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Motorola: Talk Is Fine, But...


There's no denying that Motorola Inc. (MOT) makes some of the hottest phones out there. The RAZR, SLVR, and Q phone are pushing the envelope and forcing rivals into brazen imitation.

Too bad other parts of the company don't throw off quite the same sheen. Admittedly, we're talking about the less exciting pieces of the business, including a division that makes wireless network gear and the broadband unit, which cranks out TV set-top boxes and cable modems. But these two units represent a crucial part of Motorola's long-term strategy to provide the infrastructure for the next generation of gadgetry.

The trouble is that both divisions are growing slowly and cost-cutting their way to profitability. What's more, they face larger rivals with far more resources to toss at new products. So while Motorola also has a $6 billion business selling telecom equipment to the government and corporations, it could find itself overly reliant on the low-margin handset business, which last year generated over half of Motorola's $4.6 billion in net profits. "They're boxed in," says Susan Kalla, of New York investment bank Caris & Co.

Most vexing to Moto watchers is the fact that Chief Executive Edward J. Zander could have shored up the network business by buying another company. Instead rivals are doing the deals. Case in point: the Nokia Corp. (NOK)-Siemens (SI) joint venture, announced June 19, that created a networking equipment behemoth with global scale. Motorola, sitting on a cash pile of more than $10 billion, was sniffing around Siemens, according to sources close to the company, but never acted. Motorola declined to comment, but Zander has said several times that big acquisitions are hard to pull off.

The Euro tieup hurts Motorola because networking equipment looks like a good business. The market for wireless gear will grow from $46.5 billion in global revenue this year to nearly $51.9 billion in 2009, says researcher IDC. But Motorola's $6.3 billion network business pales next to Nokia-Siemens' $16 billion JV. Most analysts expect Motorola's network division to shrink over time. A shame since operating margins are approaching 14% while they're barely 11% in Moto's snazzy phone division.

SQUEEZED

Meanwhile, Motorola's $2.8 billion broadband unit is suddenly struggling to reach double-digit growth, despite being No. 1 in its market. Because Motorola must make what its cable customers want, there's little room for the kind of cool features that set apart its phones. As a result, its boxes aren't radically different from what everyone else sells, allowing the likes of Comcast Corp. (CMCSA) to squeeze the same low prices from Motorola that it gets from upstart overseas rivals. That's why margins were 2% in the first quarter and won't be more than 7% for the year, says Standard & Poor's, like BusinessWeek a unit of The McGraw-Hill Companies. It doesn't help that Cisco Systems Inc. (CSCO) last fall gobbled up Scientific Atlanta, Motorola's chief rival in this market, creating another Goliath to contend with.

As Zander huddles with his team to craft strategy, investors remain cautious. Motorola trades at about 15 times 2006 earnings vs. 20 to 22 on average for its peers, according to Citigroup (C). Zander has done a great job turning around the phone business. Now Wall Street is waiting to see him do the same for the rest of the company.

By Roger O. Crockett


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