A New Company Called Motorola

Once in serious trouble, the cell phone maker has remade itself--and embraced the Net

In late March, when Janiece Webb and other Motorola Inc. executives visited the London headquarters of wireless giant Vodafone AirTouch PLC, they ran into unconcealed anger. The company's top brass were fuming over Motorola's past arrogance and its repeated blunders in delivering cutting-edge phones. "I don't want to waste my time with you guys," said Paul Donovan, Vodafone's marketing director, according to people at the meeting. But Webb, head of Motorola's Internet initiatives, promised the company would be more responsive and that it would speed innovative products to market. To prove her point, she showed off a splashy array of futuristic mobile phones capable of surfing the Web. Donovan, who only planned on staying for 90 minutes, ended up listening for eight hours, and Vodafone agreed to start buying the phones this fall. "I cannot believe this is the same company," said Donovan at the time.

Good thing it's not. Two years ago, the once mighty Motorola Inc. was in serious trouble. The company that had invented the cellular industry was getting hammered by more innovative rivals such as Finland's Nokia Group. It was infuriating its customers by trying to dictate what kinds of mobile phones they could buy. And, in the ultimate embarrassment, the company that had won the Malcolm Baldrige National Quality Award was taking heat for shoddy products. In March, 1998, wireless carrier PrimeCo Personal Communications dumped Motorola in favor of Lucent Technologies Inc. because Motorola's gear led to shutdowns of up to two hours.

But over the past two years, Christopher B. Galvin, the company's chief executive, has taken drastic measures to resurrect the company that his grandfather founded in 1928. He has cut costs by $750 million and slashed more than 20,000 of the 150,000 jobs at the Schaumburg, Ill.-based company. He shut down semiconductor and paging plants and overhauled the rest of the company top to bottom. And to boost growth prospects, he agreed to the largest acquisition ever at Motorola, the $17 billion purchase of cable equipment maker General Instruments Corp. "Everything has been modified or changed at the company," Galvin says.

Nothing more than Motorola's attitude toward the Internet. Once viewed as an oddball curiosity inside the company, the Net is now the core of everything Motorola does. With Galvin's blessing, Webb has been traveling the globe to convince wireless players that Motorola will offer the best lineup of Web phones in the world. Already, Motorola says it has shipped 1 million phones capable of browsing the Net--which analysts say is more than any other cell phone maker. And Motorola's wireless network gear is impressing customers with trials that zap data over radio waves at a speedy 64 kilobits per second, faster than today's typical computer modems. "Motorola is clearly rising to the mark," says Michael Reilly, head of market strategy at BT Cellnet, the British Telecom wireless unit that will roll out Net service with Motorola gear in May.

WARRING TRIBES. To transform Motorola into a Net company, Galvin has had to rock the company's corporate culture. Once an environment of intensely warring tribes, the new Motorola is becoming a more cooperative place. To respond to changes at Net speed, managers are paid based on their ability to foster collaboration, and employees are evaluated on their customer service. "Being fast, smart, quick, agile--this is what will make the company different so we can avoid the issues that occurred in our past," says Galvin.

Galvin's shock therapy is working. Net income, excluding restructuring charges, hit $1.3 billion in 1999, vs. $347 million in 1998. And analysts expect the comeback will continue this year: Wall Street is expecting that Motorola's first quarter results, due out Apr. 11, will show a 25% jump in sales to $9 billion and a tripling of net income to $625 million. For 2000, profits are projected to climb 50%, to about $2 billion, and revenues to rise 24%, to $38.5 billion, says PaineWebber Inc. The newfound optimism has done wonders for Motorola's stock. From its low of $38 in October, 1998, shares soared to $184 earlier year before dropping to about $134 during the recent market correction.

Still, Motorola will face plenty of challenges in the year ahead. The company needs to boost growth in its mobile-phone operation, where revenues increased a modest 13% in the fourth quarter, vs. 63% at Nokia. It also has to gain ground in the wireless equipment business against fierce rivals who have bested Motorola in the past few years. "They will have extensive competition for leadership of the market," says William Wiberg, president of wireless equipment at Lucent Technologies. And Galvin will have to figure out how to avoid serious financial liability for Iridium, the troubled satellite phone system. Motorola conceived of and helped finance Iridium, and now some bondholders and shareholders think Motorola should pay billions to compensate them for their losses. Galvin readily admits the turnaround is not complete. "Success is a journey, not a destination," he says.

Investors who doubted Galvin's ability to turn the company around two years ago are beginning to trust his leadership. When the unproven executive took over in 1997, many suspected he got the job because of nepotism rather than talent. But Galvin, now 50, has weathered what appears to be his toughest storm. He seems to have struck the right balance between acting like an insider respectful of Motorola traditions and pressing for radical change. "He inherited a wreck, and he's done a good job of restructuring the company," says Jane A. Snorek, an investment officer at Firstar Corp., a Milwaukee-based money manager that has purchased Motorola stock.

So how did this icon of American ingenuity, so recently battered, recover? Interviews with 15 top Motorola executives, plus customers, rivals, and analysts, reveal the story behind the comeback. It's a cautionary tale about how the success of a company can breed such arrogance that only a steep decline can help it find the humility to reinvent itself.

TOP-SECRET MEETINGS. The seeds of Motorola's comeback were sown in the bleak days of early 1998. In March, Galvin huddled in top-secret meetings with Chief Operating Officer Robert L. Growney to figure out how to remake Motorola into a major Internet player. Galvin insisted that they would have to change the company's culture. The internal competition it had prided itself on was now hurting product development and customer relationships. The two execs figured the company needed a sweeping restructuring. For two weeks, they locked themselves in the 12th floor conference room at Motorola's headquarters, writing ideas on an electronic white board.

