Motorola plots its comeback as cellphone icon

Talking with Greg Brown, Motorola's new CEO, is a bit like stepping into The Twilight Zone: Both require you to suspend disbelief, at least temporarily, and simply go with the story line.

Brown says the company's board is spinning off Motorola's mot troubled cellphone division for one reason and one reason only: to "unlock" the value of the business, which has no strategic value to the rest of the company.

Carl Icahn, the corporate-raider-turned-shareholder-activist, has pushed Motorola for more than a year to take such a step. Brown says, "That really wasn't a factor."

Even if the handset division were flying high and Icahn hadn't shown up, he says, "The result would have been the same. We would have spun it off anyways."

So it goes these days at Motorola, which is struggling to recover from a string of management, marketing and product blunders. The missteps have left it ill-prepared to compete in the wireless industry it birthed and promoted for more than 35 years.

Motorola's answer, for now, is to split itself into two parts: one devoted to the money-losing handset business, the other to the profitable parts of the company that provide software, hardware and broadband gear to a range of government and corporate customers. About half of Motorola's $37 billion in annual revenue is generated by the cellphone business. The balance is from the other two divisions.

The split, which will result in two independent companies with separately traded stocks, is expected to take about a year to complete. Investors will wind up with shares in both. Brown plans to join the successful part of the business. A search for a CEO for the handset business is underway.

Some analysts are lukewarm, at best, to Motorola's plan. "Breakups don't usually enhance shareholder value," says Mark Sue, an analyst at RBC Capital in New York.

In Motorola's case, Sue thinks the split could actually be detrimental. "It will still be the same company. The brand will be diluted, which is a concern for investors."

On a positive note, Brown's willingness to jettison the storied handset division at its weakest point "hastens change," says John Jackson, a senior analyst at Yankee Group. Otherwise, he says, there probably "would have been a natural inclination" to stay the course "in a hunker-down mode."

Fixing the handset business

Motorola for decades was considered a shining example of American innovation and leadership. Founded as a manufacturing company in 1928, its superstar status was cemented in 1973 when engineers envisioned, designed and produced the world's first cellphone. The 28-ounce phone finally went on sale in 1984, igniting a global wireless revolution.

Now, it's unclear whether Motorola's $18 billion cellphone business can even survive. In the fourth quarter, sales plunged 38%, resulting in a $1.2 billion loss for the division. The nose dive pushed Motorola into the red, setting the stage for its breakup plan.

Motorola's pain is global in nature. In 2006, the company claimed 21.1% of the worldwide market for handsets. By the end of 2007, its share had slipped to 14.3%, according to Gartner estimates. During the same period, No. 1 Nokia nok saw its global share expand to 37.8% from 34.8%. Motorola reports first-quarter results Thursday.

Is the handset business fixable?

Brown doesn't hesitate. "Absolutely," he says.

If that's the case, then why hasn't Motorola already fixed it? "We are fixing it," he says.

How? By "implementing a range of operational improvements that will result in better accountability," Brown says.

One example is marketing. Brown says the marketing function in the handset group has been rolled back into the division, giving it more control over its own fate. Likewise, he says, governance and product lineup are now under the direct supervision of the unit.

The autonomy is "energizing" the workforce, he says. By the time the unit is spun off a year or so from now, Brown says, he expects the division to be churning out cool new products at a rapid clip.

Breaking the mold

Brown's enthusiasm aside, it's unclear how any of that addresses Motorola's fundamental problem, which can be boiled down to three words: no hot products.

To survive, Jackson says, Motorola's handset division needs not only to come up with a raft of cool new products, but also to break the mold. That's the only way Motorola can make itself relevant to a finicky, and increasingly sophisticated, consumer market, he says.

"They're going to have to emerge looking more like an Apple, aapl with the capability of launching lots of products" that appeal to a wide range of users, he says.

Brown doesn't disagree. He faults "inconsistent execution" in the handset business for a lot of Motorola's troubles.

