When he took over as chairman and CEO of technology behemoth Motorola in the first few days of 2004, Ed Zander must have felt as though he'd agreed to cross a tightrope while juggling axes and bowling balls. By the time Zander, formerly the president and COO of Sun Microsystems, stepped in, Motorola's flagship cell phone division had repeatedly missed market-driven style and feature upgrades and vital delivery dates. The semiconductor division, which at the time was the company's second-largest unit, had suffered losses every year since 2000.
Adding to Zander's challenge was the very public disagreement between the Motorola board and his predecessor Christopher Galvin, grandson of Motorola's founder. Galvin had initiated fixes in 2002 and was satisfied with the pace of recovery, but the board wasn't, so Galvin resigned in September 2003. Not long after, the board yielded to three years of demands from Wall Street to spin off its semiconductor division, which became
Freescale Semiconductor. Zander faces a daunting challenge: achieving the company's goal of "seamless mobility" via seamless execution. It won't be easy: Motorola (no. 15 on this year's EB300) has four major divisions, some of which are doing well, some of which are doing poorly and all of which desperately need to create some mutual synergy. Analysts' opinions about Zander's chances of getting to the other side without falling into an economic precipice are mixed.
Galvin's legaciesThe question also remains whether Zander owes Galvin bows or brickbats for the condition in which he left the company. Certainly, there were missteps galore. Back in 2000, Motorola had a banner year, earning $1.3 billion on revenue of $37.6 billion and building up staff and manufacturing capacity for anticipated revenue of $45 billion in 2001.
That revenue never materialized. In the following year, which Galvin termed "different and more difficult than any other in our history," Motorola incurred a net loss of $3.9 billion on $30 billion in earnings. The year 2002 saw even less revenue: Motorola lost $2.5 billion on revenue of $27 billion. Of that loss, 71 percent—$1.8 billion—was attributable to its semiconductor division.
Motorola suffered again in 2002, when it totally misjudged the market's interest in cell phones equipped with cameras. The first of these phones were introduced in early 2002, but Motorola didn't get one out the door until August 2003. That same year, Samsung beat out Motorola for the No. 2 spot in cell phone revenue, although Motorola was still second in the number of phones sold. The semiconductor division was on its way to another year's loss, $304 million. "Motorola stumbled and fell many times," says Bill Lesieur, a director at high-tech and telecom analysis company Technology Business Research Inc. (TBRI). "It didn't move in and out of markets at the right time, and it hasn't executed well."
On the other hand, Galvin's reform efforts may finally be giving Zander a safety net. In 2002 Motorola eliminated more than 13,000 jobs, closed down plants, consolidated manufacturing and sold several business units. Galvin and other senior executives OK'd new handset designs in the lean years, one of them the thin metallic Razr V3, currently a hot seller. The company was on its way to 2003 earnings of $893 million on revenue of $23 billion. Although that was a far cry from 2000's $37.6 billion revenue, it still represented an improvement over two years of losses.
Analysts view the spin-off of Freescale as a positive, especially given how erratically the unit was performing. "The spin-off was a good thing," says Brian Modoff, managing director and senior wireless equipment analyst at Deutsche Bank Securities, because the semiconductor unit had been a big consumer of cash flow. Although the semiconductor unit was Motorola's biggest chip set supplier for handsets, the spin-off is unlikely to threaten the company's silicon supply chain. "Motorola can now second-source semiconductors from other suppliers more effectively and get better pricing," Modoff adds.
Motorola is still a major player in the semiconductor industry, but now as a buyer, not as a producer. It's long been the No. 2 handset maker, after Nokia (except for the 1Q03 blip). Industry research house iSuppli reported that last year Motorola shipped nearly 105 million handsets, out of a global total of 703 million. Assuming at least three chips per phone-and handsets often have more than three-that's more than 300 million chips. "Any large chip consumer will have an influence on the chip industry-features, functions and architecture-by virtue of the requirements they impose," says Scott Smyser, iSuppli's principal analyst for wireless and networking research.
A new balancing actThat's the goodwill Zander has to work with. He's hoping to meld the best of Silicon Valley with Schaumburg, Ill.-based Motorola's innate strengths. "It's been hard bringing the things I think are valuable, such as a sense of urgency and fast decision-making," Zander told The Wall Street Journal in June 2005. "I got the feeling that there were days the company was on autopilot to a degree."
