Shifting Gears at Motorola

To address a steep drop in profits, CEO Ed Zander is cutting jobs and betting on an open-source software platform for smarter phones

Less than a year ago, Motorola (MOT) Chief Executive Ed Zander could do no wrong. His company was sizzling with the success of its iconic, ultraslim RAZR phone. During the second quarter, ending in June, the world's No. 2 mobile-phone maker posted a 53% jump in handsets shipped, nearly twice the growth posted by its bigger rival Nokia (NOK). Motorola's sales and profit soared as well.

Since then, growth has cooled more than the winter air off Lake Michigan in Motorola's Chicago backyard. After an early warning of a shortfall in profitability (see, 1/5/07, "Wall Street Hangs Up on Motorola"), Motorola on Jan. 19 reported that while fourth-quarter revenue was up to $11.8 billion, net profit tumbled 48%, to $624 million from $1.2 billion. "We did not forecast properly," Zander told analysts in a conference call. "You can get off a little bit on this thing, and it can get away from you pretty quickly."

Dropping the KRZR

A lot of things got away from Motorola. The company was blindsided by pricing pressure on low-end products in emerging markets such as Latin America and on high-end products in Europe. In addition, Motorola didn't release enough phones with rich multimedia features that take advantage of the most advanced, or third-generation, wireless networks.

Cingular Wireless, which is owned by AT&T (T) and is being renamed after its parent, had exclusive rights to the RAZR when it debuted, but didn't offer the offshoot, the KRZR, late last year. Motorola did not make the KRZR in a 3G version for use on the Global System for Mobile communications used by Cingular and most big European carriers. That means the KRZR doesn't handle services tailored for these carriers' fastest networks.

And even though it's not a 3G device, the KRZR is priced like a high-end phone. So it competes with phones offering far more robust features, including better cameras, more storage, and richer e-mail capabilities. Making matters worse, explained Motorola's mobile-phone chief Ron Garriques, makers of 3G products ratcheted down prices, putting pressure on slightly lower-tier phones like the KRZR.

Improved Products

To bolster profitability, Zander unveiled what amounts to a three-step plan. He will slash 3,500 jobs, many in middle management, to cut costs by $400 million by yearend. While he generally likes the current strategy, he wants Motorola to be more selective about the regions where it will try to gain market share. And finally, he's pushing his troops to produce more cool products. "Stay tuned," he says. "We have a lot of products coming out."

In the foreseeable future, the emphasis will be on phones that give users "cool experiences," as Zander calls them. The shortfall in profits flags the severity of challenges facing Motorola. Among them, competitors such as Nokia, LG Electronics, and Apple (AAPL) (which this month unveiled a phone full of easy-to-use rich media) are outstripping Motorola in introducing phones that users want (see, 1/10/07, "The Future of Apple").

To their credit, Motorola's executives aren't dodging blame. Garriques told analysts that after his wife gave birth on Jan. 8, Zander sent him a card saying, among other things, "This is the first rich experience, next-generation device Ron delivered all year."

A New Platform

Executing on cool experiences will start with a revamp of Motorola's phone platform. Garriques explained that Motorola has gone through only one platform transition in the past eight years. A new, user-friendly platform can be found in the recently introduced MotoFone, released in emerging markets last fall. But that phone isn't packed with cutting-edge camera, music player, and Internet-search applications.

To address the high-end market, where Motorola is suddenly suffering most, it recently introduced an offshoot of the RAZR, called the Motorola RIZR Z6, available by midyear, whose cover slides up to reveal the keypad. Its most important component: a new operating system designed to be a snap to use.

To nail simplicity, Zander pushed his troops to develop phones with a more elegant design and easier-to-use features. Despite its nifty outside, the RAZR (as well as most other Motorola phones) runs an aging, homegrown operating system. That's a big reason why it has been dogged by persistent customer complaints about the difficulty in using basic features such as texting, finding phone numbers, and shooting photos.

Just Two Clicks Away

Consumers will likely be happier with their RIZR experience. The new phone uses the open-source Linux operating system and Sun Microsystems' (SUNW) Java. It manages to offer 7.5 hours of talk time, nearly twice what some models of the RAZR offer.

The RIZR's operating system is designed to eliminate the number of key clicks required for users to send messages, download music, and view photos. The company strove to make every task just one or two clicks away. "We really wanted to have something that is easier and simpler to use," says Scott Durchslag, Motorola's vice-president for strategy.

If Zander has his way, the majority of Motorola phones (as much as 60%) will soon feature the new software platform. Ease of use is one reason, but by shifting from proprietary software to an open-source system such as Linux-Java, Motorola can squeeze costs out of the process. Motorola licenses the Java software from Sun, which created a community called JavaOne for software developers. That means when Motorola engineers are faced with the urgent task of developing the code that becomes the building blocks for new and cool applications, it has a broader pool of developers to tap. Once Motorola migrates the bulk of phones to that platform, innovation comes more swiftly. And, Zander hopes, so will profits.

Before it's here, it's on the Bloomberg Terminal.