Motorola's struggle for survival

Motorola, the company that invented the cell phone, is on the brink of disaster, but can the company 'pull an Apple' and make a comeback?

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
6 min read

The iconic American technology company Motorola is in big trouble. But can a last ditch effort by a new top executive help the company pull one of the biggest comebacks in American business history?

That's the question that everyone is asking after Motorola broke the bad news on its quarterly conference call Thursday that the handset business, which has been in serious trouble for more than two years, will likely not make a turnaround until early 2010. The problems are so grave at the company, which reported huge losses for the third quarter, that Motorola is delaying its planned spin-off of the handset division and restructuring the entire business in the hope that it can finally create products that will excite consumers.

Sanjay Jha
Is Sanjay Jha the man to turn around Motorola's handset business? Motorola

As the world economy tumbles toward recession and competitors like Apple and Research In Motion continue to pump out hot new products, Motorola's fight to survive will be an uphill battle. But recoveries do happen. Other companies have risen from their deathbeds. And now with the help of its new star co-CEO Sanjay Jha, Motorola hopes it can add its name to the list of companies that have risen from the ashes.

"We're either witnessing a slow death here, or the darkest night before the dawn," said Sam Wilson, senior analyst at JMP Securities. "But one thing is clear this is a company royally screwed up in a brutally competitive market. And it won't be easy to turn things around."

Motorola invented the cell phone market some 35 years ago when its engineers demonstrated the very first mobile phone call using a device developed by Motorola. A decade later, after services were built, it was the first manufacturer to commercially sell its cell phone, nicknamed the "Brick." And while the Motorola cell phone is what helped the company make its brand a recognizable name throughout the world, it's also what could eventually destroy it.

Motorola's fundamental problem today is that the company has not had a hit phone since it introduced the ultra thin Razr in 2004. But even worse than not having a hit phone, the company seems to have entirely missed a significant paradigm shift in the handset market. Consumers are moving away from traditional feature-based cell phones, such as the Razr, and they are moving toward more sophisticated smartphones, like the iPhone.

Motorola hasn't ignored the smartphone market entirely. It has introduced a handful of Windows Mobile phones including the Motorola Q. But new competitors, such as Apple with the iPhone and Research in Motion with the BlackBerry, have clearly stolen the show and garnered much of the attention in the smartphone category.

"The market essentially moved without them," Wilson said. "There is very little growth left in the standard feature phone market. And when you think of a smartphone, you think iPhone or BlackBerry. You don't think Motorola Q."

Meanwhile, Motorola's traditional competitors have gotten stronger. Nokia has widened its worldwide market share lead. And Samsung has replaced Motorola as the No. 2 handset maker in the world. Now LG is close on Motorola's heals and could bump the company to fourth place.

Betting on Windows Mobile and Google's Android
In an effort to breathe new life into its handset line up, Motorola is betting the farm on two mobile operating systems: Windows Mobile and Google's Android.

Co-CEO Jha, who was hired in August to take over the handset business and help spin it into its own company, said on the company's earnings call that Motorola will dump at least four operating systems, including Symbian, to focus on developing products using Android and Windows Mobile. Mid-tier phones will run Android, while the company will use Windows Mobile for its high-end smartphones.

The problem for Motorola is that it will take time to make this transition. Jha said he doesn't expect an Android phone on the market until the 2009 holiday season.

By that time, Apple and RIM will likely have introduced new products to the market too. But more importantly, Motorola will have to ensure whatever phone it brings to market is a hit. And that is not easy to do, especially given the fact that the company is counting on two operating systems that are already being used by other phone manufacturers.

Motorola image

HTC has already introduced its first Android phone, the G1, which is currently being sold by T-Mobile. And HTC along with a slew of other players like Samsung and LG are already selling several phones using Windows Mobile.

"It's really hard to go into the smartphone market using a third party operating system," said Tavis McCourt, an equity analyst with Morgan Keegan & Co. "It just means that pretty much any phone manufacturer can come out with a product that looks and feels like yours."

Indeed, Apple and RIM, two of the most successful smartphone makers in the market, use their own proprietary operating systems on their devices.

But even though Motorola's prospects for success may look bleak, it may be too early to write its obituary. For one, other than the handset business, Motorola is a strong company. Its home networking, mobility, and enterprise businesses are doing very well.

What's more other companies have also recovered from their deathbeds. For example, Apple, which is a huge threat to Motorola today, was in a similarly dismal place a decade ago. Steve Jobs, Apple's founder who had been ousted in 1985, returned to take the CEO spot at the company in 1997 when it looked like little could be done to save the computer company. Within a few years that changed, and Apple began selling the iPod. The device was by no means the first digital music player on the market and some would argue it wasn't even the best portable digital music player to hit the market. But it created a sensation and helped save the company.

While turn-arounds are not impossible, they're never easy. Just like with Apple's recovery, leadership will be a critical element in Motorola's comeback. It's clear that a lack of leadership and clear vision for the handset business has hurt the company over the past year. Jha, who was hired in August to take over the handset business, had been a top executive at Qualcomm where he worked for 14 years. While at Qualcomm he ran the company's CDMA division. His deep operations experience and knowledge of the cell phone industry should help in his job with Motorola.

But even with good leadership Motorola's battle for survival will likely be made more difficult by the current state of the world economy. In anticipation of harder times ahead, Motorola has postponed the planned spin-off of the handset division into its own company. Earlier this year, Motorola said the split would be finalized in the third quarter of 2009. Now it's looking like 2010 could be the earliest that the Motorola handset division becomes its own company.

And as spending in the consumer market tightens, Jha announced during the call that the handset division will cut $600 million in costs next year, as part of an overall $800 million budget cut. This will include cutting an additional 3,000 workers from the Motorola payroll, two-thirds of which are expected to come from the handset division.

The company is also scaling back its sales efforts in Europe and parts of Asia, where it has had relatively low market penetration. Instead, it will focus on stronger markets, such as the North America and Latin America.

But JMP Securities analyst Sam Wilson warns Motorola to balance its cuts with increased spending in some areas.

"On the one hand they're pulling for the fire escape and with the other their trying to innovate," he said. "You can't cut your way to prosperity. You still have to invest in the business to create products people want to buy."