Wireless Goes Haywire At Motorola

Faulty switches, a tarnished reputation--how bad can it get?

Wireless technology is supposed to be Motorola Inc.'s strong suit. But lately the deck seems to be stacked against the electronics giant. Upstarts have beaten it to market--by years--with new digital phones. And its transmission equipment for digital-cellular networks has been plagued by bugs. With its once-indomitable paging business shrinking and formidable competition squeezing its semiconductor division, it's unclear what sector the $30 billion company can depend on for growth. Wails one Motorola executive: "It's the freaking Titanic over here."

And there's an iceberg ahead. By early March, PrimeCo Personal Communications--a wireless service owned by Bell Atlantic, U S West and AirTouch Communications--is expected to cancel a $500 million contract with Motorola for digital network equipment. Rival Lucent Technologies Inc. is expected to get the business, one of the biggest orders in the industry. "To replace a half-billion dollars? Ouch," says telecom analyst Ian Gillott at International Data Corp.

How bad will it hurt? Even before the anticipated loss of PrimeCo, Furman Selz Inc. has already slashed its Motorola 1998 earnings estimate to $2.38 a share from $2.80 and its 1999 estimate to $2.80 a share from $3.80. "The rest of the business is experiencing worse-than-expected performance," says analyst Susan Kalla.

The misfires raise questions about how Motorola, longtime leader in analog-wireless systems, will fare as the industry moves squarely into the digital age. Last summer, faulty base station regulators that direct calls interrupted service on PrimeCo's digital network in Chicago. The network--using so-called CDMA code--typically stayed down from 30 minutes to two hours because Motorola didn't have enough engineers to fix the problem, executives close to the company say. Though it accepts responsibility for the outages, a top Motorola executive disclaimed: "Rarely is software perfect the day it's rolled out."

For Motorola, this is particularly true. It had software problems with equipment it supplied GTE Wireless and Nextel Communications Inc., too. But those companies say they will stick with Motorola. "With any vendor, you run into occasional problems," says John McLean, GTE Wireless' vice-president of technology.

Motorola has been scrambling to bring its digital portfolio up to speed. An aggressive pitch to Sprint PCS last spring landed the company 60% of a $750 million contract to complete the construction of Sprint's digital network. And on Feb. 22, at the Cellular Telecommunications Industry Assn. convention in Atlanta, Motorola announced its first commercial availability of CDMA digital phones.

CATCH-UP. Still, Motorola is playing catch-up. Qualcomm Inc., for example, has already released tiny CDMA phones the size of cigarette packs. Motorola isn't expected to have a digital version of its compact StarTac phone until the end of this year.

The lack of competitive phones is quickly leading to lost market share. AT&T Wireless says its new subscribers are choosing digital as much as 85% of the time--because they're cheaper to use, have longer battery life, and more easily accommodate features like E-mail.

Motorola also faces quality questions with its digital phones. Recently, the company had to issue a software upgrade to digital phones in Latin America because the handsets shut down when they received unfamiliar signals from network equipment. BellSouth, SBC Communications, and AT&T Wireless have chosen other than Motorola technology. A BellSouth spokesman says the company would like to have a digital Motorola product in its mix, but none has passed its "shake and bake test."

"Their brand has eroded," adds Gary Cuccio, COO at Omnipoint Communications, an East Coast digital phone carrier. While some customers still accept Motorola gear, "it's not like they have to have the products." How times have changed.

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