canada would be sinking into a deep economic recession currently but for its exceptional population growth. To the contrary, the U.S. appears, if anything, in the midst of an exceptional economic boom. This suggests that heightened immigration is, at least in part, responsible for Canada’s declining per capita GDP.

There’s, of course, also good economic reason to believe that heightened immigration is contributing to falling GDP per capita. A first-order determinant of GDP per capita in any economy is average capital per worker. Capital is what allows workers to be productive, and includes everything from machinery and equipment, to factories, to highways and public transportation systems, to schools, hospitals, and housing. When the population grows at a faster rate than the capital stock, as we’re seeing now, there is less capital per worker which lowers labour productivity and average economic living standards. Second, the post-COVID era has seen the Trudeau government shift immigration policy from a longstanding prioritization of candidates with high levels of human capital and, in turn, high expected Canadian labour market earnings, to plugging holes in lower-skilled labour markets where the growth in job vacancies has been overwhelmingly concentrated. If the policy objective of immigration is to leverage immigrants to boost growth rates in GDP per capita, this policy shift is not economically sound.

SEAN SPEER: Is there a trade-off between higher GDP per capita and egalitarian concerns about distribution?

MIKAL SKUTERUD: The hypothesized relationship between GDP per capita and inequality is the known as the “Kuznets Curve.” The curve hypotheses an inverse U-shaped relationship in which countries who are in the early stages of economic development tend to see increasing levels of economic inequality up to some maximum, beyond which further advances in development tend to reduce economic inequality. It seems entirely reasonable to believe that Canada is on the downward sloping part of the Kuznets Curve where further gains in average living standards tend to benefit the most disadvantaged in society. The success of the Canada Child Benefit in reducing child poverty rates is a noteworthy example pushing us along the downward sloping part of the Kuznets Curve.

GDP per capita can be thought of as the size of the average slice of the national economic pie. When the size of the average slice is growing over time, citizens are more willing to support bigger slices for those with the smallest slices because doing so doesn’t require anyone to have less. But in an economy where the size of the average slice is decreasing, support for progressive policies can quickly turn as citizens become more focused on maintaining what they already have. In the words of a song from my youth: “the grabbing hands grab all they can.” More troubling, if heightened immigration is seen as contributing to falling GDP per capita, Canada’s historical and exceptional public support for high immigration rates risks being undermined. This, in my view, is the ultimate risk of Canada’s current immigration policy experiment.

SEAN SPEER: What if any consequences are there for a growing GDP per capita gap with the U.S.?

MIKAL SKUTERUD: As noted earlier, a key mechanism through which immigration has the potential to boost GDP per capita is through its potential to increase the average human capital of the population by attracting and retaining top international talent. One obvious risk of a growing GDP per capita gap with the U.S. is that it exacerbates Canada’s ability to attract and retain skilled workers, and not only immigrants, but also Canadian-born workers who might increasingly look to the U.S. to realize their career and economic ambitions. This is one mechanism through which declining per capita GDP can be self-perpetuating.