Zander's strategy for the company is "seamless mobility"—an ironic choice given that Galvin's grandfather made his fortune in car radios (hence the company name), the first instance of mass-market wireless mobile communications. The company's goal is to keep people digitally connected as they move from subways to cars, homes, offices, city streets or shopping malls, via Bluetooth, WiFi, conventional or next-generation cell phones, or any other technology using devices ranging from PDAs to laptops, to handsets, to computers in the home or office or anywhere else.
Reviews of the new strategy are mixed. "It's Motorola's version of what everyone else has," says Modoff. Further, says Greg Teets, an analyst with brokerage firm AG Edwards & Sons, "It will be a challenge to pull off, because there are so many diverse technologies that don't talk to each other."
To support the strategy, Zander reorganized the company last January into four business units: mobile devices, networks, government and enterprise mobility solutions, and connected home solutions. He also consolidated all the support functions, from finance to R&D. "These support functions were separated according to business unit before," says Teets, "but, centralized, they can benefit by economies of scale." Teets thinks that keeping the business units separate is also a good idea, because they are responsible for design, sales and customer interaction. Being separate lets them respond to customer needs immediately and independently, rather than having to wait for direction from a central authority.
But how will each contribute to Zander's seamless mobility strategy, and will there be seamlessness between the divisions? Based on analyst interviews (Motorola declined multiple invitations to participate in this story), we've rated the four divisions on whether their effect on the company's strategy is positive, negative, or still unknown.
Freescale's freedom
Since it was spun off from Motorola in 2004, Freescale Semiconductor has been taking advantage of its freedom. In segments from automotive to analog to wireless, it's targeting newfound opportunities. "We want to engage and penetrate the Tier 1 OEM handset makers outside of Motorola's 17 percent market share," says Sumit Sadana, vice president of strategy and business development. "Eighty-three percent of the market is an opportunity for us."
Nonetheless, Motorola's market share in handsets-one of its strongest divisions-serves as a buffer as Freescale adjusts to independence. "As long as Freescale is competitive in price, Motorola has a commitment to buy broadband processors for wireless handsets through 2006," says Sadana. "That is really a shipment cycle that will last through 2008, due to design cycle requirements." Sadana says, however, that the two companies do business because of their relationship, not because of the contract.
Freescale's sales and marketing were originally organized by business unit, but now the focus is on vertical solutions-oriented sales consolidated under one executive. Instead of selling single chips and letting customers figure out their applications, the new method incorporates reference designs that showcase the types of solutions the company's chips can provide. Even if customers tweak the designs Freescale provides, they can still take the end products to market faster than if they started from scratch with their own solutions. Freescale is also increasing resources for sales, marketing and field support in Asia, where it earned 44 percent of its revenue last year.
And the result of all the changes? The numbers tell the story. In 2002 and 2003, when it was still Motorola's semiconductor division, the unit lost $1.8 billion and $366 million on revenue of $5 billion and $4.9 billion, respectively. In 2004, the company earned $211 million on revenue of $5.7 billion. And after falling off the list of the Top 10 semiconductor makers in 2003, the company returned to the list in 10th position, according to iSuppli. All signs suggest that Freescale will thrive on its new independence.—B.M.T. |
Mobile Devices (+). In terms of seamless mobility, "Handsets are one of the key items for bringing it all together," Modoff says. "They are one of the key connectivity tools-the glue where it all happens." Thus Motorola's biggest business unit, accounting for 54 percent of the company's $31.3 billion in sales in 2004 and more than half of its $1.5 billion in earnings, is well positioned. It roared in 2004 after poor performance from 2001 through 2003. Still stuck behind Nokia, a position that nettles Zander, it almost quadrupled its 2003 earnings and released 60 new phone models. "Motorola has reenergized itself and is in a good position to hold onto the number 2 spot," says Smyser.
In its latest phones, such as the half-inch-thick Razr, which is the size of a credit card; the rounded clamshell Pebl V6; and the slim candy-bar-shaped Slvr V8, Motorola is emphasizing style over its usual technological substance. Make no mistake: The technology is there; the new models feature advanced 2.5 or 3G communications technology, Bluetooth, MP3 music download/play capabilities, still and video cameras, and
Microsoft's Windows Mobile operating system, among other capabilities. But technology doesn't sell today, according to Smyser. "Handsets already have lots of capability in technology," he says. "Now the differentiating factors are usability-form, function and fashion."
Networks (–). Here's where you'd expect the synergy to kick in. Motorola's second-largest division, with 17 percent of net sales in 2004, includes wireless voice and data communications network infrastructure devices, such as radio base stations, base site controllers and associated software and services. But it's one of the units that Modoff says must rack up bigger sales if the company is to achieve long-term success. "The infrastructure segment is a question we analysts all have," he says. "It's big enough to be important for Motorola, but it's not a big player in the industry."
