Switch from motorola to a primeco phone

Information Technology

HOW MOTOROLA LOST ITS WAY

F or years, Motorola Inc. had supplied virtually aU the wii'eless phones to Ameritech Coi'p. But when it came time to switch to the new digital technology, sometliing went haywire: Motorola wasn't ready. So in the summer of 1997, Ameritech rolled out its digital service using phones from rival Qualcomm Inc., a

S;m Diego upstait. "I could not stop my strategy or my busi- ness plan and was forced to go witb vendors that were reaily," says Mai-c Baniett, Ameritech Cellular's director of product mai'keting.

An isolated case? If only. Instead, one of the world's most admired com- panies, known for cutting-edge technol- ogy' and gold-plated quality, is coming up stunningly short these days. The former trailblazer in two-way radios, cell phones, pagers, and computer cMps has missed a digital beat and now finds itself sci*ambling to catch up. Even then, its products don't always pass muster In 1994, Motorola claimed 60% of the U.S. market in wireless phones, ac- cording to Hei-schel Shosteck Associates. Today, it has 34%.

The company's wireless-equipment business hasn't fared any better. In the U. S., Motorola lias lost a-ucial gi-ound to Lu- cent Tbchnologies Inc. and Northern Telecom Ltd.—in part be- cause it has sold faulty products. On top of the problems Mo- torola has created for itself, a downturn in the semiconductor and paging industries and tui'moil in Asia haven't helped.

Now, the go-go gi-owth company of a few years ago is barely inching along. Revenue gi'owtli, which soared an av- erage 27% a year between 1993 and 1995, has slowed to 5% in the past two yeare, to $29.8 billion in 1997. Profits have

tumbled, too: down 83% since 1995, to $1.2 billion in 1997, with a 25% plunge expected this year. As for shareholder re- tm-n. it has averaged less than 1% annually in tbe past tlu'ee years, vs. an average 54% in tbe previous three yeai-s. Says Steven Goldman, a professor at Lebigh University who has done consulting work for Motorola: "It's bard to imagine that six or seven yeai-s ago Motorola was one of the most ad- mired companies in the world. Now, you talk about Nokia and

Ericsson and how they're eating Mo- torola's luncb."

Even woi-se for Motorola in the long haul, its hard-earned reputation for quality is being questioned. The same

rv-p TTiTQ VV1 Y\ 0 "Fo of\ o n ^ company that won the Malcolm

The inside saga

and strategic blunders

Baldrige Quality Award in 1988 and once insisted that every executive pre- sentation begin witb an example of how to improve quality, now finds itself field- ing customer complaints. These came to a head in March, when Motorola lost a $500 million contract witb wireless carrier PrimeCo Personal Communica-

tions. Tbe can-ier's beef: Motorola's equipment would some- times shut down, leaving customers unable to make calls.

Motorola admits to having problems in recent years but in- sists the future is bright, CEO Christopher B. Galvin de- clined to comment for this article, but Motorola executives who report to him say he bas set a hui'dle of 15% to 20% rev- enue gi-owth and, despite the company's problems, expects to achieve that vrithin the next year or two. Galvin is betting tbat the industries tbe company is ¡n will gi'ow 15% a year, and expansion into new markets will be frosting on the cake. "We're not very happy with the last few years of business re-

AS MARKET SHARE HAS ERODED...

SHARE OF U.S. WIRELESS PHONE MARKET

•94 •95'92 '93 A PERCENT

DATA: HERSCHEL SHOSTECK ASSOCIATES

140 BUSINESS WEEK / MAY 4. 1998

...MOTOROLA S PROFITS HAVE SLID...

...ANO STOCK RETURNS HAVE TANKED

•97 '92 '93 ^94 '9 A BILLIONS or DOLLARS

DATA, MOTOROLA

'95 •94 •95 '96 '97 A PERCENT

^ SLOOMBERG FINANCIAL MARKETS

suits," says Merle L. Gilmore, an executive vice-president. "Just as we have renewed businesses regularly in our histo- ry. . . we expect to be able to renew oui- business again."

