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Motorola shapes up its act

Four groups emerge from radical resructure

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Motorola CEO Ed Zander is approaching his first anniversary in the job, one that will be overshadowed by the probable loss of the company's largest equipment customer, Nextel. As analysts mulled over the potentially serious impact of that loss, Zander rolled out his long awaited corporate restructuring, in an announcement that was low key, but highlighted many pointers to a future Motorola.

Zander's score card since taking over the battered and bruised corporation from Chris Galvin at the start of 2004 has been generally positive. Motorola has managed to avoid most of the disastrous miscalculations, in terms of product type and timing, that plagued its handset business in 2003. This, and other creative moves in the equipment and integration businesses, have helped greatly improve financial performance and, together with Zander's strong and intelligent leadership style, boost confidence that the wounded lion could still be turned around.

The new structure centers around Motorola's current theme - "seamless mobility" - and reorganizes the corporation into four groups, reflecting the key markets for that notion of ubiquitous, always-on communication. The groups are personal devices; networks; government and enterprise; and connected home. The structure is far simpler than Motorola's current one and will capitalize on its ability to cross-sell products and services, and seek to reduce its well known susceptibility to in-fighting and fiefdoms.

  • Personal devices, headed by Ron Garriques, will combine all subscriber units, not just cellphones but also PDAs, fixed wireless CPE and other units.
  • The networks division, led by Adrian Nemcek, will concentrate on cellular infrastructure, core IP networks, broadband wireless and other network-related applications and services.
  • Government and enterprise, headed by Greg Brown, will focus on delivering mobility applications for Fortune 500 class enterprises, governments and automobile manufacturers, including the important public safety business.
  • Dan Moloney will run the connected home unit, which will focus on broadband, set-top boxes and emerging technologies such as UltraWideBand home media networks.

The company said all the activities of the divisions will be centrally architected, and this will include supply chain operations, information technology, finance, human resources, legal, strategy and business development, marketing, quality and technology. Motorola will also form a new organization to oversee global manufacturing, distribution and procurement.

Motorola, despite several years of under-performance and poor management, is now in a strong position to capitalize on its unquestioned engineering strengths and deliver a portfolio of products and services for the next generation of ubiquitous communications. It has unparalleled technological expertise in broadband wireless and the chance to integrate those emerging technologies with 3G; the ability - unlike rival Nokia - to span home, mobile and enterprise systems effectively; and a strong, though often overlooked, base in public sector. The new structure could provide the organizational framework to leverage these assets.

The handset business

Ironically, it is the largest business, handsets, that fits uneasily here. Motorola requires higher margins than the cut throat device market can deliver, unless it is considering a far more radical reorganization than this one, and it lacks the market share or brand of Nokia to push into the real cutting edge of mobile devices. On the other hand, a business that combined integration services and provision of network equipment from home media systems to 4G wide area networks could deliver high margins, high growth and play to all Motorola's strengths, enabling it to cash in on its R&D excellence and combine its various activities to be more than the sum of their parts.

Could Motorola sell its handset business - as we suggested when Zander took over a year ago - or take the fashionable route of pushing it into a joint venture, probably in China - a market on which Motorola is more dependent than any of its rivals. The decisions it must be considering mirror those at its closest European equivalent, Siemens. The German company, too, is seeking to turn around a business with too much legacy baggage and focus on its strengths in integration and high speed networks, with a keen interest in China and Eastern Europe.

Siemens

Last week, Siemens was reported to be planning to sell all or part of its mobile phone business, which was recently merged with its other wireless communications activities, illustrating a defocus on the pure cellular handset sector. Siemens denied the reports, but they made much logical sense. The most likely route would be an expanded venture with Ningbo Bird, the company's Chinese joint venture partner. In May, the two companies agreed to develop handsets for China that will be sold through Bird's 30,000-shop dealer network under the Bird brand. The products would eventually be marketed outside China by Siemens itself.

A full venture with Bird would mirror the path already taken by Alcatel, which in April sunk its handset unit into a venture with another Chinese phonemaker, TCL, leaving the French giant free to focus on its core infrastructure businesses, while putting it in a position to reap the rewards of an expansion of Chinese vendors into the global handset market.

Such a move would be radical for Motorola, but is unlikely to be off the agenda altogether. It remains to be seen how brave a CEO Zander will be after his healthy start. He is unlikely, however, to announce any major shake-up - especially one that would increase the focus on infrastructure - until the dust has settled on the Nextel deal and its negative impact on that business.

Loss of the Nextel deal

So how serious is the loss of Nextel - a relationship into which Zander had put huge personal effort to rebuild bridges? The impact can be exaggerated - although Nextel had committed, after Zander's efforts, to implement the software upgrade to its iDEN network, WiDEN, that was always going to be its last investment in its unique network before moving to a standard - either CDMA or OFDM - as it shifted from its odd 800MHz spectrum into conventional PCS at 1.9GHz.

Motorola could have hoped to supply that CDMA network, or even to do a deal with Flarion had Nextel picked the Flash-OFDM alternative. Its prospects at Sprint, which is already rolling out CDMA EV-DO with its own preferred vendors, are weaker, though there is a clause in Motorola's agreement with Nextel that "ensures Motorola will supply 50 per cent of the units for Q-Chat PTT if Nextel adopts a non-iDEN PTT solution." QChat PTT is the CDMA version of Nextel's most important service, Push to Talk, developed by Qualcomm. This clause, according to American Technology Research, means "Sprint would almost have to consider Motorola as a supplier even if there is no contract".

There is no denying, though, that this is a blow, however well signposted. As Nextel's exclusive supplier of networks and handsets for 10 years, Motorola derives 20 per cent of its revenue in both activities from that one customer. iDEN handsets are also Motorola's most profitable, because of its monopoly status, with an average price of $250, compared to $170 for CDMA and even less for GSM. Ehud Geldblum of JP Morgan Chase believes that the loss of the $3bn a year iDEN business will shave eight cents off annual earnings per share for the next three years, translating to about 10 per cent of per share earnings at current levels.

But, with the iDEN technology on the way out anyway, Zander will clearly have a business plan that involves reducing dependence on the technology and compensating for its decline with new products and services. Nextel made a commitment this week to keep buying iDEN gear for three years. Even with falling volumes, this should be enough breathing space for a company of Motorola's strengths to come up with a fallback plan.

Motorola is a significant shareholder in Nextel, and therefore in the combined company.

Copyright © 2004, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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