Telecommunications

Motorola: Becoming a 'Peripheral Player'


Motorola is struggling to turn less into more. Never has that been more apparent than on Feb. 3, when quarterly financial figures showed a company becoming a shadow of its former self.

Once the world's largest maker of wireless handsets, Motorola (MOT) said it shipped 19 million phones in the fourth quarter, about half the number it shipped a year earlier. The de facto inventor of the cell phone introduced 50 phones in 2008; that number may be halved this year.

For a sixth straight month, Motorola devices are conspicuously absent from a ranking by Avian Securities of the best-selling U.S. wireless phones. Motorola recently lost its top U.S. market share ranking to Samsung, and global share is hovering around 6.3%—a mighty fall from its peak of 26% two years earlier. "They are becoming a peripheral player," says Avian analyst Matthew Thornton. Since the late 1990s, "they were always in the top 10."

Dividend Is Suspended

The market-share losses and dearth of best-selling phones is taking a toll on Motorola's bottom line. Motorola posted a $3.6 billion loss, reflecting costs associated with the diminishing value of its cell-phone business, while revenue slumped 26%, to $7.1 billion. The company also suspended its dividend. Among the few bright spots are Motorola's government, enterprise, and home-based equipment divisions, which recorded a stable performance.

After failing to find a buyer for the ailing handset division, Motorola is trying to make the best of its diminishing prospects. Co-CEO Sanjay Jha intends to make Motorola's phone business more relevant—and profitable—by making it smaller. It's already in the midst of shedding 5,000 jobs this year and many more cuts are likely. Jha would prefer you to imagine Motorola now as the new Research In Motion (RIMM)—a tightly focused supplier of mostly high-end smartphones that boast a user-friendly operating system and display. In the case of Motorola, the phones would run on the Google-backed (GOOG) Android operating system. "Android is a flexible operating environment that has attracted thousands of developers," Jha said on a conference call discussing the results. "We can [offer] a differentiated user experience."

To do that, Motorola will draw on its experience tinkering with the same Linux-Java software used in Android to make what it hopes are compelling tools and other applications. Social-networking apps, for example, are one area of focus for the Android phones. Jha says in an interview that Motorola engineers are working closely with Google to develop appealing apps.

Music Software Flops

The problem is that Motorola consistently has failed to deliver compelling applications. Its highly anticipated music software on the Rokr phone flopped. And Motorola's previous attempts to customize Linux-Java and build its own operating system have been "disastrous," says Richard Windsor, an analyst at Nomura Securities. Windsor also frets Motorola will end up bearing high software development costs.

Jha says Motorola's carrier customers are impressed with the competitiveness of the portfolio in development, though he wouldn't name the carriers. "We've spent a lot of time on our user interface and user experience," he says. "That is one of the big changes that we are making."

Motorola execs have pledged repeatedly over the years to improve their phones' experience for users, to little avail. "Another quarter with no new game-changing models out there," said Ittai Kidron, an analyst with Oppenheimer (OPY). "Another quarter of more promises." Odds are Motorola has four quarters to rediscover its innovation chops and return to relevance. If it can't, Kidron suggests, it might be time to raise the white flag and ask, "Is this really worth a fight?"

Key Execs Dismissed

Indeed, a sale of the handset business could still happen, though co-CEO Greg Brown suggested in an interview that spin-off plans are on ice until 2010. Meantime, Motorola is doing what it can to decentralize operations. Relatedly, Motorola announced the dismissal of Chief Financial Officer Paul Liska and said that Edward Fitzpatrick, senior vice-president and corporate controller, will serve as acting CFO while the company searches for a permanent replacement. "Paul was helpful driving a lot of changes here and helped prepare for the separation," Brown said in the interview. "Now, we want our individual business franchises to be as self-sufficient and independent as possible."

But for now, Motorola investors and customers will need to settle for less.

See BusinessWeek's slide show of the top-selling cell phones in the U.S.

Crockett is deputy manager of BusinessWeek's Chicago bureau.


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