One promising new mai'ket: satellite communications. Mo- torola's flagbearer there. Iridium, will blast the last two pieces of a 6{>-satellite constellation into the ski,- on Apr. 30 and begin offering new voice and paging services for business travelers in September. Iridium, 17.7% owned by Motorola, could gen- erate revenues of $2.6 billion by 2000, says Chase Securities Inc. "If you throw our product in yoiu- briefcase, you know you can make a call fi'om anywhere on the planet, and people can get to you," boasts Indium chief Edward F. Staiano. Mo- torola has $6.3 billion in Indium contracts and it's developing satellite expertise that should help win fiiture business.

To be sure. Motorola remains a force to be reckoned with. Even with its market-share losses and customer complaints, it's still the world's lai'gest maker of mobile phones and a top supplier of wireless equipment. It's a leafHng maker of digital phones overseas. And it remains the most sought-after brand name in mobile phones. Almost every carrier that criticizes the company for its late products says it does so because it wants them so badly. "We need them back in the game." says Dennis E. Strigl. CEO of Bell Atlantic Mobile.

But time is crucial. Galvin, 48, the grandson of Motorola's founder, is working furiously to stem market-share losses and return the company to its roots as a creator of top- notch products. Since taking over 16 months ago, he has re- placed the heads of the wireless-phone and -equipment busi- nesses and has installed top lieutenants in key posts throughout the company.

Galvin also has railed against a culture that he thinks, at tbnes, has been too smug, too engineering driven, and too fo- cused on internal rivalries. To foster cooperation among di- visions, he's starting to pay top execs based on companywide performance—not just their own division's results. At the same time. Galvin has insisted that sales reps better serve customers. Already Motorola is working closely with AT&T Wireless Services to develop an innovative digital phone. "They're bending over backward for us," says an AT&T exec- utive. "That's never happened before." "WARRING TRIBES." The most dramatic change is expected later this spring, when Galvin will restructure the company for the second time in his short tenure. His aim: to consolidate op- erations into three major groups, including a communications division that wilt pull together mobile phones, wireless equip- ment, two-way radios, pagers, and cable modems. Tliis will en- courage the communications teams to coordinate business plans, share ideas, and cut down on development costs.

This also could go a long way toward cui-bing Motorola's cul- ture of "waning tribes." In recent years, division heads had al- most total control of their operations, which meant they could compete or simply refuse to cooperate with other divisions. That cultui'e worked well at times, especially when the cellulai" operations cannibalized Motorola's own two-way radio busi- ness and became a much bigger business. But recently, internal fiefdoms left Motorola's di\isions badly out of step. The semi- conductor gi-oup wouldn't make chips other divisions wanted to use. And the wireless-equipment gi*oup sold customers digital geai- two years ago—while the wireless-phone unit is just now coming out with digital phones for those systems.

Motorola's History IT HIT THE PINNACLE OF SUCCESS ONU TO FOLLOW ITWITH MANAGEMENT MISSTEPS AND ILL TIMED STRATEGIES Galvin and his brother Joseph Galvin found Galvin Manufac- turing in Chicago.

portable FM two-way radio, a backpack walkie-talkie that's the predecessor of today's cellular

AN EARLY r- WALKIE- ^

TALKIE

'A GALVIN

the first

phones. The company goes public.

its first pagers—a business Motorola comes to domi- nate with 85% market share.

• V^>£l Unveils its first microprocessor, the 6800. By 1997, Motorola's computer chip business grows to $8 billion in sa les^21% of the company's revenues.

years and $200 million in devel- opment, the com- pany's first cellu- lar tele- phone net-

AN EARLY EIGHTIES

PORTABLE

work begins commercial operation.

f ^ L M The company's nine- year push to emphasize qual- ity products culminates when it receives the Malcolm

Baldrige National Quality Award from Congress.

George Fisher suc- ceeds Robert Galvin as chief execu- tive officer,

the first non-Galvin to head the company.

l ^ i ^ l ' l Motorola discontinues development of wireless infrastructure based on a standard called TDMA in favor of an alternative, CDMA, which is supposed

to have higher capacity to carry phone calls. Today, the lack of TDMA equipment means Motorola can't supply 25% of the digital U.S. wire less infrastructure market.

I H ^ I ' l G T E . Southwestern Bell, BellSouth, and Metro One drop Motorola because of poor switching capabilitie in its wireless equipment.

I^I:>:1 Gary Tooker takes over as CEO after Fisher leaves for Eastman Kodak.

