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Moto to get ASBO?

For sale: One ailing mobile phone business

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Analysis Motorola's share price rose ten per cent after the company issued a statement saying it may sell or spin out its mobile phone business.

So the company need only issue eight such more statements, and the share price will have returned to its October 2006 peak of $26. Cynicism aside, it's hard to see what Motorola wanted to achieve by bowing to its long time antagonist, the shareholder activist Carl Icahn.

To increase shareholder value, Icahn proposes, Motorola should spin out the loss-making phone division, just as it spun out the loss-making semiconductor division and its military systems unit at the turn of the decade.

"For many months I have been publicly advocating the separation of mobile devices from Motorola's other business," said Icahn, "and I am pleased to see that Motorola is finally exploring that proposal."

For years, Motorola's mighty chip business dragged down the company's earnings. The spin-out has been tough: Freescale, as it became called, lost $2bn on sales of $6.3bn in 2006, and lost $1.6bn on sales of $5.7bn last year. But those losses aren't Motorola's problem any more, and if the phone business got an ASBO, then they wouldn't be either.

Diamonds in the rough

There's little disagreement about Motorola's assets. The company has mature channels to market, a coherent brand, and excellent radio know-how - so while it may not make its own components in house, it knows how to test and integrate them. Its designs are much more resourceful and inventive than people give them credit for, too. The $35 MotoFone showed it could hit a bargain-basement Bill of Materials target with some style, and it's this low-end market that has the most growth potential, with first-time phone users in emerging markets. At the high end, Moto's Q9 and Z8 again show what can be done with standard components (Windows Mobile and UIQ, respectively) when good design is married to good project management - and pulling in the same direction.

Given all these qualities, and the fact the market is expanding, Motorola's condition is far from er... terminal. (No pun intended.)

However, few disagree about the health of the business either - it's sickly - nor the extent of the challenge for Motorola or a possible purchaser to knock it into shape.

During three generations of leaders from the same family (Bob, Paul and Chris Galvin), the company spawned a bureaucracy that still hampers decision-making. Organisational fiefdoms ensure tough decisions take far longer than they should, or are never made at all.

For example, Motorola supports 12 different phone platforms: three versions of P2K (all separate development trees - so a fix must be written three times), two versions of Linux, and also Google Android, Danger, Ajar, Windows Mobile, Symbian, and a couple more besides. (The MotoFone was one example.)

Motorola still has several thousand developers working on Linux, which still can't do 3G after six years of trying. That should be one of new CEO Greg Brown's easier decisions...

Fixing Motorola requires the kind of ruthless rationalisation begun at Apple in the mid-1990s by Gil Amelio and continued by Steve Jobs, who culled projects such as the TV set-top box, the Newton PDA, sub-Notebooks and Apple's equivalent of Motorola Linux back then: OpenDoc, a development project involving thousands that was going nowhere. Jobs then cut a Mac portfolio of over 20 models into a 2x2 matrix. Competing fiefdoms were brought under a central dictator. This isn't a template for Motorola, but it's an analogy for the kind of ruthless reorganisation that's needed to get the company pulling in the same direction again. And if Moto doesn't do it, a buyer must be persuaded that it's possible.

The touted price of $6bn-$8bn reflects the scale of the task in turning the business around: it's more than a token $1, but not by much.

Either way, time is running out.

The phone business recorded a $1.2bn loss in 2007, and with market share crashing down from 20 per cent to 12 per cent, it's harder to exploit the economies of scale and bargaining power that come from being a Tier 1 manufacturer.

Rather than buying back its own shares, Motorola should make these tough decisions. There isn't much of a Moto left, without the phone business. As one analyst pointed out this week: "It doesn't make sense for them to have spent so much money developing their consumer brand if they're going to use it to sell set-top boxes and emergency radios."

RIM may be a possible buyer, but it would surely serve its own shareholders by focussing on its key assets and expanding its niche gradually - a strategy that has served it very well so far. Gullible buyers such as BenQ, which acquired Siemens phone business and almost destroyed itself as a result, don't pop up every day. ®

Next gen security for virtualised datacentres

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