Motorola's biggest problem in networks is its lack of relationships. In North America,
Ericsson and Nokia are entrenched with Cingular and
Nortel and
Lucent have long relationships with Verizon. Motorola was still able, however, to win a five-year contract from Verizon in 1Q05 to provide optical equipment for next-generation fiber networks (no dollar value for the contract was announced). In Asia, local providers are winning many contracts, although Motorola is popular in China.
"I got the feeling that there were days the company was on autopilot to a degree."
—Ed Zander, chairman and CEO
In Europe, as might be expected, Ericsson and Nokia dominate. The continent's wireless communications technology is GSM, and much of the rest of the world has followed suit. Therefore, Ericsson and Nokia also have legacy relationships wherever GSM has spread-and it has spread widely. According to Allen Nogee, principal analyst for wireless technology at research company In-Stat (a division of EB's parent company), last year there were more than one billion GSM subscribers. Compare that with the 384 million subscribers for all other wireless technologies combined. "The issue for Motorola's networks group is that it can't break the GSM stranglehold of Ericsson and Nokia," says Kevin Dede, wireless technology analyst for investment firm Merriman Curhan Ford & Company.
Motorola faces another difficulty with winning network contracts. Wireless technology is changing rapidly, but unevenly, around the world. In developing countries, such as India and China, the goal is to get coverage. In more-advanced countries and regions, such as North America, Japan, Singapore, South Korea and western Europe, the goal is advanced 3G communications. However, there is no single 3G technology. "A wide spectrum of technologies is being deployed, and there is a lot of uncertainty in the market," says Jagdish Rebello, a wireless network infrastructure analyst at iSuppli. Thus, a vendor such as Motorola has to try to stay on top of a host of different technologies for different regions.
How well does the networks group play in seamless mobility? "One of the challenges in developing new handsets is making sure they work with networks," says James Faucette, a senior research analyst at investment firm Pacific Crest Securities. Having the network business has made it easier for Motorola to build cell phones that operate with different communications technologies. But Faucette thinks this may not help as much in the future, mainly because Motorola isn't winning major contracts. "Missing out on wins on the network side means that having the network business is not as helpful for the handset business," he says.
Government and Enterprise Solutions (+). Motorola's third-largest business group contributed 15 percent of the company's total sales in 2004. Although the division includes automotive electronics and commercial and industrial solutions, its biggest product is public-safety radios for governments, the kind that figured prominently in rescue operations on September 11, 2001.
Talk about missing seamless mobility: Lack of interoperability among different public-safety groups was a big problem that day, and it still is. "Now states are trying to integrate communications with federal radio systems," says Dede. "Orders have increased by an order of magnitude. What used to be a small, $2 million order from one town is now a big $250 million order from an entire state. Motorola is a big player in this market."
The technologies involved in making police and other "first responder" radios interoperable will play a key role in seamless mobility. Thus, this division has a strong role in Zander's strategy.
Connected Home (?). This division represented just 7 percent of Motorola's sales last year. However, the company is the undisputed world leader in this unit's main focus: cable modem infrastructure and set-top boxes (STBs).
Motorola is particularly strong in North America, and that's no surprise-for years, that was the only place cable operated. Today, that situation is changing rapidly. Now, in the advanced countries and regions of the world, "cable broadband via cable modem is growing," says Ian Weightman, vice president of analyst company IMS Research.
Although Motorola lacks relationships in many of these new markets, it's working hard to build them. And the company's ability to provide literally everything an operator needs in order to build a new cable network gives it a tremendous competitive advantage over local vendors. Companies have been trying to deal with the "last mile" for years, but home networking may yet prove to be an essential element in the concept of seamless mobility. So Zander needs this division to perform well.
Shakeups aheadZander has, by all accounts, gotten off to a good start. Revenue grew from $23 billion in 2003 to $31 billion in 2004, and net earnings went from $893 million in 2003 to $1.5 billion in 2004. Lesieur expresses the consensus of most analysts: "He's doing a good job. He needs to shake up the whole company and make it think differently, and that's what he's doing."
