Apathetic Anchor Fails to Weigh Down Waterloo
Updated: Jan 24, 2022
BlackBerry's indifference allowed tech sector to thrive
Apathy is not a word uttered positively in Waterloo tech circles. With its connotations of passivity, laziness, and willful lethargy, "apathy" directly conflicts with the start-up ethos of energy, innovation, and, most of all, passion. And yet apathy, as demonstrated by Research In Motion during its meteoric rise, could be one of the key reasons why the Waterloo tech sector is firing on all cylinders in 2021, according to a recent study from the Munk School of Global Affairs and Public Policy at the University of Toronto.
Because RIM, now known as BlackBerry, built much of its technology in-house or relied on suppliers and partners from other parts of Canada and the world, the local tech sector largely weathered the storm when the smartphone king began its nosedive in 2011 and 2012.
"RIM's apathy led local technology firms and associations to forge their own path, positioning them to absorb displaced labour and deliver relevant programming when the anchor imploded," noted the paper, authored by Darius Ornston, a professor at the Munk School, and labour market researcher Lorena Camargo. Entitled The Benefits of an Apathetic Anchor: Why Waterloo Adjusted Faster Than Ottawa, the study examines the impact on the host regions of the two largest high-tech implosions of the past 20 years in Canada.
The story of Waterloo’s resilience in the face of BlackBerry’s collapse stands in sharp contrast to the narrative in Ottawa, where the tech cluster suffered a crippling blow after the decline of its anchor tenant Nortel in the early 2000s. Unlike RIM whose supremacy spanned less than ten years, Nortel was an active player on the Ottawa tech scene for decades. It launched spinoffs, supported startups, built social networks and shaped investment in the community, says Ornston, who has written two books on Nordic innovation and several studies comparing tech clusters in Canada.
A Northern Star Shines in Ottawa
When it was thriving, Nortel pulled Ottawa up by the bootstraps, but how did the company become such a force in the first place?
The story begins in 1895 when Bell Canada spun off its mechanical division in Montreal and called it Northern Electric. Over the years the company cranked out hardware to keep the Bell Canada system running, along with a range of other electrical devices, including radios, phonographs and film projectors. Much of its mechanical expertise and product design came from the Western Electric Company, the manufacturing arm of AT&T in the U.S., which owned 40 per cent of Northern Electric. The system worked well until 1956 when, feeling pressure from the U.S. government to break up the monopolistic phone system, Western Electric sold its stake in Northern Electric to Bell Canada. The sale turned out to be a blessing in disguise. Cut adrift from its main source of R&D, Northern Electric was forced to develop its own expertise in phone equipment. It started by opening a research lab in Ottawa in 1962 to tap into resources provided by the federal government through the National Research Council and the Defence Research Board, notes Camargo, who did much of the work on the Ottawa tech sector while Ornston researched Waterloo.
Growth was slow at first as Northern Electric focused on breaking into rural US markets not covered by AT&T and selling equipment to independent carriers. Early on it decided to concentrate on digital as opposed to analog phone switches. It was a brilliant move. Its main competitor, AT&T, was too busy winning Nobel Prizes through its groundbreaking research division Bell Labs to make much progress on the digital front. The strategy came to fruition in 1975 when Northern unveiled the SL-1, the first truly computerized switching device. It was the BlackBerry of its time, the company's killer app, which could handle thousands of lines running through private branch exchanges (PBXs) in company offices. In 1979 this technology reached its apogee with the DMS-100, which could support up to 100,000 lines, handling both local and long distance calls.
The DMS and other digital switches in its pipeline “made Nortel a major player in telecom switching, not only in North America but around the world,” Douglas Hunter writes in his 2002 book on Nortel’s rise and fall, The Bubble and the Bear: How Nortel Burst the Canadian Dream. Renamed Northern Telecom in 1976 and then Nortel in the late 1990s, the company moved its head office to Brampton but kept its research division in Ottawa. The Ottawa workforce would eventually grow to 15,000, about 20 per cent of Nortel’s global workforce.
From the outset Nortel was a tech sector locavore forging partnerships with Ottawa subcontractors. The biggest was Microsystems International Ltd., a semiconductor manufacturing facility established by Nortel in 1969. Microsystems didn’t last long but more than 20 Ottawa-based startups emerged from its ashes, including Calian and MOSAID Technologies. The most notable phoenix was Mitel which focused on business telephone equipment. Terry Matthews, who co-founded the company with Michael Cowpland, was eventually forced out of Mitel, but would go on to nurture a whopping 90 startups through his data and voice company Newbridge Networks. In 2008 prominent tech entrepreneur Denzil Doyle determined that a stunning 450 companies could claim Nortel as the major catalyst in their origin stories, Camargo notes. Not only that, Nortel “nurtured a deep bench of experienced and engaged serial entrepreneurs” including Cowpland, Matthews, Antoine Paquin, whose firm made semiconductors, and Jozef Straus, founder of JDS Uniphase, which supplied fibre optic equipment to Nortel.
