Shifting Gears at Motorola

To address a steep drop in profits, CEO Ed Zander is cutting jobs and betting on an open-source software platform for smarter phones

by Roger O. Crockett

Less than a year ago, Motorola (MOT) Chief Executive Ed Zander could do no wrong. His company was sizzling with the success of its iconic, ultraslim RAZR phone. During the second quarter, ending in June, the world's No. 2 mobile-phone maker posted a 53% jump in handsets shipped, nearly twice the growth posted by its bigger rival Nokia (NOK). Motorola's sales and profit soared as well.

Since then, growth has cooled more than the winter air off Lake Michigan in Motorola's Chicago backyard. After an early warning of a shortfall in profitability (see BusinessWeek.com, 1/5/07, "Wall Street Hangs Up on Motorola"), Motorola on Jan. 19 reported that while fourth-quarter revenue was up to $11.8 billion, net profit tumbled 48%, to $624 million from $1.2 billion. "We did not forecast properly," Zander told analysts in a conference call. "You can get off a little bit on this thing, and it can get away from you pretty quickly."

Dropping the KRZR

A lot of things got away from Motorola. The company was blindsided by pricing pressure on low-end products in emerging markets such as Latin America and on high-end products in Europe. In addition, Motorola didn't release enough phones with rich multimedia features that take advantage of the most advanced, or third-generation, wireless networks.

Cingular Wireless, which is owned by AT&T (T) and is being renamed after its parent, had exclusive rights to the RAZR when it debuted, but didn't offer the offshoot, the KRZR, late last year. Motorola did not make the KRZR in a 3G version for use on the Global System for Mobile communications used by Cingular and most big European carriers. That means the KRZR doesn't handle services tailored for these carriers' fastest networks.

And even though it's not a 3G device, the KRZR is priced like a high-end phone. So it competes with phones offering far more robust features, including better cameras, more storage, and richer e-mail capabilities. Making matters worse, explained Motorola's mobile-phone chief Ron Garriques, makers of 3G products ratcheted down prices, putting pressure on slightly lower-tier phones like the KRZR.

Improved Products

To bolster profitability, Zander unveiled what amounts to a three-step plan. He will slash 3,500 jobs, many in middle management, to cut costs by $400 million by yearend. While he generally likes the current strategy, he wants Motorola to be more selective about the regions where it will try to gain market share. And finally, he's pushing his troops to produce more cool products. "Stay tuned," he says. "We have a lot of products coming out."

In the foreseeable future, the emphasis will be on phones that give users "cool experiences," as Zander calls them. The shortfall in profits flags the severity of challenges facing Motorola. Among them, competitors such as Nokia, LG Electronics, and Apple (AAPL) (which this month unveiled a phone full of easy-to-use rich media) are outstripping Motorola in introducing phones that users want (see BusinessWeek.com, 1/10/07, "The Future of Apple").

To their credit, Motorola's executives aren't dodging blame. Garriques told analysts that after his wife gave birth on Jan. 8, Zander sent him a card saying, among other things, "This is the first rich experience, next-generation device Ron delivered all year."