CHAIRMAN TOOKER

142 BUSINESS WEEK / MAY 4, 1998

Hopes are high that these efforts will put the company back on track. To head the new communications division, Galvin has tapped Gilmore, a long-time confi- dant who had heen i-unning the compa- ny's operations in Euj"ope, Africa, and the Middle East. "The most important objective," says Gilmore, "is that the organization will he able to serve the customer better."

But will it? Motorola has a good shot at recovering if Galvin is willing to make hokl moves. Top of the list: He needs to decide whether to sell the com- [jany's stmggling wireless-equipment business or huy a tele- com-switch maker to holster it. More important, he must take the starch out of Motorola's culture so its executives get back to listening to customers—instead of dictating to them. JARRING PICTURE. So how did the once mighty Motorola lose its way? How could a company once dubbed the "American Samui'ai" for blazing a trail overseas, ftnd itself being beaten to the punch by European giants and outfoxed by U.S. startups? Intemews with cuirent and former Motorola ex- ecutives, customers, rivals, and analysts paint a jarring picture of the company's fall from grace.

Motorola's tale is a cautionaiy one. It's a lesson in how a company reaches the pinnacle of its industry—and becomes blinded by its own success. It was hubris, say insiders, that kept executives from recognizing better technologies, chang- ing markets, and customei^' needs. What followed were man-

The company's semiconductor group wouldn't

make chips other divisions needed

agement missteps, ill-timed strategies, and spotty execution.

It began in the heady days of 1995. At the helm of the company sat Gaiy L. Tooker, a personable if not charis- matic executive who had started work- ing in Motorola's semiconductor opera- tion 33 years earlier. He hail replaced the much praised George M. C. Fisher, who had left to head Eastman Kodak Co. in 1993. At the time, Robert L. Galvin. the son of the founder anil the company's chief for 27 years, polled the board to find out if they would name his

son, Chris, then a senior executive vice-president, as CEO.

Board members balked. They thought the younger Galvin, then 43, was too gi-een. He had started out at Motorola in 1973 selling two-way radios and had headed several key businesses, including the paging division. But .some executives still considered him a lightweight, in part because he did not have an engi- neering degi-ee like most of the other top brass. Still, it was a matter of when Galvin would become CEO, not if. "Inside, people knew it was a monarchy," says one for- mer senior executive.

Tooker, by contrast, was an engineer who had helped Mo- torola prosper lai'gely by giving division heads free rein to run their own show. The company owned the wireless-phone

Information Technolog;

i n Motorola raises $800 nillion for the Iridium satél- ite system, which promises 0 supply communications to îvery part of the world.

l:yM Motorola and slorthern Telecom discontin-

their joint venture for vireless equipment. Lack of 1 strong switch partner lurts Motorola's ability to Jellver end-to-end wireless ietworks.

E U Top execs decide igainst buying General nstrument, a leader in cable "V set-top boxes. Tooker and )thers think Motorola's îxpertise is in wireless com- nunications—not cable nfrastructure. The decision eeps Motorola from wrap- )ing its cable modem ixpertise into Gl's set-top joxes.

l^i^ Execs decide not 0 buy CDMA chip from iualcomm because of I/hat it considers xorbitant costs.

Christopher

QUALCOMM CHIP

Developing CDMA chip internally slows intro- duction of Motorola phones.

i--lii,'.!.'J^:#gTrni Discontin- ues production of its Marco and Envoy handheld comput-

ers, which are design marvels but commercial flops.

MOTOROLA ENVOY

Introduces the Star- TAC, Motorola's

smallest cellular phone. Motorola's

decision to limit distri- bution to carriers that

buy most of their phones from the compa-

ny infuriates customers.

STARTAC CELLULAR PHONE

Galvin, grandson of the founder, becomes CEO.

CHRfS GALVIN

Apple Computer interim CEO Steve Jobs pulls the plug on licensing the Macintosh to cloners. Motorola, which developed the PowerPC chip used in the Mac and had launched a Mac-clone business, has to fold its clone operation. JOSS

Because its network shut down for up to two hours, wireless carrier PrimeCo replaces Motorola with Lucent Technologies as the supplier of wireless infra- structure for a $500 million contract.

