Mar­ket changes, in­vestors drive Mo­torola’s breakup

Austin American-Statesman - - BUSINESS - By Peter Svensson

NEW YORK — For decades, Mo­torola Inc.’s prod­ucts told the story of the march of elec­tron­ics into the hands of con­sumers: car ra­dios in the 1930s, TVs in the 1940s and cell phones start­ing the 1980s.

Now, the com­pany is break­ing up, the vic­tim of chang­ing mar­kets and the need to present sim­pler sto­ries to in­vestors.

Mo­torola’s cell phone busi­ness, which as late as 2007 was rid­ing high on the suc­cess of the Razr, is strug­gling to re­shape it­self. Its sur­vival may de­pend on whether it suc­ceeds in turn­ing a once-mass-mar­ket cell phone busi­ness into a much smaller mold, fo­cused on play­ing in the same niche as Ap­ple Inc.’s pop­u­lar iPhone.

Early next year, Mo­torola is slated to sep­a­rate the busi­ness that makes cell phones and set-top boxes from the one that makes po­lice ra­dios and bar-code scan­ners, En­ter­prise Mo­bil­ity.

In a pre­lude, Mo­torola an­nounced Mon­day that it is sell­ing the bulk of its wire­less net­works di­vi­sion for $1.2 bil­lion to Nokia Siemens Net­works, free­ing En­ter­prise Mo­bil­ity from a Net­works busi­ness that has been hold­ing it back in the eyes of in­vestors.

En­ter­prise Mo­bil­ity is the part of Mo­torola that’s do­ing the best. Its cus­tomers are po­lice de­part­ments, govern­ment agen­cies and big re­tail­ers.

Its roots also stretch back fur­ther than any other Mo­torola busi­ness: The com­pany, then called Galvin Man­u­fac­tur­ing, sold its first twoway po­lice ra­dio sys­tem in 1940 to the po­lice depart­ment in Bowl­ing Green, Ky.

By con­trast, Net­works, which sup­plies equip­ment to wire­less car­ri­ers, has an ag­ing prod­uct port­fo­lio and is too small to com­pete in to­day’s global mar­ket. Wire­less car­ri­ers have been con­sol­i­dat­ing into larger com­pa­nies and now pre­fer to deal with only a cou­ple of equip­ment ven­dors each, nar­row­ing the scope for small sup­pli­ers such as Mo­torola.

The point of one com­pany mak­ing both cell phones and the equip­ment that con­nects their calls has di­min­ished as well.

The in­dus­try was pi­o­neered by Mo­torola, LM Eric­s­son and other com­pa­nies that made both phones and net­work equip­ment. But with in­creas­ing stan­dard­iza­tion of the technology,

there is no longer much syn­ergy; any phone will con­nect to a com­pat­i­ble net­work.

So Eric­s­son spun its hand­set busi­ness into a joint ven­ture with Sony Corp., and Nokia Corp. com­bined its net­works busi­ness with Siemens to form a joint ven­ture that fo­cuses on hand­sets.

In the hunt for scale, the other big U.S. sup­plier of net­work equip­ment, Lu­cent, was bought by the French com­pany Al­ca­tel in 2006. Canada’s Nor­tel Net­works filed for bank­ruptcy in 2009, shortly af­ter it was said to have dis­cussed join­ing its net­works busi­ness to Mo­torola’s. Eric­s­son and Nokia Siemens net­works ended up buy­ing parts of Nor­tel.

Mean­while, de­vel­op­ments on the cell phone side are be­ing driven by com­pa­nies that don’t make net­work equip­ment, in­clud­ing Ap­ple and Re­search In Mo­tion Ltd., cre­ator of the Black­Berry.

Caught off guard

That blind­sided Mo­torola, which made the cell phones for the launch of the first com­mer­cial net­work in the U.S. in 1983 and par­layed its de­sign skill into a world­wide fran­chise. Late in 2004, it launched the Razr phone, a slim “clamshell” that be­came a best-seller.

Go­ing into 2007, Mo­torola was still the world’s sec­ond­largest maker of phones, af­ter Nokia.

But the Razr was get­ting old, and Mo­torola was un­able to come up with an equally suc­cess­ful en­core. Sales started cra­ter­ing.

What made the im­plo­sion worse was that even at its peak, Mo­torola was not an ef­fi­cient man­u­fac­turer in the man­ner of Nokia, and it didn’t have very good profit mar­gins. When sales shrank, losses piled up very quickly.

Pres­sured by cor­po­rate raider Carl Ic­ahn, Mo­torola crafted a plan to split off the phone busi­ness and hired San­jay Jha, the chief op­er­at­ing of­fi­cer of Qual­comm, in 2008 to run that unit.

But the cell phone busi­ness tanked fur­ther, and it be­came clear that in­vestors would not value it at all as long as it was post­ing huge losses. The split was post­poned, and Jha em­barked on a pro­gram to fo­cus Mo­torola in the high­est-mar­gin sec­tor of the phone busi­ness: smart phones.

That ini­tia­tive started bear­ing fruit last year, with the in­tro­duc­tion of the Droid and Cliq phones. Be­cause the iPhone is ex­clu­sive to AT&T Inc. in the U.S., other car­ri­ers are ea­ger for phones that can com­pete. Ron Gruia, a Frost & Sul­li­van an­a­lyst fo­cused on tele­com, likens their thirst to that of drinkers seek­ing booze dur­ing Pro­hi­bi­tion.

Mo­torola’s smart phone sales have been mod­est com­pared with Ap­ple’s, and they haven’t been able to re­verse the over­all sales slide of the di­vi­sion. But it has launched sev­eral more mod­els this year. Jha said he ex­pects the phone busi­ness to be profitable in the fourth quar­ter af­ter years of losses. Once the sec­ond-largest maker of phones, Mo­torola is now the sev­enth-largest.

Bet­ting on An­droid

Mo­torola has placed its bet on An­droid, Google Inc.’s phone soft­ware, and that has paid off so far. Car­ri­ers and con­sumers see An­droid as the next best thing to the iPhone, and ap­pli­ca­tion de­vel­op­ers are warm­ing to it. And be­ing a one-trick pony has burned Mo­torola be­fore.

In any case, En­ter­prise Mo­bil­ity, sup­ported by steady govern­ment or­ders, will be free of fickle con­sumers as the two part ways early next year as Mo­torola Mo­bil­ity for the con­sumer de­vices and Mo­torola So­lu­tions for govern­ment and cor­po­rate prod­ucts.

The split is driven by the logic of the stock mar­ket, un­der the the­ory that in­vestors like busi­nesses that are easy to un­der­stand. The ups and downs of the phone busi­ness are dif­fer­ent from those of the po­lice ra­dio busi­ness.

The fact that Mo­torola plays in both is a re­flec­tion of its long his­tory, but the days of the elec­tron­ics con­glom­er­ate are over.

Rus­sel A. Daniels

The Mo­torola Droid smart phone de­buted last year. San­jay Jha, CEO of Mo­torola’s mo­bile de­vices di­vi­sion, said he ex­pects the phone busi­ness to be profitable in the fourth quar­ter af­ter years of losses.

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