Motorola’s split decision may be the wrong call
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| Devices like the Razr2 V8 haven’t done enough to raise Motorola’s profile and its revenues. Image: Motorola |
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| CEO Greg Brown says splitting the company will improve Motorola’s focus. Image: Motorola |
The year is 2010, and the Motorola brand is hot again. By aggressively retooling its design and manufacturing processes, the independent cell phone business has returned to profitability, grabbed back market share from Samsung and Sony Ericsson, and gained on Nokia (NOK) with low-cost handsets in developing markets like India and China.
Meanwhile, in its separate wireless equipment business, Motorola has outmaneuvered tech titan Cisco (CSCO) in the corporate market, and out-innovated both Cisco and Apple (AAPL) by reinventing set-top boxes that bring the Internet to the TV. Investors are thrilled, and they trace it all back to Motorola’s (MOT) breakup announcement in March 2008.
Sound like a fantasy?
Odds are, that’s all it is – and that’s the downside to the Schamburg, Ill., company’s announcement Wednesday that it will split itself in half in 2009. Though the news is probably music to the ears of activist investor Carl Icahn, who has been agitating for a breakup to boost Motorola’s flagging stock price, it’s difficult to see how two mini-Motos will be better positioned to compete with some of the best-managed competitors in the technology world.
Motorola CEO Greg Brown sees the spin-off differently. “I think it provides a clear sense of our intentions and direction,” Brown tells Fortune. “The independence, improved focus and alignment of individual organizations will facilitate and enable stronger performances.”
We’ve been here before, however. In previous slumps, Moto management hocked heirlooms like the automotive and semiconductor divisions in the name of raising money and gaining focus. Did it work? Well, if trimming divisions were the recipe for its success, Motorola would be thriving by now. Instead the firm has swung from a $3.6 billion profit in 2006 to a $49 million loss in 2007, and the stock is flirting with five-year lows. Motorola’s problem isn’t size – it’s discipline. “Every time they go back to the drawing board, they start talking about selling off businesses, splitting up the company,” says Shawn Campbell, of Campbell Asset Management, who has followed Motorola for years. “They’re running out of things to sell.”
Even so, offloading phones must have been too tempting a quick fix for newly minted CEO Greg Brown. While Motorola’s other businesses are holding their own selling wireless equipment to governments, corporations and telcos, the decline of the Razr phone has caused the handset division to tumble from second to third in the ranks of the world’s largest cell phone makers, bleeding profits along the way. But breaking up is hard to do; as Brown casts off the mobile division he’ll also lose a powerful consumer brand (it’s tops in U.S. market share) that brings in more than half of Motorola’s revenue. He’ll be left with a weakened company seeking to compete with Cisco and Apple in wireless equipment and set-top boxes – a bit like David facing Goliath, only without a slingshot.
How did it come to this? Motorola ushered in the mobile phone age in 1983, when inventor Martin Cooper stood on a New York street and called a rival researcher for bragging rights. But today the momentum in the cell phone business belongs to Nokia. A decade ago, when Motorola clung to analog technology and one-off designs, an upstart Nokia recognized that digital technology and standard parts were the future of wireless. And much as Toyota did in the auto industry, Nokia mastered the art of “platforms” – taking a few well-engineered blueprints and tweaking them slightly to support a dizzying variety of products. The result: Nokia sells two of every five phones in the world, and its local design teams can deliver a whole line of handsets with features tailored for customers in India, China, or Russia, often faster than Motorola can produce a single phone.
Critics say Motorola Chairman Ed Zander should have done more to close the platform gap with Nokia in the four years he was in the CEO’s seat. Instead, while Zander reveled in the Razr’s success, Nokia’s agile efficiency helped it stage a quick comeback. “Ed had no experience in this area,” says Richard Doherty, principal at Envisioneering Group. “All Ed did was essentially inherit a Razr and try to milk that product design. At the same time, Nokia really did own a platform.”
Now it’s Brown’s job to lead a successful Motorola breakup. Brown, who got the CEO job after streamlining Motorola’s automotive and network businesses, is wisely focused on the handset business – he says he’s dedicating 80 percent of his time to that division, much of it to finding a tech-savvy visionary who can take over as CEO when it becomes an independent company. “We’re looking for a proven leader with results orientation and preferred experience around consumer electronics or wireless, or a technology orientation,” Brown says. He argues that the spin-off announcement should help attract a top-tier candidate who wants to run a company, not just a fiefdom.