PRIMECO : O MMUNICk 1 IONS

APRIL 7,1998 First-quar- ter earnings plummet to half those of a year ago, and Motorola warns that profits will remain below forecasts for several quarters. The stock plunges 1 1 % .

Galvin plans to announce a restructuring into three major groups: communications, semicon- ductors, and components. The goal is to better coordi- nate the R&D and marketing in the divisions making con- sumer products such as cel- lular phones and pagers.

BUSINESS WEEK / MAY 4, 1998 143

Infonnation Technology

business: Its share of the U. S. market had increased to 60% in 1994—Nokia Corp. and L. M. Ericsson were barely a blip on the wireless scene. In January. 1995- Motorola announced results for 1994 that brought Wall Street to its feet: Revenues were up 31%, to $22.2 billion, and pi-ofits soared 53%, to $1.6 billion.

But this also was the year that U.S. wireless caniers be- gan waking up to digital technology. The digital era promised new services like CaJler I. D., paging, and short messaging. The carriers were hooked.

Not so Motorola. In one telling meeting in î'ebruary, 1995, top execs The celiular phoiie ft'om Ameritech met with Motorola's chief clunfí tO analog brass at the cellular industry's big ,. ^., trade show in New Orleans. "I need COStmg the company [digital! handsets... in a year," Bai-- preciouS time nett recalls saying. Motorola's cellular- phone chief, Robert N. Weisshappel, wasn't there, but Ms sec- ond-in-command did her best to reassui-e Bai-nett. "We want to meet your goals," said Suzette Steiger, according to Bai-- nett. "Let me take it under review." AT&T, Bell Atlantic, and others were delivering the same message.

But inside Motoi-ola, it was falling on deaf eai-s. Weisshappe!, a bespectacled fonner engineer, had spent 24 yeai's at Mo- torola and desei-ved much of the ci-edit for making its cellulai- phone bushiess dominant. Known for his explosive temper, liL'; greatest skill was in designing ever smaller stylish phones.

In li)95, he believed that what most consumei-s wanted was a better analog phone, not a dig- ital phone that would have to be

big and bulky because the technology was so new. "Forty- three million analog customers can't be wrong," lie told a small gathering of execs at the cellulai- gi'oup's headquaiters in suburban Chicago, according to one former employee. "It was hard to get him to stop talking about [analog]," recalls one executive. "The rank and file were scared to death."

But Weisshappel had what he thought was an ace up his sleeve. In Jamiai-j', 19%, Motorola introduced the ultrasleek StaiTAt' phone. The phone had taken two years and millions of dollars to develop—and it was a design mai-vel, smaller than a cigarette pack. "Motorola has taken what was never thought possi- ble and made it a reality," Weisshap- pel crowed at the time.

Sui-e, the StatTAC wasn't digital, but Weisshappel thought he could use his design breakthrough to hold back the tide of technology. In the summer of 1996, he and his top execs introduced the so-called Signatm-e pi-ogram. The idea was simple: Motorola would dis- tribute the StaiTAC only to canners that had bought a high percentage, " t>'pically 75%, of their mobile phones from Motorola'—and agi'eed to promote the phones' featui'es in stand-alone dis- plays. The goal was to boost maj-gins with higher-priced prod- ucts such as the $1,500 StarTAC and, at the same time, protect Motorola's market shai'e.

The Signature program turned into a fiasco. In one meet- ing in Bell Atlantic Mobile's executive conference room at its Bedminster (N.J.) headquarters, Weisshappel and his team laid out the requirements for the carrier's executives with what Bell Atlantic Corp. says was a "you-must" attitude. The can-ier's Strigl quickly became ftmous. "Do you mean to tell me that [ii' we don't agi-ee to the progi-am] you don't want to sell the StarTAc in Manhattan?" he recalls teUing Weiss- happel. Weisshappel declined comment on the incident. Bell

Customers started complaining

Motorola's system sometimes shut down

Atlantic wasn't the only company to take exception. CTE Corp. and BellSouth Corp. reñised to participate in the pro- gram, and sales to both carriers dropped.

