The WSJ on how utterly caught off-guard BlackBerry was by the iPhone, how top management was unsure what was sitting in front of them, and how Apple basically inadvertently crippled the entire company:

“It’s OK—we’ll be fine,” Mr. Balsillie responded.

RIM’s chiefs didn’t give much additional thought to Apple’s iPhone for months. “It wasn’t a threat to RIM’s core business,” says Mr. Lazaridis’s top lieutenant, Larry Conlee. “It wasn’t secure. It had rapid battery drain and a lousy [digital] keyboard.”

If the iPhone gained traction, RIM’s senior executives believed, it would be with consumers who cared more about YouTube and other Internet escapes than efficiency and security. RIM’s core business customers valued BlackBerry’s secure and efficient communication systems. Offering mobile access to broader Internet content, says Mr. Conlee, “was not a space where we parked our business.”

The iPhone’s popularity with consumers was illogical to rivals such as RIM, Nokia Corp. and Motorola Inc. The phone’s battery lasted less than eight hours, it operated on an older, slower second-generation network, and, as Mr. Lazaridis predicted, music, video and other downloads strained AT&T’s network. RIM now faced an adversary it didn’t understand.

“By all rights the product should have failed, but it did not,” said David Yach, RIM’s chief technology officer. To Mr. Yach and other senior RIM executives, Apple changed the competitive landscape by shifting the raison d’être of smartphones from something that was functional to a product that was beautiful.

“I learned that beauty matters….RIM was caught incredulous that people wanted to buy this thing,” Mr. Yach says.

I love reading these types of stories, especially when they present the utter confusion of top executives who think their market positions are incapable of changing in an instant. The iPhone took the wind out of RIM’s sails, and the company has yet to make any movement since. It is likely this way because BlackBerry misunderstands what makes the iPhone so compelling.