While he’s looking for a leader, Brown will have to continue standardizing phone blueprints for chips and software. A move to more basic platforms is the only way Motorola can become more nimble, and free itself from the boom/bust cycle where it struggles for a hit phone, then languishes when the appeal wears off. A streamlined product lineup will also help the company adjust to past-paced retail environments in Europe and Asia, where Motorola must meet the daunting challenge of keeping cool new phones in front of consumers.
“Retail is about having things in stock – and when you’re dealing with storefronts in China with ten glass cases with 300 devices inside, it’s a very different inventory replenishment model,” says Patricia Morrison, Motorola’s chief information officer. “We’re doing better inventory planning and making sure we have the right product in the right place at the right time.”
Plus, there’s the matter of localization – customers in Bangalore crave different phone features than customers in Boston. With a U.S. recession and a European handset slowdown, developing markets in Asia will be especially important. With a streamlined product design process, Motorola would be better positioned to serve the poorest entry-level users in these growing markets as well as the burgeoning middle class. In fact, it’s the middle class in these up-and-coming markets that could be the key to Motorola’s success. “Folks there are willing to spend up to two months salary to have the latest and greatest cell phone,” says Ramon Llamas, researcher with IDC. “Why? Because it’s a status symbol, a thing to be seen with.”
Once the breakup is done, Brown will have to run what’s left of Motorola; and while the handset division’s challenges are steep, the rest of the businesses won’t have a cakewalk, either. Aside from a niche operation selling two-way radios to governments and other organizations, they mainly compete with Cisco in wireless networking equipment and television set-top boxes. Not only is Cisco a tightly managed organization with dominant positions in both areas, its $23 billion cash hoard is equal to Motorola’s entire market capitalization. If that weren’t enough, Apple CEO Steve Jobs has lately shown an interest in the market, offering Apple TV as a way to bridge the Internet and the TV set.
All of which suggests that Motorola’s toughest challenges are still ahead. While Brown is overseeing a handset business turnaround and making sure the other units are holding their own, he’ll also have to deal with Icahn’s continuing efforts to elect directors to Motorola’s board in May. Those directors would likely push for a faster spin-off timetable and possibly an entirely new management team. Brown also will have to solve puzzles including which half of Motorola will inherit the brand, various patents, and the lion’s share of the company’s $8 billion in cash and $4 billion in debt.
Despite the challenges, among those not counting Brown out is Tim Tokarsky, who was an executive at startup Micromuse years ago when Brown was the company’s CEO. Tokarsky recalls Brown’s determination under pressure, and his talent for keeping executives on course. At one particularly tense meeting, he recalls, the executive team was struggling to release a new product, and everybody was giving reasons why it couldn’t be done. Brown told them to stop, and leaned across the table. “People, that is your job,” Tokarsky recalls him saying. “Your job is to find a way to make this thing work.” Chastened, the team went back to the drawing board, and got the product out.
Safe to say Brown now needs all that intensity – and then some – to salvage Motorola.
How good of a decision was it to sell the Automotive business? Streamlined, or not, it was Motorola’s counter-cyclical hedge against a volatile handset market.
Have you seen ads for the Ford / Microsoft Sync multimedia interface? That was Motorola’s hardware — until they sold it to Continental, who is turning a nice profit from this new hit technology with significant upside.
By the way, Continental is the one who really streamlined the Motorola automotive business.
The real reason Motorola got out of this business is because lack of quality resulted in frequent trips to Detroit to beg forgiveness. Zander could not bear that type of scrutiny, so he jettisoned the business rather than emphasizing improved quality and manufacturing fundamentals.
Sad, because the Automotive business was solid and relied upon stable process technologies — unlike the bleeding edge component designs that often-times result in unstable manufacturing yields.
The handset division has been on a downward trend since 1998 when Nokia overtook MOT for good. The author is correct in saying that Motorola held on to analog far too long and that Nokia’s superb platform execution vaulted them to the a dominant No. 1 position.
As a former, 12-year Motorola knew about platforms. But they couldn’t get it done. Not in an environment focused more on warring tribes, in-fighting, empire building, empire protecting, back-stabbing and horrendous middle and upper management.
When Motorola had no competition, they were king. During this run of success, mediocre (or worse) employees were shuttled up the management ladder. It was this group of managament that had no clue how to run a business when competition got tough. Or how to operate; or, how to let people innovate. Or, how to create an evironment where employees cared about the products and each other–and reward them for it.
As more and more competition entered the marketplace, the downward spiral continued.
