Motorola close to naming new chief for cell phone division
Head of handset unit will face huge challenges.
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| Motorola's focus on design left it vulnerable as consumers began to demand multimedia phones that required sophisticated software. |
(Fortune) -- After hunting for more than four months, Motorola is in late-stage talks with a few candidates about running its troubled cell phone division, according to a person close to the process.
Whoever takes the job will have a chance at business stardom - the opportunity to return the famed division to its glory days. But he or she will also have one of the hardest jobs in corporate America. Motorola (MOT, Fortune 500), which just a year and a half ago was posting record profits and sales from its ultra-thin Razr phone, is now on average losing $12 on every phone it sells. With Motorola's stock is stuck around $9, Wall Street is valuing the handset division at a paltry $1 a share.
How is it that this 80-year-old American icon - the company that invented the cell phone - finds itself trying to convince investors not that its mobile business can thrive, but that it can even survive? And what can the company do to get out of this mess?
Even if CEO Greg Brown pulls off the plan to separate the cell phone business in 2009 - a strategy devised to help it fill the top handset job and to meet the demands of investor Carl Icahn - Motorola will be a shadow of its once proud self. Without the cell business, the company is left making products such as set top boxes for cable companies and communications gear for businesses and law enforcement. Those divisions, with combined revenue of $17.7 billion last year, are providing life support for the ailing mobile unit, which has lost $1.5 billion in the last five quarters.
Motorola has a long history of boom and bust. In the mid-1990s, the company dominated the nascent cell phone market only to miss the shift to digital and get clobbered by Nokia (NOK). In 2003, after deep cost cuts, a problem with the cameras on its line of flip-top Triplet phones left Motorola unable to ship millions of units for the Christmas season. The board eventually fired CEO Chris Galvin, the grandson of the founder, and brought in Ed Zander, a longtime No. 2 at Sun Microsystems (JAVA, Fortune 500).
The Zander reign, which ended last November, was filled with bitter infighting and backstabbing. Even now, while current and former executives won't talk on the record, privately they are quick to blame others. Plenty of people who once trashed Galvin now sing his praises. Others blame Zander. Or the board. Or Ron Garriques, who ran the handset division while it rode the Razr wave and then bolted to a top job at Dell (DELL, Fortune 500) just as sales began to slide in early 2007. After Garriques left, in fact, Zander told the board that Garriques created a mess deeper than he had ever realized, according to a person close to the board. Asked if he was blindsided, Zander told Fortune: "As CEO you're not supposed to be, but I was." (Garriques declined to comment).
First on the to-do list of the new head of the handset division: Visit all the carriers, and mend relationships with their execs. The last few years were filled with so many broken promises that top executives at the carriers privately say they feel burned.
The new leader needs to assure them that Motorola's products will show up on time. Motorola desperately needs the carriers help to get out of the hole. They subsidize the handsets, after all, and they sell them. An extra $25 dollar subsidy on a popular phone can turn a poor quarter into a profitable one. Working in Motorola's favor is that the carriers want competition. "Many would like to see us strong again as soon as possible," says Brown.
The oft-told storyline is that Motorola failed to come up with a hit product to replace the Razr. While that's true, the problems are deeper. Motorola doesn't need one hit product. It needs a line of solid products. And a number of miscalculations have left it scurrying to catch up.
When the carriers were upgrading their networks to what's called 3G - a system that's commonplace in Europe and Asia and is far faster for multimedia applications and surfing the Web - Motorola was almost entirely focused on its 2G phones. Making matters worse, it had an agreement to buy all its chips from the semiconductor business it spun off, Freescale. Some execs say that problems at Freescale stalled Motorola's efforts. In January, Motorola paid $276 million to get out of the agreement with Freescale.
Motorola also has been too focused on design - to the point where it lost sight of what consumers want to do with their phones. Consider the original Razr. The appeal was its sleek form. As a phone, it wasn't great. The software was limited, and the camera was lousy. It was good enough, but expectations change fast in this business. Today, people want to listen to music on their phones, access the Web and send quick text messages. That's the stuff of great software, which Brown says is now becoming a priority for Motorola.
The company is also playing catch-up as it tries to simplify its systems. Motorola long had an array of platforms - different software architectures - for its lines of phones, and it's been working to scale them back. That in turn should help the company produce phones on time. Still, it's a slog. Such an overhaul can take a couple of years to achieve. "We're working with a sense of urgency," says Brown.
Indeed, urgency is what the company needs. "No phone maker has ever had problems as deep as this," says Citibank analyst Jim Suva. "The bet now is whether Motorola's mobile business will completely go away or not."
Some industry execs and analysts are betting the business will die. "The spinoff is far fetched," says Edward Snyder, a longtime Motorola analyst who runs a firm called Charter Equity Research. "You can't spin off a division that losing $300 to $400 million every quarter."
History is full of cell phone companies that couldn't get out of such a situation, Snyder points out. Ericsson (ERIC), Siemens (SI) and Qualcomm (QCOM, Fortune 500) each gave up. Stale products crushed sales. They cut costs. Talent left. The business moved so fast that they failed to get back on track. Under that scenario, Motorola's handset business would end up getting bought; even some top Motorola officials have privately speculated it could end up a division of Research in Motion (RIMM) or one of the Korean makers. Or the company could end up licensing off the still-strong brand that is Motorola.
To be fair, though, Motorola could very well escape that fate. It still has a strong global sales channel and supply chain. And while the company is scurrying to get an array of 3G phones to carriers - competitors had theirs out in early 2007 - its engineers and designers in the Chicago suburb of Libertyville are toiling away on scores of new products that Motorola promises roll out later this year and in 2009.
And while investors are dubious, one of the biggest, Carl Icahn, has been building his position, which in May he upped from 6.4% to 7.6% of the company - just after Motorola reported that its first quarter sales of handsets had fallen 39%, to $3.3 billion. And as Brown likes to point out, this is a company used to a hard fight. "Motorola has a strong track record of reinvention and resilience," he says. 
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