But Nortel did more than just stimulate the Capital Region's startup activity. In the early 1980s, it played a significant role in the launch of the Canadian Microelectronics Corp., which trained students in the design of integrated chips, and the Ottawa-Carleton Research Institute (OCRI), a public-private organization designed to promote research and represent the tech community as a whole. In essence, OCRI was the Communitech of Ottawa. Nortel contributed financially to its operations and backed its lobbying efforts. The telecom giant’s accomplishments also lured more investors to the region. Ottawa led the country in high-tech venture-capital investment in the 1990s. Bolstering this wave was a pool of more than 100 angel investors, including a group of retired Nortel employees called the “Purple Angels,” formed in 2001 to invest in local startups.
By 2000, Nortel's workforce had risen to 97,000. Two years later it plummeted to 37,000. In Ottawa, its payroll shrank from 15,000 to 5,000. In 2009 Nortel filed for bankruptcy. How did it happen? How could a once-dominant telecom powerhouse like Nortel implode so quickly and so spectacularly? It's a complicated story but if it can be boiled down to its essence, Nortel bet on the wrong technology to carry data on the emerging internet, then went too far into debt to catch up.
With its background as a telecom company specializing in voice communications, Nortel went all in on technology that would deliver voice and data together over the internet. It was called ATM, a hybrid form of packet and circuit switching that broke up information into packets and sent them along a single, dedicated line. The main competitor was TCP/IP, which relied entirely on packet-switching. Data was broken up into packets and sent over a bunch of lines before being reassembled at its destination. ATM delivered better quality in voice and video but was slower than TCP/IP.
In The Bubble and the Bear, Hunter likened the difference between the two technologies to railways competing with the automobile. The ATM train worked well as long as the line was clear, but if there were too many trains—gridlock. Also, prior to widespread adoption of the internet, TCP/IP was
already entrenched in local computer networks linking corporations and institutions. Similarly, Nortel’s adoption of fiber-optics as its conduit-of-choice was ill-conceived for its time. Although glass was faster, copper wire was still adequate, and most telecoms saw no reason to switch.
By the late 1990s Nortel realized that the future lay in TCP/IP and scrambled to catch up, triggering a series of unfortunate financial decisions. The company spent billions acquiring firms specializing in TCP/IP technology and built fiber-optic networks to carry the data. It financed these acquisitions primarily by issuing company shares and hid the expenditures from investors and analysts using an accounting category known as “income from operations,” which excluded acquisition costs. Even though it was losing money every quarter, Nortel created an illusion of profitability and its stock prices soaring commensurately.
The company got lured into a race for global supremacy in the internet equipment market with American rivals Cisco and Lucent. Unlike Cisco, Nortel relied on too many large customers and ignored signs of an industry slowdown. When the internet gear market collapsed in 2001 on the heals of the dot-com crash, large orders were cancelled and Nortel's revenues plummeted along with its inflated stock price. Hunter likened it to the Titanic approaching the iceberg. Nortel CEO John Roth was lowering his own lifeboat just as the vessel hit the floe leaving his successor Frank Dunn to rearrange the deck chairs.
Dunn then executed one of the largest and fastest downsizings in Canadian corporate history. Just when it appeared the company had turned the corner and returned to profitability, Dunn and two other top executives were sacked in 2004 amid allegations of financial malfeasance. In his 2013 book, 100 Days: The Rush to Judgment That Killed Nortel, Ottawa Citizen reporter James Bagnall argues that Nortel might still be around today if that skilled and vital troika had not been dismissed at such a crucial time in the company's history.
Blame for the firings must fall to the Nortel board of directors led by Red Wilson, former CEO of Bell Canada Enterprises, and John Cleghorn, who once led the Royal Bank of Canada. Scandal and fraud were running rampant on Wall Street with the fall of Enron and WorldCom, and Nortel shareholders were looking for blood after the deceptive way that Nortel had run its books.
Swayed by these issues, the Nortel board hired a Washington DC law firm to look into the fraud allegations. The firm concluded erroneously that Dunn and his two colleagues had manipulated earnings to trigger bonuses for themselves and other executives. The downsizing had been done so quickly that paperwork had gone missing for nearly a billion dollars in liabilities. The paperwork was eventually found and the company restated its earnings, but Dunn and crew had done nothing wrong and were cleared of criminal charges in 2013.
