Motorola's Comeback No. 9

Nineteen ninety-five was a turning point for Motorola(MOT - Cramer's Take - Stockpickr) -- the year when the company started acknowledging some of its strategic problems and promising a "new digital strategy." Six years have passed, and one by one, the key divisions of Motorola have slipped from profit to loss. This winter, the last leg is about to buckle, with Motorola's infrastructure division poised to plummet into the red.

As seasons change and the fundamentals of the company keep deteriorating, one thing remains stable -- Wall Street analysts will go to infinite lengths to once again recommend owning Motorola. Here are several reasons why they should stop.

The Nextel problem isn't going anywhere. To the contrary, every time there is an external shock, investors seem to switch from Nextel(NXTL - Cramer's Take - Stockpickr) to Sprint PCS(PCS - Cramer's Take - Stockpickr),Verizon(VZ - Cramer's Take - Stockpickr), SBC(SBC - Cramer's Take - Stockpickr) and AT&T Wireless(AWE - Cramer's Take - Stockpickr).

The basic problem is that Motorola is stuck with a major client that is the only sizable iDEN operator in the world, and Nextel is stuck with Motorola as the only network and phone vendor it can depend on. Both are losing money. As the world economy deteriorates and the telecom financing outlook steadily dims, investors are finally starting to worry about this incestuous tangle. Who will pay for the 1xRTT (2.5G) upgrade for Nextel? How expensive is it going to be? What are the phone specs for dual-mode units and when will they ship?

The nerves are not being soothed by recent news from KDDI, Japan's second-largest operator and a major Motorola customer. KDDI's rival J-phone has been clobbering KDDI in mobile Internet subscriber adds and the 1xRTT upgrade was supposed to be KDDI's way to hit back. But recently, KDDI abruptly pushed its upgrade launch into next spring without any explanation. The link between KDDI and Nextel? Both employ stand-alone standards (KDDI's version of CDMA is not the one used in North America or Latin America). Both have Motorola as the key network provider. And as heavily indebted challenger operators, both companies' futures absolutely depend on successful and quick upgrades for these networks, something which seems to be slowly receding into the future.

The U.S. is not the world. The preceding discussion was pretty complex, which is why most analysts covering Motorola simply leave out the complicated infrastructure talk and make simplistic pronouncements on the phone business. So here's a tip for the next time you meet an analyst talking about Motorola phone sales at Sprint and Verizon: Take a newspaper, roll it up and whack the guy sharply on his nose. For despite the fact that Sprint and Verizon together make up just 3% of the worldwide mobile subscriber base, some U.S. analysts keep acting like these two operators predict global market share for phone vendors.

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This approach has never worked and never will. When Motorola yet again issues a new profit warning, there is a stunned silence -- and after a week or two, hopeful commentary about Motorola sales at Sprint resurface. Let's breakt his vicious cycle right now -- take a newspaper to your next analyst meeting. I'd go with the Sunday edition of the New York Times.

Being first to market doesn't mean anything if you don't take advantage of it. Yes, Motorola was the first to market with GPRS phones. And no, the company hasn't made a single dime of profit from being first. If you're really tickled about companies losing money by being first to market, why not go whole hog and buy some NEC (NIPNY - Cramer's Take - Stockpickr)? That firm is losing literally billions of dollars by being first-to-market with a variety of gadgets, including 3G models in Japan. For most investors, this might be a good time to concentrate on profit. I have a gut feeling that money-losing techfirms will not be the biggest investment craze of 2002.

Dynasties don't work. We have experimented with various dynastic systems here in Europe during the past several millennia. Here's a news flash: They don't work. Hereditary power is a creepy idea in the best of times, whether we're talking Pyongyang or Schaumburg, Ill., where Motorola's based. But during bad times, the issue gets even thornier. Motorola chairman and CEO Christopher Galvin is the grandson of the founder of Motorola -- is he defending the family heritage or running a corporation? Can immediate relatives of past giants commit to painful but necessary cuts? The early indications do not look good.

Motorola's built for having market share it no longer possesses. Motorola has made a serious strategic mistake in bundling its fate to operators such as Nextel and KDDI who need unique, non-standard data upgrades that are hellishly complicated to design and will never reach proper manufacturing economies of scale. At the same time, Motorola has lost the game in orders for GPRS and W-CDMA, mobile data standards that actually offer serious production volumes for winning contractors. Motorola bet the ranch on its 1xRTT technology and neglected GPRS and W-CDMA. This tactic is now unraveling as news about 1xRTT launch troubles start leaking out from KDDI and Sprint Wireless. Motorola is essentially trying to sell multiple, splintered standards. Just how messy things will get in 2002 is anyone's guess.