The success with the Razr was sheer luck–nothing more. Big deal, the phone was thin, yet still with a horrible User Interface. Consumer fads are finicky. When the fad wore off, MOT had nothing else. Innovation is, and has been, dead for years. The majority of the good engineers have left the company on their own or have been laid off. What’s left is a steaming pile of over-paid employees that crave the good ol’ days of the late 80s and early 90s, when there was no competition. When ugly, black phones–still with horrible user interfaces–would be gobbled up by the marketplace. Ah, those were the days.
I expect the Mobile Devices spin-off to lead to a depressed stock price of that entity, one that will be purchased–like Iridium–for pennies on the dollar.
Brown did not streamline the Automotive business…..he sold it!
From Jon Fortt: To be fair, he streamlined it and then sold it.
Interesting thoughts on the proposed split. I’m a current employee and have been through the previous ups and downs (and I called this downturn 3 years ago after the RAZR came out). Splitting the company seems like it’s meant strictly to enhance the pocket books of the major shareholders, and is a short term fix. What needs to happen is a total clean up of management that’s bogging down everything from idea generation to development. There’s a lot of short-sightedness within the company.
Management who thinks they are ahead of the curve area so far behind it that it would take years for them to catch up to the tail end! If splitting the company up is the right thing to do then I agree with you Mr. Fortt…what will it do during the next down turn when there are no more pieces to sell off!
Management has made it what it is and they need to put a bit more faith in its people (not middle management) and let some of those voices be heard.
Salvaging the company is possible if the right people are put in charge, and action is taken wihtout the red tape that’s been involved the past few years. It would also help to infuse some funding into the R&D side of the house and get some creative thinkers like Apple has into this company.
The analyst above is out of touch. As an ex-Motorolan, I can tell you 6-sigma is not saturating the company….I would say it is used rather sparingly now-a-days, and only in pieces.
What the heck is a “3G board member”? This shows short-sightedness on his part. As soon as 3G is mainstream (which it is in much of the world), it is time to start looking forward to future technologies like 4G, converged devices.
As for the other business profitability, the “Networks” business is a dog and needs to go. It is capital equipment in a market with too much capacity. WiMax may be a short-term savior (increasing world-wide spend), but it is just a short fix. The market needs consolidation, and if I were MOT, I would find the quickest way out of that business so I could concentrate on profitable businesses (Cable, Government, ex-Symbol, etc.)
Mr. Fortt appears NOT to have done his homework on this one. First off the top of my mind is Motorola’s history of industry innovation and then when everyone else is copying…it’s time to move on to new innovations. The problem here isn’t that Motorola is splitting into two parts “IF” Brown stays true, which he did leave himself an out in yesterday’s conference call…the problem is too much control through Six Sigma, not applying it as it was originally intended…bleeding it off into other arenas as if they were all “government contracts”. True to Carl Icahn’s request of the Motorola board…Motorola needs 3G board members, none of which seem to be available on the current board. As for as profits in the future…break down the balance sheet from past quarters Mr. Fortt and you will see that Broad Band and Networking has been a profitable business. So much so that the two entities have carried the beleagered handset division for the past 2 years. Had it not been for Broad Band and Networking Moto’s numbers would have been much much worse. So when everyone on the block is cooking meatloaf for dinner, which house will your kids go to??? Time to cook something else… As far as Broad Band is concerned, please do your homework before trashing the innovative and profitable work being done by that group.
From Jon Fortt: I don’t think I trashed it at all. I said it’s holding its own while the handset division loses money, and that Brown helped streamline the business. I do point out, however, that going head-to-head with Cisco and Apple will be no picnic.
Motorola has no real option but to split as proposed. The core business of the company is not and has never been cell phones - that is one of the most unstable and volatile markets in the world. But far too many on Wall Street cannot see past this month’s cell phone numbers, and that view is far too destabilizing for the company to survive. A division will at least allow the core business to survive and thrive, and will also increase the chances of prosperity for the cell business by allowing a management focussed on the peculiarities of that specific market.
The company’s major challenge is not to apportion the cash and the debt, but rather to apportion the challenge of the instant-gratification wing of Wall Street to the volatile cell market and the long-term-interested investors to the steady, progressive and always first-place positioning in its market that has been Motorola’s stance since the days of Paul and Bob Galvin.
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A senior writer for Fortune, Jon Fortt focuses on technology and innovation in Silicon Valley - a subject he's been reporting on since his days as a rookie reporter for the Lexington (Ky.) Herald-Leader. Before joining Fortune in 2007, Jon had reporting and editing stints at Business 2.0 magazine, and the San Jose (Calif.) Mercury News, Silicon Valley's hometown newspaper.
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