NYTimes. Motorola Rolls Itself Over [see bottom on I*]
July 14, 1999
After a Bad Year, Almost Everything Is Coming Up Rosy,
and Wireless
By DAVID BARBOZA
CHAUMBURG, Ill. -- A year ago, Motorola Inc. was faltering
badly. Investors were dumping shares, complaining that the
company had lost its way. It had missed a critical beat a few years
earlier, betting on analog products when the world began craving all
things digital.
The company took a charge
against earnings of $1.9
billion a year ago, but
Tuesday it is on the rebound.
Shares that were selling for
$38 last October are going
for nearly $100 -- a $30
billion leap in market value.
The reason: a restructuring
that trimmed the work force
and refocused the company's
marketing of cellular
telephones and
semiconductors. In addition, demand has begun to revive in the critical
Asia market, which slumped in 1998.
Tuesday, Motorola handily beat Wall Street projections by reporting
earnings of $273 million, or 44 cents a share, for the second quarter of
the year, up from $6 million, or 1 cent a share, a year ago. Analysts had
estimated 41 cents a share. The announcement came after the close of
trading. But ahead of the earnings release, shares of Motorola closed at
$96.50, down $2.50, on the New York Stock Exchange.
Underlying Motorola's recent spate of good fortune is a less well-known
strategic shift, top executives say. The company plans to recast itself from
a manufacturer of technology hardware to a software maker. The
company is boldly vowing to bring the World Wide Web not only to
cellular telephones and pagers but even to the automobile, which could
soon be wired to download video games for backseat passengers.
It is unclear whether Motorola's futuristic musings are just that, but the
company has already invested billions of dollars and hired thousands of
new software engineers. It also says it will equip every cellular telephone
it makes next year with an Internet browser.
"We are becoming much more of a software company," said Dennis A.
Roberson, chief technology officer at Motorola. "It's a very significant
break for us. There are more software capabilities in the devices we
produce, and we're expanding into the Internet space."
None of these ambitions would be possible, of course, without a
recovery in the sale of cellular telephones and microchips, which account
for about 68 percent of revenue. This year, the company is finally selling
substantial numbers of digital cellular telephones, allowing it to compete
against Nokia of Finland and Ericsson of Sweden.
Still, executives at company
headquarters here in Schaumburg, a
suburb of Chicago, are cautious
about using the word "turnaround"
just yet, and for good reason.
Motorola faces some huge problems,
ranging from a billion-dollar
investment in a tottering satellite
venture called Iridium to the challenge
of regaining market share in the
increasingly competitive market for wireless products and infrastructure.
Although it is making and selling digital products, for example, Motorola
still does not have a digital telephone able to supply the One Rate plan at
AT&T Wireless, one of the nation's largest wireless service providers.
Motorola executives say such multiple-system phones should be ready
later this year.
Still, Christopher B. Galvin, the 49-year-old chief executive, talks about
creating a "new Motorola," a company in search of "breakaway
opportunities." Doing so means fostering double-digit growth at a
technology giant with $30 billion in revenue and more than 130,000
employees. Motorola is emphasizing software ventures, in part, to make
the company more flexible and less capital intensive.
Wall Street analysts have been almost universally optimistic about
Motorola in the last year. But several analysts said the company still had
to prove it could execute its plans.
"They have been a well-regarded stock lately," Kenneth Leon, a wireless
communications analyst at ABN Amro, said of Motorola. "But they have
a growth rate in the low teens, and their competitors, like Lucent and
Nokia, have growth rates in the 20's and 30's."
Motorola says a corporate makeover is well under way. Some factories
have been shuttered and their functions farmed out, and executives have
been trying to do away with a "warring tribes" culture that pitted one
division against another.
Gone is the sense of invincibility that once pervaded the company,
analysts say.
"Motorola had an insular attitude," said Merle Gilmore, an executive vice
president at the company. "We need to change that view. Things are
happening too fast. Customer demands are too exacting. Now you need
to be part of an overall ecosystem."
The company found itself outside that ecosystem in recent years and did
not adequately foresee technological changes and market trends.
Motorola stumbled when the wireless industry began to shift from analog
to digital technology. In 1994, it practically owned the cellular market
with a 60 percent share in the United States. Nokia, which then had only
11 percent of the United States market, is now the leader at about 34
percent, with Motorola second at about 31 percent, according to
Herschel Shosteck Associates. Motorola executives saw the shift coming
but did not expect it to come so swiftly, they now acknowledge.
Motorola's problem was compounded by a rash of product delays,
marketing miscues (Motorola's once trend-setting flip phones have
recently been perceived as having lost their fashion edge) and repeated
complaints that the company was using bully tactics with some of its
customers.
