Motorola's split decision may be the wrong call

March 27, 2008: 9:03 AM ET
RAZR2 V8
Devices like the Razr2 V8 haven't done enough to raise Motorola's profile and its revenues. Image: Motorola
Motorola CEO Greg Brown
CEO Greg Brown says splitting the company will improve Motorola's focus. Image: Motorola

The year is 2010, and the Motorola brand is hot again. By aggressively retooling its design and manufacturing processes, the independent cell phone business has returned to profitability, grabbed back market share from Samsung and Sony Ericsson, and gained on Nokia (NOK) with low-cost handsets in developing markets like India and China.

Meanwhile, in its separate wireless equipment business, Motorola has outmaneuvered tech titan Cisco (CSCO) in the corporate market, and out-innovated both Cisco and Apple (AAPL) by reinventing set-top boxes that bring the Internet to the TV. Investors are thrilled, and they trace it all back to Motorola's (MOT) breakup announcement in March 2008.

Sound like a fantasy?

Odds are, that's all it is – and that's the downside to the Schamburg, Ill., company's announcement Wednesday that it will split itself in half in 2009. Though the news is probably music to the ears of activist investor Carl Icahn, who has been agitating for a breakup to boost Motorola's flagging stock price, it's difficult to see how two mini-Motos will be better positioned to compete with some of the best-managed competitors in the technology world.

Motorola CEO Greg Brown sees the spin-off differently. "I think it provides a clear sense of our intentions and direction," Brown tells Fortune. "The independence, improved focus and alignment of individual organizations will facilitate and enable stronger performances."

We've been here before, however. In previous slumps, Moto management hocked heirlooms like the automotive and semiconductor divisions in the name of raising money and gaining focus. Did it work? Well, if trimming divisions were the recipe for its success, Motorola would be thriving by now. Instead the firm has swung from a $3.6 billion profit in 2006 to a $49 million loss in 2007, and the stock is flirting with five-year lows. Motorola's problem isn't size – it's discipline. "Every time they go back to the drawing board, they start talking about selling off businesses, splitting up the company," says Shawn Campbell, of Campbell Asset Management, who has followed Motorola for years. "They're running out of things to sell."

Even so, offloading phones must have been too tempting a quick fix for newly minted CEO Greg Brown. While Motorola's other businesses are holding their own selling wireless equipment to governments, corporations and telcos, the decline of the Razr phone has caused the handset division to tumble from second to third in the ranks of the world's largest cell phone makers, bleeding profits along the way. But breaking up is hard to do; as Brown casts off the mobile division he'll also lose a powerful consumer brand (it's tops in U.S. market share) that brings in more than half of Motorola's revenue. He'll be left with a weakened company seeking to compete with Cisco and Apple in wireless equipment and set-top boxes – a bit like David facing Goliath, only without a slingshot.

How did it come to this? Motorola ushered in the mobile phone age in 1983, when inventor Martin Cooper stood on a New York street and called a rival researcher for bragging rights. But today the momentum in the cell phone business belongs to Nokia. A decade ago, when Motorola clung to analog technology and one-off designs, an upstart Nokia recognized that digital technology and standard parts were the future of wireless. And much as Toyota did in the auto industry, Nokia mastered the art of "platforms" – taking a few well-engineered blueprints and tweaking them slightly to support a dizzying variety of products. The result: Nokia sells two of every five phones in the world, and its local design teams can deliver a whole line of handsets with features tailored for customers in India, China, or Russia, often faster than Motorola can produce a single phone.

Critics say Motorola Chairman Ed Zander should have done more to close the platform gap with Nokia in the four years he was in the CEO's seat. Instead, while Zander reveled in the Razr's success, Nokia's agile efficiency helped it stage a quick comeback. "Ed had no experience in this area," says Richard Doherty, principal at Envisioneering Group. "All Ed did was essentially inherit a Razr and try to milk that product design. At the same time, Nokia really did own a platform."

Now it's Brown's job to lead a successful Motorola breakup. Brown, who got the CEO job after streamlining Motorola's automotive and network businesses, is wisely focused on the handset business – he says he's dedicating 80 percent of his time to that division, much of it to finding a tech-savvy visionary who can take over as CEO when it becomes an independent company. "We're looking for a proven leader with results orientation and preferred experience around consumer electronics or wireless, or a technology orientation," Brown says. He argues that the spin-off announcement should help attract a top-tier candidate who wants to run a company, not just a fiefdom.

While he's looking for a leader, Brown will have to continue standardizing phone blueprints for chips and software. A move to more basic platforms is the only way Motorola can become more nimble, and free itself from the boom/bust cycle where it struggles for a hit phone, then languishes when the appeal wears off. A streamlined product lineup will also help the company adjust to past-paced retail environments in Europe and Asia, where Motorola must meet the daunting challenge of keeping cool new phones in front of consumers.

"Retail is about having things in stock – and when you're dealing with storefronts in China with ten glass cases with 300 devices inside, it's a very different inventory replenishment model," says Patricia Morrison, Motorola's chief information officer. "We're doing better inventory planning and making sure we have the right product in the right place at the right time."

Plus, there's the matter of localization – customers in Bangalore crave different phone features than customers in Boston. With a U.S. recession and a European handset slowdown, developing markets in Asia will be especially important. With a streamlined product design process, Motorola would be better positioned to serve the poorest entry-level users in these growing markets as well as the burgeoning middle class. In fact, it's the middle class in these up-and-coming markets that could be the key to Motorola's success. "Folks there are willing to spend up to two months salary to have the latest and greatest cell phone," says Ramon Llamas, researcher with IDC. "Why? Because it's a status symbol, a thing to be seen with."

Once the breakup is done, Brown will have to run what's left of Motorola; and while the handset division's challenges are steep, the rest of the businesses won't have a cakewalk, either. Aside from a niche operation selling two-way radios to governments and other organizations, they mainly compete with Cisco in wireless networking equipment and television set-top boxes. Not only is Cisco a tightly managed organization with dominant positions in both areas, its $23 billion cash hoard is equal to Motorola's entire market capitalization. If that weren't enough, Apple CEO Steve Jobs has lately shown an interest in the market, offering Apple TV as a way to bridge the Internet and the TV set.

All of which suggests that Motorola's toughest challenges are still ahead. While Brown is overseeing a handset business turnaround and making sure the other units are holding their own, he'll also have to deal with Icahn's continuing efforts to elect directors to Motorola's board in May. Those directors would likely push for a faster spin-off timetable and possibly an entirely new management team. Brown also will have to solve puzzles including which half of Motorola will inherit the brand, various patents, and the lion's share of the company's $8 billion in cash and $4 billion in debt.

Despite the challenges, among those not counting Brown out is Tim Tokarsky, who was an executive at startup Micromuse years ago when Brown was the company's CEO. Tokarsky recalls Brown's determination under pressure, and his talent for keeping executives on course. At one particularly tense meeting, he recalls, the executive team was struggling to release a new product, and everybody was giving reasons why it couldn't be done. Brown told them to stop, and leaned across the table. "People, that is your job," Tokarsky recalls him saying. "Your job is to find a way to make this thing work." Chastened, the team went back to the drawing board, and got the product out.

Safe to say Brown now needs all that intensity – and then some – to salvage Motorola.

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