latest warning highlights the most curious feature of the recent
rally: The markets don't really think anyone is going to lose badly -- the recent tide has lifted a lot of deadwood.
Investors more or less assume that even in crowded sectors, there's room for five to seven sizable players. Motorola can't succeed in the mobile-network business, yet it can't seem to let go. It's left in limbo.
Symptoms of Structural Problems
In a way, Motorola's brutal warning and
another recent one from
both reflect the current mobile-network vendor glut. Motorola's core problem is indeed structural, so it makes no sense to view its most recent warning in terms of the current quarterly issues.
About seven major mobile-network companies are in the business. Nobody refuses to exit, even though new orders have started aggregating to the top four vendors:
Motorola is now perhaps No. 5 or No. 6 among mobile-network vendors when it comes to 2.5-generation and third-generation, or 3G, network orders -- mobile- data upgrade technologies that are the only possible revenue-growth engine for 2002-10. The infrastructure division isn't Motorola's core property. Both semiconductor and mobile-phone units are far more important revenue generators.
This company isn't prioritizing the network business, and it isn't among the top four vendors globally. Incomprehensibly, Motorola still refuses to draw conclusions. The layoffs announced Monday were sprinkled among all divisions.
How badly has Motorola lost it in the mobile-network business? Consider this: Ericsson and Nokia are currently battling for the No. 1 position in the W-CDMA network-order melee -- Ericsson topping 30 orders and Nokia perhaps five deals behind. (W-CDMA stands for wideband code division multiple access, a type of technology that enables high-speed multimedia services.)
That technology will have at least 80% of the global 3G network business, calculated as revenue generated for vendors. Little growth is left in the second-generation network business, and what remains will be increasingly bundled into 2.5G and 3G orders. No stand-alone second-generation mobile-network market will remain. The sales are being annexed to new-generation orders.
Motorola has two genuine W-CDMA orders, one of which is limited to two cities in Australia, as Ericsson has somewhat maliciously revealed. This weakness scares potential W-CDMA clients, but it's also starting to frighten current 2.5G clients and basic global systems for mobile communications, or GSM, customers. A network business with no future upgrade credibility may unravel slowly, but the process is not reversible.
To balance the weakness in GSM, W-CDMA and GPRS (the packet-switched data-access method expected to improve the prospects of data phones -- the so-called 2.5G solution), Motorola is becoming increasingly dependent on
and clients of second-generation code division multiple access, or CDMA, which is one of three major global digital mobile telephony standards.
This is a problem, because GSM currently makes up more than 70% of the world's digital-phone subscribers. By messing up the GSM upgrade business, Motorola turned its network unit into a niche ghetto. Nextel's infrastructure is unique, and Motorola can never leverage its expertise here to export sales.
Years ago, Motorola created a proprietary network technology for Nextel, a standard called iDEN. This technology never caught on internationally like GSM or CDMA did. At the moment, Nextel is stranded with iDEN and depends on Motorola for both network and phones. This one-on-one situation is highly atypical -- and lucrative for Motorola, as long as it can keep Nextel in a hammerlock.
But as the U.S. operator market consolidates, it's becoming increasingly likely that one of the top four operators (
) will buy Nextel simply to convert it to either GSM or CDMA. Nextel has almost no chance of cracking the top four on its own, and there's no room in the American market for five or six national operators. So while Motorola currently holds Nextel hostage when it comes to network and phone sales, the situation is bound to change.
The Nextel case is typical of Motorola's unsavory habit of adopting orphans and oddballs as customers --
come to mind. These client relationships are more or less unstable: Palm has
already bolted in favor of
; Apple is looking for somebody new; and Nextel finally showed the first signs of rebellion a few months ago. (The company slapped down Motorola in a stunning public display of hostility when it refused Motorola's proposal to accept 1xRTT as its new data-upgrade solution. By declining to implement the costly 1xRTT upgrade now, Nextel is keeping the door open to a possible takeover from either GSM or CDMA operators.)
The most recent available statistics show 1% CDMA subscriber growth in Asia and 6% growth in Latin America during the third quarter of 2001. This is probably the common thread running through both Lucent's and Motorola's warnings. Both companies bet on second-generation CDMA network growth and let the GSM market slide to rivals. But the global CDMA growth is now decelerating sharply from the white-hot pace of 1999. The old strategic-prioritization mistake allowed the giant American GSM expansion deals of Cingular and AT&T to go to foreign rivals.
These strategy decisions doomed Motorola's network division. That bell can't be unrung, but management refuses to even admit the problem. Exiting the network business may be extremely messy, but staying in it will slowly sap cash from Motorola and Lucent. The choice is either wriggling out of future commitments to existing customers or allowing the moribund network unit to hamstring the entire corporation.
There's no obvious solution, which is why the mobile network also-rans are among the most dangerous and unstable investment choices. It's impossible to calculate the value of a mobile-network division that's enmeshed in future obligations, but not strong enough to turn a profit.
I don't understand why the valuation models for Motorola and Lucent cavalierly assume that their network divisions are worth so much. It's just as easy to construct a scenario in which the infrastructure divisions end up costing these companies billions of dollars before being sold for a song to stop the bleeding. The management behavior of Motorola and Lucent implies that these companies won't sell the units until they finally spin out of control.
Tero Kuittinen wears several hats. He is vice president of wireless communications at investment firm Halsey Advisory & Management of New York; tech adviser to Opstock Investment Banking of Helsinki; and senior strategist to SpringToys of Helsinki. At time of publication, Halsey had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback and invites you to send it to