"They used to be very arrogant," said Phillip
Redman, an analyst at the Yankee Group in
Boston. "They used to push phones on people
and say, 'If you want our phones, you have to
buy so many.'"
The company suffered huge losses in cellular
handsets and infrastructure -- the base stations
and servers that make cellular calls possible. A
$1.1 billion profit in 1997 became a loss of $1
billion in 1998.
Motorola is trying to fix its cellular and chip divisions. In recent months,
the company has sold off its low-end chip manufacturing business, laid off
more than 17,000 employees and shifted more than 3,000 engineers to
develop new digital handsets.
"In handsets, Motorola is emerging as a winner again," said Matthew
Hoffman, an analyst at Dataquest. "And the pie is growing 30 to 40
percent a year. There could be 200 million handsets sold this year. And
that's good for Motorola."
The company faces a fierce competition in cellular infrastructure from
Ericsson, Nortel and Lucent Technologies. All three rivals possess a
"switching technology" -- the costly and critical component that is at the
hub of all telephone service.. Motorola is the only major supplier of
cellular service without an end-to-end solution.
"They have a big challenge ahead on the infrastructure side," said Jane
Zweig, an telecommunications analyst at Herschel Shosteck.
Motorola's executives say, however,
that they are working on a solution: a
complex packet-switching technology
that would shuttle voice, data and
video from the Internet to wireless
devices. To get there, Motorola has
announced ambitious joint ventures
with Cisco Systems Inc., a leader in
networking, and with Sun
Microsystems Inc., best known for its
Java programming language and its
Solaris operating system.
Motorola and its partners are by no
means alone. Lucent (which bought
Ascend Communications) and Nortel
(which acquired Bay Networks) are
also working to develop wireless
Internet access, and what they call the
"broadband living experience." But
Motorola is betting that its approach
will put it ahead of the pack,
eliminating the need for circuit
switching technology.
The company is experimenting with
microchips for everything from shoes,
doorknobs, sofas and the family pet
that it hopes will pervade an
interactive society in which trillions of
snippets of voice, data and video are
beamed around the globe. Mr.
Roberson, the chief technology officer
at Motorola, foresees enormous opportunities as well as fun in the "trillion
device problem," linking everything up wirelessly. "Embedded processors
of the world unite," he said with a smile.
Motorola chips would be the "Digital DNA" inside a new breed of
"smart" products, in the company's view of the future. Motorola chips
already power cellular phones, digital cameras and 3Com Palm Pilots,
television sets, printers and microwaves.
Motorola does not just want to make the chips. It wants to design and
develop the software that runs them, and to work with customers to
create new products.
The company is developing myriad devices, from flat-panel displays and
set-top boxes to a wireless biotechnology product that might someday
take an individual's blood sample and instantly transmit it to doctors, or
even offer a diagnosis using a genomics data base.
For the short-term, Motorola is trying to broaden its revenue sources.
The company has a strong two-way radio business (sold to governments
and large industry), consumer-oriented walkie-talkies, called Talk About,
and "smartcards," which can be used for security clearances, automated
tellers, debit cards and other types of E-commerce.
Its paging business is slumping, but Motorola is a leader in cable modems
and chips supplied to networking companies like Cisco Systems..
Motorola is also a leading supplier of the auto industry, selling global
positioning satellite technology.A new division is working on
high-definition television and interactive television.
One of the more troublesome projects, however, is the Motorola-led
consortium called Iridium, a big satellite communications network that has
teetered on the brink of bankruptcy in recent months. The network of 66
satellites, which offers telephone service anywhere in the world, has had
a difficult time signing up subscribers and making loan payments, some of
which are guaranteed by Motorola. Analysts worry that Motorola could
be be hurt by a mounting debt load.
"Iridium is an exposure, and no one is happy with it," said Wojtek
Uzdelewicz, an analyst at S. G. Cowen. "The biggest risk is that Iridium
will stay afloat and Motorola will increase its financing, and then you'll
have this sinkhole. The hope is that Motorola makes a decision very
soon."
Motorola is moving ahead with another satellite venture called Teledesic
L.L.C., which would deliver voice, data and high-speed Internet access
to hand-held devices. Other partners in the $9 billion effort include
William H.
Gates, the Microsoft chairman; the cellular pioneer Craig McCaw and
Boeing. Last week, Motorola won the contract to develop the satellites
for a low-orbit system that is expected to be launched in 2004.
Wall Street analysts say that if the satellite ventures work, Motorola's
prospects would be enormous. Meantime, they are cheering Motorola's
plan.
"We like the story, we think the turnaround is for real," said Michael
Ching, an analyst at Merrill Lynch & Company. "The challenge, of
course, is execution. Now Motorola has to deliver the products on a
timely basis."
Copyright 1999 The New York Times Company |