The company's digital delays weren't caused only by Weiss- happel's preoccupation with Starâ AC. Motorola tried buying semiconductors from rival Qualcomm to get into the digital game faster. But Weisshappe! felt Qualcomm's prices were ex- cessive, and he stopped buying in 1995 to develop the chips intei-nally. As it turned out, the development took two years, cost millions of dollars, and lost the company precious time. TENSE MEETING. Meanwhile, customei-s were launching (iigital sei'\'ice—without Motorola phones. In Febniary, 1997, two yeai-s after he had fii'st asked for digital phones, Ameritech's Barnett met again with Steiger. "We're placing orders now," he told her. "Do you have phones?" She didn't. Ameritech re- luctantly tuiTied to Qualcomm.

By eai'ly 1997, newly minted CEO Chris Galvin had had enough. Rivals Nokia and Qualcomm were putting a painful dent in Motorola's mai-ket shai-e. In a tense meeting at Mo- torola's headquarters, Galvin demanded to know why the mo- bile-phone group hadn't I'eleased key digital phones. Weiss- happel had heard all this before and was tired of the badgering. "I guess I'll just buy Qualcomm." he joked, according to one person at the meeting. Weisshappel left the company the follovring August.

By that time. Motorola had long ago made the decision to make digital phones. But it wasn't that simple. Ttiere were three competing digital standards to choose from bi the U. S. Code Divi- sion Multiple Access ((.-DMA) technology offers sL\ times the capacity of analog .systems—and is now the most popu- lar, with 5()% of the U. S. mai'ket. Time Di\'ision Multiple Access (TDMA), which has three times the capacity, accounts for one-quail-er of today's market. And Global Standard for Mobile Communi-

cations (GSM), the thii-d standard with two to thî ee times the ca- pacity, claims 25% of the U. S. market and is the technology of choice in Europe.

Motorola developed its csM phones first and has become a big supjjlier overseas, as well as in that segment of the II. S. mai-ket. But it has been slow to develop phones for the oth- er two U. S. standards. "We underestimated the engineering effort to bring these products to market," says James P. Caile, coipoi-ate vice-president for mai-keting in Motorola's mo- bile-phone gi-oup. "It's an emban-assment to us."

By all accounts. Motorola's wii-eless-equipment gi-oup should be red-faced, too. In 1995, executives had been aggressively developing digital products, but they put all their chips on just one standai-d in the U. S.—CDMA. AS it turned out, that

146 BUSINESS WEEK / MAY 4, 1998

Information Technology

eliminated Motorola fi-om 50% of the U. S. market. The irony, say foi'mer executives, is the company had been developing TDMA equipment but abandoned it to focus on CDMA. "We were way ahead of eveiybody," laments one engineer who worked at the company during that period. Motorola says it dropped TDMA because it didn't think it had strong enough re- lationships with TDMA caniers to land deals.

Still, Motorola did have some big CDMA wins. In September, 1995, Primeco tapped the com- pany to help

^^^^^^^—^-'^^^^^^^^^^^^— build its national network. And Motorola would go on to nab $5 bilhon in equipment contracts in 1997.

While Motorola was scrapping for contracts, it had to protect what has been the Acbilles' heel of its wireless- equipment business: its lack of a telecom switch. A switch, a type of computer, is particuUuiy important in digital net- works, which need much more intelligence than the old ana- log systems. It's the switch that makes the snazzy new services possible. Motorola has established itself as the king of base stations, which send and receive sound over radio fre- quencies to mobile phones, but it doesn't make switches. Tradi- tional telephone-compa- ny suppliers, such as Lucent and Northern Telecom, make both pieces so tbey can offer customers no-fuss inte- gi'ated networks.

By 1995, the compa- ny had been trying for more than a decade to get a strong switch

How Motorola Missed the Mark

casionally stop working— t̂he lapses lasted between 30 minutes and two hours. PrimeCo traced the problem back to Mo- torola and, aftei- Motorola tried in vain for several months to repaii- it. PrimeCo decided to bring in Lucent. PRICE WARS. AirTouch Communications Inc., which owns half of PiimeCo, also has been experiencing a high number of dropped calls in its Los Angeles market, where it uses Mo- torola equipment. An AirTouch spokesperson declined to comment on whether Motorola would remain an equipment supplier. The stumble in digital has taken its toll: Motorola's share of the U. S. digital equipment market was Vd^e last yeai-, vs. Lucent's 38% share, says the Yankee Group.

