WSJ: Motorola's Seven Deadly Sins

Motorola, founded way back in 1928 (the name is a contraction of Motor-Victrola), is often held up as an example of great American ingenuity — one of the first truly global companies, and a leader for the next century.

As an analyst, I recommended the stock for years. So why is their stock, which in January 1995 was in the low $20s, six years and five times the total number of cell phone users later, still in the low $20s? (Intel went up by five times, Nokia 10 times, in the same time period.) Why are they announcing layoffs?

Motorola committed not one, not two, but many, many bozo no-nos. Here are seven of their sins:

• Nepotism. At analyst meetings, Motorola always showed off its deep bench of seasoned managers who worked their way to the top. Then one day in 1990 it announced the promotion to executive vice president of Chris Galvin, son of then-Chairman Robert Galvin and grandson of company founder Paul Galvin. The bench headed for the exits, most notably George M.C. Fischer to Kodak in ‘93 and Mort Topfer to Dell in ‘94. Why stick around if the throne is decided by genetics? Chris Galvin made COO in ‘93 and CEO in ‘97. With smart, experienced managers gone, a lot of bad decisions began.
  
• Not invented here. Motorola has a long history of innovation, from car radios and color TVs to microprocessors and signal processors, and then to mobile radios and cell phones. Its executives believed they could invent what they needed, and rarely looked outside for ideas. They perfected AMPS, today’s ubiquitous analog cell phone system. But when the market started to look at digital technology, especially CDMA, invented at Qualcomm, Motorola turned up its nose and decided it would invent digital when it was ready to invent digital. Oops. In 1990, Motorola did a licensing deal with Qualcomm, but didn’t get much from it because the engineers refused to work together. It quickly became mired in suits and countersuits not settled until 2000. That’s a lot of lost time.
  
• Competing with customers. Motorola looked on as customers such as Craig McCaw created billions in stock-market value from owning licenses and buying its equipment on credit. Not content to remain just a technology provider, Motorola started buying up cellular licenses in Mexico, as well as banding together Specialized Mobile Radio spectrum, used for truck fleets, into a competing cellular service. In 1994, it sold those licenses to Nextel in exchange for 24% of the company, but the damage was already done. Regional Bells, who don’t like competition in the first place, certainly couldn’t handle competition from a supplier, so they cut Motorola off like a dropped call.
  
  “Fine, we’ll do it ourselves, the future is in satellites anyway,” or so thought Motorola. Chris Galvin and others ran around the world building political and financial support for Iridium, a system of low earth orbit satellites that would allow anyone with a huge Motorola phone to make and take calls anywhere, from Sheboygan to Siberia. Since earthbound cellular in 1997 covered most of the U.S., European and non-Chinese Asian population, Iridium’s blast-off that year was a dud, an invention of a tiny market for a few forest rangers and snow blowers in the gulag. This was not only a huge financial black hole, but a management distraction for a decade.

• Thinking that manufacturing is innovation. My junk drawer is filled with great Motorola cell phones, from the Dyna-TAC brick to the Micro-TAC flip phone. It was the king of manufacturing. But as the market for cell phones moved digital, the game moved from manufacturing tinier and tinier phones to making them easy to use. Nokia and Ericsson caught up on battery life and weight, and all of a sudden things like buttons and menus and ringers and LCD screens mattered. Design for usability vs. design for manufacturability became a stumbling block. Motorola found out that software is really hard.
  
• Vertically integrating. When Motorola got out of the TV business in 1974, it was left with a great semiconductor business supplying the growing computer business. Sure, the company blew it when the IBM PC went with Intel in 1981, but it still sold to Apple and Sun. When cell phones took off in the early ’90s, its internal semiconductor designers came up with just the right products for Motorola cell phones, but they missed out on a profitable business selling components to outsiders. Silicon Valley went horizontal. Motorola missed that lesson.
  
• Failing to leverage the brand. Many in the U.S. don’t realize it, but Motorola was the brand name in cell phones in Hong Kong and non-Scandinavia Europe. Its high quality made it the “Xerox” of mobile communications (how appropriate now, given Xerox’s troubles), the name that represents the industry, without spending the zillions that others spend to establish brands. But like Xerox, it didn’t realize it couldn’t do without marketing forever.
  
• Hiding in the high end. In 1999 and early 2000, as the cellular business was maturing, growth came increasingly from cost-conscious, low-end users who bought low-priced phones or were given them by operators hungry for any new users to keep their own stocks up. Motorola was caught with an obsolete low-end phone, and a massive, multi-hundred dollar price difference between the low and high end, which killed the high end. Ouch.

So Iridium has crashed into a sea of red ink and the future is uncertain, as Palm and other non-phone devices that add voice capabilities join Nokia and Ericsson as competitors. But value investors are circling, and Motorola can easily return to its growth track. First, however, it’ll have to learn to avoid those deadly sins.

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