The dismissal of these key leaders in 2004 sent Nortel into a tailspin, writes Bagnall. High-profile CEOs were brought in from outside the company with their own teams. They fired senior managers, depriving the company of key talent. The ongoing accounting probe was a huge distraction, causing Nortel to lose ground to rivals. Worse, the stigma of financial mismanagement undermined Nortel's efforts to gain $1 billion in critical aid from the Harper government during the credit crisis of 2008. Without it, the company was forced into bankruptcy and broken up.
Nortel fall staggers Ottawa
"Deeply disruptive" is how Camargo describes the impact of Nortel's demise on Ottawa's tech sector. JDS Uniphase was hammered almost as hard as Nortel by the telecom crash. Its workforce fell from 10,000 to 580 and its head office was moved to California. Newbridge Networks laid off 800 workers and was sold to Alcatel in 2000. Census data shows that the total employment in the sector dropped from 72,000 in 2001 to 56,000 in 2016.
OCRI itself was devastated by the Nortel collapse. Not only did it lose one of its most influential voices in the telecom giant, revenues plummeted from $9 million to $2 million. The organization fell into disarray, and a mayoral candidate in 2010 campaigned against it. Worse, it was dismissed as an organization that ran golf tournaments for lawyers by Tobias Lutke, founder of the rising e-commerce startup, Shopify. In 2013, it was renamed Invest Ottawa and given a broader mandate but its plan for an innovation hub failed to attract municipal support and instead was copied and launched by Communitech, the association representing tech firms in Waterloo, according to Camargo.
On the positive side, startup activity actually increased during the initial years of the Nortel collapse, but most were small software firms that didn’t get much support from OCRI. Between 2005-2010 Ottawa tech experienced its most significant, albeit modest, recovery—not surprisingly in the telecom sector. In those years six firms went public, five specializing in telecom equipment.
2010 saw another mood swing as the sector started to shift from telecom into the software space with firms focusing on the internet of things. Outside investment played a role, with competitors acquiring pieces of Nortel during the bankruptcy phase. Even RIM got involved, acquiring QNX Software for its expertise in automotive and military applications.
The greatest catalyst for growth was e-commerce standout Shopify, now Canada’s biggest company by market valuation. It led the creation of a new cluster of software firms in the Ottawa core instead of the western suburb of Kanata where Nortel and other tech firms were based. Shopify even tried to fill the void left by OCRI, spearheading the launch of associations focusing on software investment, social media and entrepreneurship. Shopify, to a large extent, has replaced Nortel as an anchor, but the recovery of the sector as a whole has been “gradual and incomplete,” Camargo concludes.
Innovation & Isolation on BlackBerry Island
Compared with Nortel, which was strongly involved in the Ottawa tech sector, Waterloo’s RIM was an island unto itself; it was in KW but not of KW. Although the smartphone maker and wireless company invested in Waterloo during the company’s heyday, its contributions were largely philanthropic and educational.
Co-CEOs Mike Lazaridis and Jim Balsillie and co-founder Doug Fregin donated millions to create physics and governance think tanks, and the company’s first chief of software Michael Barnstijn and his wife Louise MacCallum, another RIM employee, showered $30 million on a local museum, community foundation and nature preserve. Laudable projects certainly, but they did nothing to forge business connections between RIM and other Waterloo tech firms. BlackBerry staff "weren't joiners," a former employee stated of the company's early days. They were too focused on world domination in the smartphone race.
The company was one of the founders of Communitech in the 1990s and was its largest financial contributor, yet RIM never played a meaningful role in the association’s agenda, Ornston noted. And while the company was a big supporter of the University of Waterloo’s co-op program, hiring many of its students, it did not collaborate much on research. Profs were “just as likely to encourage grads to start their own companies as they were to recommend working for RIM,” Ornston says. Nor did RIM help much with entrepreneurship at UW. During the 2000s, the university launched three incubators on campus—the Conrad Centre, the Accelerator Centre and Velocity—without any apparent help from RIM. The company was more likely to stage hackathons in Georgia or New York City than Waterloo, an industry representative told Ornston.
BlackBerry operated largely as a self-sufficient entity, building much of its hardware and software behind its own walls. Thus, it had few local suppliers. When it expanded into new markets, RIM tended to operate the same way, opening or contracting out manufacturing facilities in other parts of Canada or the world. Its five largest suppliers in 2009 weren’t even Canadian, notes Ornston.
BlackBerry didn't spin off many companies in Waterloo Region and few employees left in the early days to start their own firms. When they did, RIM reacted in a hostile manner. An example was Ted Livingston who worked at RIM as a co-op student, then left to start the popular instant-messaging app, Kik, in 2009. RIM reacted by suing Livingston for patent infringement. The case was eventually settled out of court.