Mobile devices for years were "more technology-led than consumer-led," he says. Technology-led products are "built around what's possible," Brown explains. Consumer devices "are built around what people want."

That's what Motorola did with its most famous product, the Razr, which it launched in late 2004. The Razr's sleek design redefined the cellphone as a personal statement, turning the handset-design world on its head.

But Motorola was slow to jump on the smartphone trend, which uses advanced 3G, or third-generation, technology. Brown says the void left Motorola with a product line that was heavy with Razr look-alikes but thin on devices that tapped into the power and reach of the mobile Web. In the USA, the iPhone is considered the standard-setter in that category.

"Once you miss one of those (technology) cycles, it's really hard to catch up," Brown says.

Investors are wondering whether the new cellphone company will get the iconic Motorola brand name. Asked to comment, Brown initially parries — ever so slightly — then offers tacit confirmation: "The Motorola brand is really important to devices," he says. "My feeling is that it really means a lot to the (handset) division."

Brown is quick to expound on Motorola's big brand name and product lineup, which currently includes a crush of new smartphones, including one that can morph into a cellphone, music player or video player. But he practically goes rigid when the subject turns to one of Motorola's most visible problems over the past year: Carl Icahn.

Tussling with Icahn

Before he was asked to step down by the Motorola board, former CEO Ed Zander spent a year beating back a proxy fight by Icahn, who owns more than 6% of the company. By the time Brown took over, Icahn was gearing up for Round 2, vowing to stage another proxy fight with the goal of grabbing four seats on Motorola's 14-member board. Icahn also threatened a lawsuit, accusing Brown and the Motorola board of mismanaging the business.

Earlier this month, Motorola finally reached an agreement with Icahn. Under the terms of the deal, Icahn got two board seats. One will be held by Keith Meister, managing director of Icahn's investment funds, and the other by William Hambrecht, CEO of WR Hambrecht & Co. Both men are allowed to share confidential board discussions with Icahn, an unusual arrangement that will give him maximum insight into the company's thinking and plans.

In return, Icahn agreed to drop all litigation and stop bad-mouthing management. (There's a non-disparagement clause in the deal, something usually reserved for former employees and bitter divorce cases.)

Asked to comment on the impact of Icahn over the past year, Brown takes a pass: "We thought it was a good arrangement with good conditions that allow us to be more focused," he says.

Under the terms of the agreement, Icahn can weigh in on candidates who are being considered for CEO of the new devices company. Brown, without offering any barbs in Icahn's direction, makes it clear the concession is purely window dressing.

"We will select the leader for mobile devices," he says flatly, adding for emphasis: "Management will select."

As for that clause, "Sure," Brown says, a frozen smile affixed to his face, "he can certainly offer us an opinion."

Icahn did not respond to an interview request.

Brown also has little to say about his 10-month stint as Motorola's chief operating officer. Zander put him into the job in March 2007. With Brown's blessing, Motorola froze prices on mobile handsets sold in big, emerging markets such as India. Nokia and other carriers pounced, cutting prices across the board, recalls Roger Entner, a senior vice president at IAG Research. Motorola's "global market share melted like a snowball," he says.

Brown says the pricing decision was "solid," adding that Motorola's problems at the time "were around products, not pricing."

An instructive journey

As painful as Motorola's journey has been lately, Brown says it's also been instructive. "It's all about consistency and the width and breadth of the (wireless) portfolio, rather than trying to be a hit-driven business," he says somberly.

On a positive note, he says, there's still a lot of life left in Motorola, which, bruises and all, remains one of the grand names in American technology. "Motorola is still a huge business and an iconic company," Brown says.

If things go according to plan — and Brown says he's confident they will — the mobile business could again find itself on the leading edge of wireless, setting the pace of global innovation for the next century and beyond.

"I see a vibrant, very successful mobile-device business with a fresh portfolio that is aggressive and competing effectively" in the global market, Brown says. "These elements, I think, will allow it to compete ferociously in the future."