Not all of Motorola's problems are of its own making. De- spite a huge share of the pager and paging-equipment mar- kets, price wars have left paging companies without the money to buy products. Revenues in the Motorola group that includes paging dropped 4% in 1997, to $3.8 billion. The problems at Apple Computer have devastated Motorola's computer-chip business, so it is pushing harder on specialized

chips for airbags and

CUSTOMER

PRIMECO PERSONAL COMMUNICATIONS

BELL ATLANTIC

AMERITECH

U.S. CELLULAR a

partner. In 1984, it signed an agreement with DSC Communica- tions Corp. in Piano, Tex., for the two com- panies to mai'ket their equipment together. But in 1990, Motorola got dumped foi" poor switching capabilities by four key cus- tomers—CTF,, Southwestern Bell, BellSouth, and Metro One Communications. In 1992, Motorola instead formed an al- liance with Canada's Northern Telecom—but the partner- ship fell apart two years later when the competitors couldn't put aside their differences. The company again turned to DSC and at times Siemens and Alcatel AJsthom.

But problems continued. In early 1996, Bell Atlantic was getting more concerned about cellulai- fi-aud and asked its two equipment providers, Lucent and Motorola, to come up with solutions. Lucent provided a product within three months. In part because of switching problems, it took Motorola more than a year—and Bell Atlantic is still not satisfied. Strigl re- placed Motorola with Lucent as his equipment provider in Connecticut. "We were veiy concerned that we were getting sucb fast response from Lucent and we were getting promis- es but no action from Motorola," he says. "I couldn't take them at theii" word anymore."

It got worse. In late 1996, PrimeCo started getting com- plaints from customers because Motorola's system would oc-

PROBLEM

Equipment problems in 1997-98 result in its network shutting down for up two hours. PrimeCo drops Motorola's equipment in favor of Lucent's gear.

In early 1996, the carrier asked both Lucent and Motorola for equipment to help prevent fraud. Lucent pro- vided the technology within three months. Motorola took a year—and Bell Atlantic still isn't completely satisfied with its product.

In 1995, the Baby Bell told Motorola, which supplied most of its wireless phones, that it wanted to move to digital equip- ment. When Ameritech launched ifs digital network in spring 1997, Motorola still didn't have products ready. Ameritech turned to other suppliers, including Qualcomm and Sony.

other products. The Asia turmoil also

has contributed to Mo- torola's woes. In 1995, Motorola was beginning to reap substantial ben- efits from its two- decade pusb overseas, paiticulai'ly in Asia. The company dominated the Asian market for two- way radios and pagers. It was running neck- and-neck with Ericsson for leadership of the mobile phone market and, after battering its way into Japan's pro- tected telecom market, it held close to a quar- ter of the mobile-phone market.

But trouble lay ahead. The 200 engi- neers at Motorola's headquartei-s wbo were focused on the Japan- ese market were wed- ded to analog prod-

ucts—despite protests from Motorola's executives in Japan. "Motorola could be revered today if only it bad embraced dig- ital," says a foi-mer Motorola executive wbo was in Japan at the time. Motorola was late witb digital phones and, in the past thi*ee years, has seen its market share slide to 3%. The recent econoniic downturn in the region also has hml demand.

Questions about the company's future remain. Can it catch up in digital phones? Will it sell off its wireless equipment busi- ness? Can Galvin fix its cultui-e, a task of no small magnitude?

Despite its problems, a sense of optimism is creeping through the company's headquaiters. Galvin is telling execu- tives that Motorola must strive for "renewal"—completely new businesses in which the company can recreate itself. After all, Motorola got its name because founder Paul V. Galvin developed a mai'ket in car radios, and then the com- pany abandoned it as cellular service was taking off.

Now we'll see if Chris Galvin can truly follow in his gi-and- father's footsteps.

By Roger O. Crockett m Chicago, with Peter Elstrom in New York

The carrier is forced to test four batches of Motorola's digital wireless phones over a six-month span before they finally work. Meanwhile, similar phones—all used in its Tulsa (Okla.) market—have been supplied by rival Nokia for two years. U.S. Cellular still can't get digital phones from Motoro- la for its Knoxville (Tenn.) and Yakima (Wash.) markets.

148 BUSINESS WEEK / MAY 4, 1998

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