The Motorola brand is the stuff of legends. Yet, after its recent
roller-coaster trajectory, does it have the stamina to ride out the course
or has it already veered tragically off course?.
It’s not as if handset manufacturers haven’t had to suffer through topsy-turvy times. Even Nokia, the world’s top manufacturer, struggled through a turnaround as recently as 2004. Motorola itself has seen its share of ups and downs. It was late to the digital handset game. It didn’t have an immediate follow-on to the StarTAC. It suffered throughout the dot-com bomb, laying off thousands of employees.
But this time, the situation is much more dire. The Motorola brand is still seemingly untarnished when it comes to its government and public safety products, as well as cable set-top boxes. The attention is centered on the handset division, which just four or five years ago was riding the RAZR high. Now, plans call for spinning off the handset unit, or possibly even selling it, although analysts say they don’t see anyone willing to step forward on that score.
Analysts also say it’s hard to point to one cause of the current handset unit calamity, although they agree what the company really needs is a strong, innovative new product offering.
“It’s a crime,” said Roger Entner, analyst at Nielsen IAG. “It’s more than a shame. It was the second-largest wireless handset manufacturer, and the thing imploded … So many missteps, so many that this will be a Harvard Business Review case study one day and the students will say it’s impossible this happened this way. It’s one of those head-scratchers, where you’re like, Holy Cow … Where reality is stranger than fiction.”
Motorola declined to comment for this story, referring to its July 31 Q2 financial release for updates on its progress. In a previous conference call announcing Q1 results, management said changes were under way and CEO Greg Brown referred to upcoming new products in the somewhat ambiguous categories of messaging and touchscreens. Leading up to July 31, analysts were not optimistic that the handset division had hit rock bottom in Q1.
Motorola’s shelf space at carrier stores moved down from18% in May to 15% in June, according to a survey by Avian Securities analysts. The Q has lost much of its early luster, replaced by such devices as Research In Motion (RIM) BlackBerry Pearls and Curves, the Apple iPhone 3G and Samsung Blackjack, said Avian analyst Matthew Thornton.
A few years ago, when Thornton and colleagues called to survey stores about their top-selling mobile devices, it got to the point where instead of asking, “What’s your top-selling mobile device?,” they had to re-phrase the question because the RAZR was always first. Well, not anymore.
Motorola built the clamshell market and rode that wave. The RAZR took the country by storm, but it didn’t have a follow-on for that, either. It didn’t thoroughly pick up on the consumer smartphone trend. “I think they missed this emerging growth segment and continued to ride the RAZR franchise,” Thornton said. Last-ditch efforts to right that ship, like the RAZR 2, didn’t represent enough of a change. Motorola launched the device with a price point higher than $200, while older RAZRs were going for $99 or thereabouts. “The device wasn’t interesting and the pricing was mind-boggling,” he said.
Some analysts have surmised that major U.S. carriers will lessen their exposure to Motorola handsets the rest of this year. Verizon Wireless, for one, doesn’t comment on its relationships with its handset partners, said spokeswoman Brenda Raney. Verizon as of last month was offering seven Motorola phone models in its line-up, as well as the Q. In July, Motorola and Verizon Wireless announced the Adventure V750, a rugged push-to-talk phone for extreme conditions.
While Nokia is a master at distribution worldwide and is now making inroads with carriers in the United States, a market it previously has not penetrated in a big way, Motorola a few years ago had high hopes of penetrating the low-cost handset market in emerging international markets – an area where Nokia has succeeded. Motorola pulled out of those efforts, a move analysts say didn’t help because bigger volumes mean handset makers can command better pricing. A lot of the same components that go into high-end phones are used in the low-end phones. Plus, the emerging markets are where the growth lies. “You can’t blame the iPhone,” Entner said. “The real problem for them was the low end. That’s what unraveled this thing. It’s the non-sexy stuff that kills you.”
A year ago, analysts at Raymond James & Associates thought maybe the company would turn around by the second half of 2008, but so far that hasn’t happened. “They need to do something radically different and do it profitably,” said Melissa Fairbanks, senior research associate at Raymond James. That most likely won’t happen until 2009.