For Motorola to be successful, it must capitalize on its pluses and turn its minuses and question marks into pluses as well. "Motorola can't be strong just in handsets," Modoff says. "It needs a mix of other products, especially in higher-margin areas" that its other divisions represent. "Motorola needs more revenue in the other divisions, so it needs to grow the other units more than the handset unit." Motorola's targeted operating margin is 15 percent, and it won't get there just with handsets, warns Modoff. Indeed, the handset division's operating margin is only 10 percent, compared to a range of 12 percent to 15 percent for networks and a range of 15 percent to 18 percent for government and enterprise.
But the company still faces a crucial balancing act. In handsets, Motorola can't afford to lose market share. It must guess right about whatever features and designs end users think are cool and get the handsets to market on time. It must also address the planned merger of Sprint and Nextel, announced last December and awaiting SEC approval (see the "What's Next for Motorola and Nextel?" below). Nextel, with 17 million subscribers on its iDEN network, is Motorola's biggest customer and contributes to the company's handset market share. That's because Motorola invented and owns the iDEN technology and has been Nextel's sole handset and network infrastructure provider since 1996. Sprint, however, uses CDMA technology. And because iDEN has no real upgrade path to high speeds (and CDMA does), it's inevitable that Nextel will convert to CDMA. That means that other cell phone vendors will get a shot at this once exclusive Motorola market. However, Teets says, "The merger may be an opportunity for Motorola to do more business with Sprint."
And it has to boost its wins in the other divisions, especially in network infrastructure. "Motorola will have to do a better job of penetrating the infrastructure market. It did well with operators in 2G but absolutely terribly in 3G. It got one or two customers, and that's it. It's like an asterisk in that business." If this division doesn't win more business, it's entirely possible that the network division will be sold or, like the semiconductor division, spun off as an independent company.
If Motorola keeps winning state and big-city contracts for its public-safety radios, that'll be a good sign. Ditto if it can develop relationships with cable operators in regions where cable broadband is just taking off, such as Europe. It must also stay on top of new developments in set-top boxes as they evolve from basic cable-connection devices into the center of the home data and voice network. Does Zander have enough balance to transform these separate entities into a worthy competitor, or does he face a long, long fall?
Most analysts feel that Motorola has at least the potential to excel. A.G. Edwards' Teets says, "If anyone can pull off seamless mobility, Motorola is in all the right places." Most analysts feel that Zander has been breathing new life into a company that desperately needed shaking up, but as other CEOs have found before him, the chasm between potential and execution looms large.
What's Ed Zander's biggest challenge at Motorola? Send your thoughts to
www.feedback@reedbusiness.com.
Bridget Mintz Testa is a frequent contributor to Electronic Business.
What's next for Motorola and Nextel?
Mobile communications provider Nextel is Motorola's largest customer, buying 10 percent of Motorola's products and services in 2004, 12 percent in 2003 and 11 percent in 2002. Motorola has been Nextel's sole supplier of handsets and core network equipment since 1996. That's because Nextel's wireless voice/data network is based entirely on a technology called iDEN, which Motorola invented and owns.
Last November, however, Nextel and Sprint-whose wireless network uses a different technology called CDMA-announced their intent to merge. Analysts see no obstacle to the merger, although approval is still pending. What does the merger mean for Motorola?
Nextel has announced that it will operate the iDEN network through 2010. Last year Nextel bought upgrade technology from Motorola to improve the network's capacity and voice capabilities. The company also signed an agreement with Motorola for more iDEN handsets and network infrastructure equipment. That agreement is good through 2007.
Nevertheless, iDEN's maximum data rate, 40 kbps, is about the same as that of dial-up, and, according to iSuppli wireless infrastructure analyst Jagdish Rebello, there's no evolutionary path to speedier transmission. Thus, it seems inevitable that Nextel will eventually move away from iDEN to Sprint's CDMA technology, which does have an upward evolutionary path to true broadband speeds. That's a necessity for the future.
Because any cell phone maker will be able to provide CDMA phones to the new company, the merger "opens up what was an exclusive situation for Motorola," says Bill Lesieur, a director at high-tech and telecom analysis company Technology Business Research Inc. (TBRI). So Motorola will face competition in providing handsets and infrastructure equipment to the new company, whereas it previously had none.
For Motorola to keep its largest customer, it must participate in the network migration from iDEN to CDMA. Last year Motorola won a two-year $450 million infrastructure supply agreement extension with Sprint. However, according to TBRI, Motorola will be competing with Lucent, Nortel and Ericsson for the equipment and services involved in first making Nextel's iDEN network talk to Sprint's CDMA network and then converting the iDEN network to CDMA. If Motorola doesn't win a big piece of that business, then its 10-year relationship with Nextel will be history.—B.M.T |
