Motorola Handset Split Could Give Further Opening to Rivals
Published on: 26th March 2008
NEW YORK -(Dow Jones)- Motorola shareholders may be pleased with the company's decision to split its handset business now, but competitors may have the last laugh.
The rigorous process of separating the businesses - which could take roughly a year - will provide a loud distraction at a time when Motorola needs to focus on execution. The Schaumburg, Ill., equipment maker has lost a third of its market share last year as its once-popular Razr phone faded and as rival products garner more buzz and sales. Spending months separating the handset business and searching for a new leader isn't seen as immediately addressing Motorola's larger problem of developing products that will capture consumers attention and win back market share.
"We're not convinced splitting the organization ultimately enhances shareholder value," said Mark Sue, an analyst at RBC Capital. "The disruptions will be meaningful this year. Once again, Motorola's pain will be other handset vendors' gain."
Motorola argues that the separation of the handset business will allow it to hire a "world class CEO," allow management to better focus on bringing out better products and accelerate the pace of its turnaround, Chief Executive Greg Brown said in an interview with Dow Jones Newswires.
"Our priorities haven't changed with this announcement," he said. "We remain committed to the performance of mobile devices business."
Shares recently rose 18 cents, or 1.8%, to $9.94, although they peaked at $10.35 earlier in the session.
Skeptics believe that, over the next year, Motorola will endure customer confusion, interruptions with the supply chain, and ultimately the loss of more market share. More importantly, a lack of stable leadership has left the mobile devices business without clear direction, which is only exacerbated by the uncertainty of a spinoff.
"It's a terrible idea," said James Faucette, an analyst at Pacific Crest Securities. "It hastens the demise of the handset business."
At the same time, Apple continues to take share in the higher end market with its iPhone, Samsung Electronics overtook Motorola as the world's second-largest handset maker.
The key priority for Motorola is to find new leadership for the rudderless handset division.
"It's basically headless right now," said Ellen Daley, an analyst at Forrester Research.
Since the departure of Stu Reed, Brown, who has more experience on the networks side, has taken stewardship of the business alongside his CEO duties. It's unclear how well Brown has juggled the different responsibilities, but employee morale is said to be low.
"They're all working in different directions," Faucette said. "There's lot of frustration."
Motorola will need to tap a leader that is more charismatic and isn't just a "numbers guy," Daley said, adding that the executive would need to clean house to rid itself of the current corporate culture.
Another dilemma is the lack of immediate candidates that come to mind. Still, the possibility of turning around the troubled but high-profile business could appeal to executives.
Motorola still boasts a large pool of creative engineers and designers, but needs to make better use of them.
Motorola would look into providing incentives and other retention programs to keep its talent, Brown said. He added that running the mobile devices business as a separate unit may give those employees a greater role and allow the unit to attract new talent.
Motorola's labs have processes in place to accelerate talent and ideas, and bring them to market. Daley said the company needs to put those programs "on steroids."
A Tougher Game
Even as Motorola works through its internal problems, it still faces competition on all sides.
Apple may draw the most attention with its iPhone, but Nokia and Samsung have been the key winners in taking market share away from Motorola.
Nokia gained 3 percentage points of market share last year, while Samsung took nearly 2 percentage points even as Motorola's share went to 14% from 21% last year, according to Gartner Inc.
Nokia and Samsung have steadily pumped out new handsets. And, unlike Motorola, they have been able to successfully attack each segment, from mass market phones to the high-end third-generation, or 3G, devices with the latest features.
It takes between six to 18 months to bring out a new phone and, while Motorola has sat at the longer end of the range, its rivals have been able to turn out phones at a more rapid rate.
Also nipping at Motorola's heels are Sony Ericsson, which is a joint venture between Sony and Ericsson, and LG Electronics, each of which added market share last year at Motorola's expense, according to Gartner.
The bleeding is likely to continue.
"This year is when you'll see Motorola lose significant market share," Sue said.
Spokesmen for Nokia and LG weren't immediately available for comment. Spokesmen for Sony Ericsson and Samsung said their companies don't typically comment on competitors.
With competition increasing, it will take a year - in ideal conditions - and more likely two before Motorola turns its handset business around, Daley said.
The rest of the business - which consists of wireless network equipment, TV set-top boxes, government and public service radios, and enterprise wireless devices - could also suffer from the near-term disruptions.
In particular, Motorola's set-top box business could be vulnerable if disruption causes it to lose share against rival Cisco Systems and its Scientific-Atlanta unit, according to Lehman Brothers analyst Inder Singh. He added that Scientific-Atlanta has been gaining a few points of share against Motorola in the past few years.
Hiccups have occurred even without distractions. Verizon Communications earlier this month reported a shortage of set-top boxes for its FiOS TV service because of supply chain problems at Motorola.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; email@example.com
(END) Dow Jones Newswires