It’s difficult to say how things might have played out under different or prior leadership. Chris Galvin, grandson of founder Paul Galvin, was forced to resign in 2003 when he and the board disagreed over the company’s pace, strategy and progress surrounding its turnaround at the time. Galvin, however, was credited for returning the company to profitability and strengthening the brand.
Ed Zander, who replaced Galvin, was ousted late last year amid a very public clash with investor activist Carl Ichan, who was pushing for the handset unit spin-off. Soon after, Chief Technical Officer Padmasree Warrior left the company; she resurfaced at Cisco. In March, Stu Reed, former president of Motorola’s Mobile Devices business, was gone, as was Kenneth Keller, who had taken charge of marketing after the unexpected death of Geoffrey Frost. Last month, Motorola filed suit against ex-employee Mike Fenger, former senior vice president for Europe, Middle East and Africa, for joining Apple before his 2-year non-compete clause was up.
Such an exodus of talent isn’t likely to help morale. As of presstime, Motorola had not yet found a suitable taker for heading up the handset division. Analysts believe the company has probably moved on to its second page of wish-list candidates as it struggles to find someone willing to take the challenge. One positive effect to spinning off the handset division is it gives a CEO job candidate the chance to run his or her own show rather than being under someone else.
But not everyone is sure a spin-off is going to be successful. Analysts at Raymond James don’t believe a break-up of the company is necessarily advantageous for investors. “It doesn’t make a whole lot of sense to us,” Fairbanks said.
A comeback is not out of the question. On the plus side, “everyone has written off Motorola’s handset business, so they can fly under the radar. No one expects anything from them,” she said. They can work quietly and when they’re ready to release a hot new product, make a splash. But given no signs of one out there, not even the crumb of a rumor about a handset in the works, it doesn’t appear to be imminent.
Within the wireless industry, thousands of engineers and others cut their teeth at Motorola, and it still represents a strong brand for many despite the recent handset foibles. Martin Cooper, who joined Motorola in 1954 and was the first person to make a call on a portable cell phone in 1973, said people are much too anxious to jump on the bandwagon and point out all the troubles going on at Motorola. Cooper is now the founder and chairman of smart antenna company ArrayComm.
Before the cell phone, however, there were police radios and pagers. He remembers when a Chicago patrolman explained how the police needed to communicate when they were on the street, not just in their cars. So, while at Motorola, they built a phone they could carry with them. Then, knowing people wanted to take their phones with them, they went to work engineering the mobile phone.
Back in 1973, they didn’t imagine how many people would be carrying cell phones today, much less how many would be given away for free. “We were dreamers, and I still am, and I’m still optimistic about our industry and wireless as a whole,” he said. And what about his former employer Motorola? People are still working hard to make things better there, he said, and he wouldn’t write them off just yet.
|Q2 Swings Up|
Talk about a roller-coaster. Just when much of the industry had written off Motorola’s handset unit, it reported a surprising 28.1 million units shipped in the Q2 and increased market share in North America.
The W755, an EV-DO clamshell with touch-sensitive buttons for music playback, was one of the highlights of the quarter, gaining traction at Verizon Wireless, CEO Greg Brown told investment analysts in a conference call last week.
Of course, the home and networking units still dominate in terms of their star power at the company, bringing in enough revenue to offset the handset division’s losses. The handset business posted an operating loss of $346 million compared with a loss of $332 million a year ago. Motorola expects sales to be down slightly in Q3 and then back up in Q4.
Brown acknowledged the company needs to improve profitability of mobile devices. The company plans to introduce a total of 50 new products this year, with 34 of them being in the second half. That’s up from 40 that were introduced during all of last year. The roadmap will reflect developments in user interface, touch, music, navigation, form factor and an expanded smartphone portfolio, Brown said.
The search for a CEO to take over the handset business is making good progress, he said, and he reiterated that spinning off that division is the right way to go. Motorola is targeting Q3 2009 for the spin-off.