In April, Galvin presented his plan to 50 of the company's top officers at the Ritz Carlton in Chicago. He told the group that Motorola would combine all of the 30 units that make cell phone, wireless equipment, satellite, and cable modem products into one large communications division. Many executives would no longer have profit-and-loss responsibility, answering instead to the head of the whole division. The goal, Galvin told the group, was to create a Motorola for the Digital Age. It could no longer be dominated by engineers focused on building gee-whiz products. Instead, employees had to pour all their energy into working together to give people easy-to-use ways to stay wired to the Net--from home, the office, the car. The devices for tapping the Web could be cell phones, pagers, cable modems, or something nobody has yet envisioned. "The market size for [these] solutions is infinite," Galvin says. "Someone has to make all this stuff work."

The restructuring didn't come easily. Growney thought that Motorola should have a separate group within the communications division to coordinate Internet strategies. But others thought the business units should develop their own initiatives. In the hallway at the Ritz, Growney and top Net strategist Randy Battat got into a tense argument over the issue. Later, Galvin gave the task of deciding how to structure the 70,000-person communications group to Merle L. Gilmore, a rising star who had run the company's overseas operations. Ultimately, Gilmore sided with Growney. In July, Gilmore decided to create two business units charged with fostering cooperation. One would be responsible for getting all the communications businesses working together to meet customers' needs. The other, headed by Webb, would coordinate Net strategies among all of Motorola's operations. Cooperation would be rewarded with stock options.

COURTING CISCO. As the new communications structure was put in place that summer, Galvin and Gilmore tackled Motorola's troubled wireless equipment business. After the top two executives of the group left for a startup, Gilmore recruited Bo Hedfors, the CEO of top equipment maker Ericsson's U.S. operations. After 30 years spent competing against Motorola, Hedfors knew precisely the holes in the company's technology. Most critically, he understood that wireless-phone companies needed a way to migrate from the big switches used for voice traffic to the routers that could handle Internet traffic as well as voice calls. To fill the void, he courted Cisco Systems Inc., the top maker of routers that direct Internet traffic. After months crafting the relationship, Hedfors penned a four-year, $1 billion pact in February, 1999.

While the venture is promising, Motorola still has much to prove in the wireless network business. The company has landed six trials for its high-speed data equipment, but it's still behind some competitors. "They're not doing the business that Ericsson and Nokia are," says analyst Matthew Hoffman of SoundView Technology Group.

"GO FASTER." Galvin was feeling the heat. In early 1999, Dataquest Inc. released figures that showed the company had lost its lead in the mobile-phone market for the first time ever to Nokia. Even Motorola's own execs felt Galvin wasn't responding quickly enough to the company's troubles. At a meeting near Chicago days after the Dataquest numbers came out, one exec stood up while the mild-mannered CEO was on stage. "We want to go faster," he said, according to one onlooker. "We've got great leadership, but by God, we want it out of your head and in your heart."

By then, the Internet was coming to the wireless world. In early 1999, cellular operators were getting ready to buy millions of data-rich wireless phones. Analysts forecast that smart phones and Web-enabled phones would account for 9%, or 35 million, of all wireless phones sold in 2000, up from 0.1% in 1999. Motorola couldn't afford to let rivals beat it to market with the next generation of handsets. "It was like sheer panic through the place," recalls Webb.

Panic may have been just what Motorola needed. Back in 1998, the company's executives had had a showdown with engineers over Web browsers being built into its phones. The engineers didn't see much urgency in developing Web-enabled phones. But Webb and other executives insisted that Motorola should offer trial equipment by early 1999. Over the first few months of 1999, Motorola was letting customers try out the equipment. By May it had browsers embedded in nearly every phone. By comparison, rival Nokia promised a browser phone last summer, but has yet to deliver. "Motorola has outshined them," says Andrew J. Sukawaty, the chief of Sprint Corp.'s wireless business. "Motorola shipped browser phones on time."

In the spring of 1999, Galvin began worrying that Motorola was missing an opportunity in the cable equipment market. The company held the top position in the cable-modem market with a 37% share, but he wanted a larger presence in the growing industry. So in late May, Galvin dispatched Gilmore to see Ed Breen, the CEO of General Instrument, the No. 1 maker of television set-top boxes. After more than three months of negotiating, Galvin signed off on a deal for the largest acquisition in Motorola history: The company would buy GI for $17 billion. Just 10 weeks after the merger closed in January, Gilmore says it's paying off because Motorola has "deeper" strategic discussions with major network providers such as AT&T.

While Gilmore was cutting the GI deal, Webb was hot on the heels of the Internet's content providers. She wanted Motorola to have more Web sites bookmarked on its phones than any rival--and she refused to settle for travel and weather sites. "Let's quit sneaking up on this," she told her team. "Go after the big boys." She led the charge. In November, 1999, Webb visited Yahoo! Inc. CEO Timothy Koogle, who had been telling analysts that phonemakers would be paying Yahoo to bookmark his site. Webb told him that wasn't going to happen. Her argument? One billion people would eventually tap the Web from mobile phones--they could either be directed to Yahoo or some other site. The pair talked for two hours, and Koogle relented. He agreed that neither company would pay the other. Webb then cut similar deals with America Online Inc. and Amazon.com Inc.

Today, with the big names of the Net backing its strategy, Motorola is becoming a company to once again fear in the wireless business. "This is a company that has moved beyond the beginnings of a turnaround to real leadership," says SoundView's Hoffman. Yet Galvin remains cautious. Sitting in the Motorola museum not far from displays of his company's long line of innovations, he calls the company's progress "early traction." And he can't help moments of wistfulness. "We want to learn from the past," he says. "But we want our dreams to wipe away our memories." If the founder's grandson remains focused on the Internet, the company may manage to wipe the slate clean.