Motorola: It's the phones

NEW YORK (Fortune) -- The real problem with Motorola's mobile phone business is the mobile phones, not the business -- and a spinoff the company announced Wednesday won't fix the problem, say observers.

Spurred by a proxy battle with activist investor Carl Icahn, Motorola (MOT, Fortune 500) said it will spin off its handset business to shareholders sometime next year. The move comes two months after the company said it was considering its strategic options for the handset business and follows more than a year of disappointing financial results at the No.3 phone shop. The financial highlights include a big swing from profits to losses and a dramatic dip in market share to rivals as Motorola fails to develop popular new phones.

Ever since the Razr phone fell out of fashion two years ago, Motorola has been left on the sidelines of an otherwise robust growth cycle in the cell phone industry. Outfits like Research in Motion (RIMM), Apple (AAPL, Fortune 500) and Sony Ericsson have swept in with compelling smartphones, making big gains in the high-end market. And at the other end, No.1 Nokia (NOK) and No.2 Samsung have enjoyed healthy demand for mid- and low-price phones across the world.

The spinoff may help isolate Motorola's other businesses, like TV set-top boxes, wireless networking and its walkie-talkie unit, from the turmoil at the cell phone operation. But critics point out that a spinoff won't address the phone business's problems with production costs or design agility. Motorola still needs successful phone designs that can be made profitably, say analysts and investors. Further handicapping the recovery, no business chief has been chosen to guide the new unit.

"The fundamental problem remains the same," says one money manager who asked not to be identified and who sees greater value in Nokia. Motorola's "handset business cannot compete in a global economy, either from a scale or scope basis," he says.