Nor did it purchase local firms. Of the 30 companies acquired by RIM from 2001-15, only three—Tiny Hippos, Slipstream and Certicom—had close connections to Waterloo. Indeed, RIM was so aloof in Waterloo that a local politician—unnamed in the Munk study—compared it to how the Vatican city state operates independently of Rome.
RIM’s detachment allowed the Waterloo tech sector to blossom and mature on its own. Indeed, the sector was already well established before RIM rocketed to prominence in the late 1990s. After its launch in the late 1950s, UW developed into a world leader in computer science and engineering. Faculty and graduates went on to start companies such as Watcom, Waterloo Maple, Open Text, Dalsa and Descartes.
Communitech also thrived without the help of RIM, developing a full suite of services to help tech startups from a renovated factory in downtown Kitchener. RIM’s greatest contribution to the Waterloo tech sector was emotional and psychological. The BlackBerry-maker’s worldwide success attracted students and young entrepreneurs to Waterloo, and local politicians and business leaders basked in the company’s glow. It created a halo effect over Waterloo and put the community on the global technology map.
RIM’s greatest contribution to the Waterloo tech sector was emotional and psychological.
If a BlackBerry falls in a forest . . .
At its peak in 2011, RIM employed nearly 20,000 people worldwide, of which almost half worked in Waterloo. A year later, when it became apparent that the company would no longer be a contender in the smartphone race, it started cutting staff in a hurry. By 2016, its workforce had fallen to below 4,000 people and the company had shifted into software specializing in security, automotive and internet of things applications.
To be sure, the downsizing was brutal but, in contrast to the devastation visited on Ottawa by the Nortel debacle, the sky over BlackBerry Town remained firmly in place. Tech employment stood at 24,490 in 2011. Five years later it held steady at 24,000, according to Ornston. Unlike Nortel, RIM did not pull other large firms down with it. If business software-maker Open Text had failed along with RIM, the impact would have been catastrophic. But Open Text was virtually unaffected and neither were other tech stalwarts such as Desire2Learn, Christie and Descartes. Their resilience helped to steady the ship.
Many RIM employees left the area and others found employment or started new companies in Waterloo, but startup generation by former BlackBerry workers was modest compared to the volume created by the sector as a whole, Ornston notes.
The Munk study highlights a paradox of the RIM years. When the company was riding high, startup activity was stagnant. When the company fell, entrepreneurship took off. Some of these startups scaled into larger enterprises, attracting so much capital that Waterloo led the nation in per capita venture capital investment in 2018, according to Ornston. The trend has only increased in recent years with local firms such as ApplyBoard, Arctic Wolf and Faire attracting enough investment to reach unicorn status with valuations of more than $1 billion.
Even Lazaridis and Balsillie, who had done little to help startups during RIM’s go-go years, got into the act. Lazaridis and Fregin donated millions to create a venture capital fund for quantum computing startups, and Balsillie worked closely with Magnet Forensics, a crime-fighting software firm, and now chairs its board of directors.
Yet the long-term prognosis for the Waterloo tech sector remains uncertain, said Ornston. Patenting has declined since RIM’s collapse and the region’s track record of building large enterprises is mediocre. The sector is short on investment from wealthy multi-nationals and lacks an anchor like Shopify, which could leave it exposed to post-pandemic credit-tightening. Even the recent expansion of Google in Waterloo is not necessarily a positive trend, Ornston notes. Like RIM in the aughts, the search engine monolith could vacuum up some of the entrepreneurial talent in the area.
Published in early 2021, the Munk study appears to have been written before much of the recent venture capital investment and public share offerings in Waterloo.
Tech anchors overrated
What to make of all this? Tech anchors are not all they're cracked up to be, Ornston concludes. Too much emphasis is placed on creating and nurturing large anchors such as Nortel and RIM in Canada, Ericsson in Sweden, Nokia in Finland and Samsung in South Korea. To be sure, these firms have transformed their countries, boosted GDP and attracted international attention. And yet, “the danger of relying on flagship firms as regional growth engines is that they fail with discouraging consistency,” Ornston says.
Even so, the failure of an anchor firm need not be a “death sentence,” the Munk study concludes. While Ottawa suffered, both it and Waterloo fared better than communities such as Rochester, NY, which began a long-term decline after the fall of Kodak.
And the renaissance did not begin with the failing anchors themselves or emergency policy moves, but with a base of incumbent tech firms and a “pre-existing entrepreneurial infrastructure,” Ornston states.
Oh, and it doesn’t hurt to have an apathetic anchor like BlackBerry.