Making sense of Motorola's breakup

Phil GoldsteinIt was only fitting that Motorola waited just before Valentine's Day to officially announce its breakup plans. The company is hoping to split into two independent, publicly traded companies in the first quarter 2011. One company will include its handset and set-top box businesses and the other company will include its radio and networking equipment divisions.

And, just as in most breakups, one party is getting something that both members of the relationship once shared. The handset and set-top box company, which will be run by Sanjay Jha and which I will call the "new Motorola," will own Motorola's brand and license it for free to the other business, which will be run by Greg Brown.

Essentially, what this signals to me is that the company is casting its lot for the future with Jha's company, which is a very risky proposition. While Motorola made its name with the businesses that Brown will run, it is becoming increasingly clear that in a converged world, it will be Jha's business that will be on the cutting edge. Jha said last week that the new company will try to capture the market opportunity for devices and services that allow consumers to share content and functionality across multiple devices. "We are working with our wireless and cable operator partners to have advanced services and expand the broadband availability inside and outside the home," Jha said.

Will this strategy work? It's a gamble that could pay off handsomely if the new Motorola can bring the smartphone experience into the living room (and visa versa), and leverage Motorola's retail handset business to suit the needs of the set-top box business. But as Current Analysis analyst Avi Greengart said, the company has been here before and has failed to take the plunge.

He noted that Motorola could have put software from Good Technology on all its phones and thereby challenge Research In Motion in the enterprise market. Or, the company could have blended its Symbol product line with smartphones. "The opportunity to develop devices and services that bridge the living room and cellphone has always been available to Motorola," he said. "So why will anything change now?"

The company evidently felt that spinning off the handset division on its own was too risky a proposition, but this new venture is itself fraught with risk. Motorola's handset unit is still working on its comeback. In the fourth quarter, handset sales were $1.8 billion, down 22 percent from $2.35 billion in the fourth quarter of 2008. The company is expected to release 20 new smartphones this year, but the response to its first Android offerings has been relatively tepid, despite heavy marketing for the Droid by Verizon Wireless. If the handset unit fails to return to strong growth, it will leave the new Motorola in an incredibly weak state, just as it is asking shareholders and potential partners to bank on the viability of the new enterprise.

So where does this leave the new Motorola? CCS Insight analyst John Jackson said the idea of synergies from the combination of the mobile devices and set-top box businesses is valid on paper, "as is the idea that the set-top box and devices businesses can magically partition and work harmoniously to increase market and shareholder value." I agree. The new Motorola led by Sanjay Jha sounds like a great idea for a converged world: a company that can deliver content at home and on the go, through multiple devices and streams.

It will be incredibly tough to pull off, given the underlying weakness of Motorola's handset unit. The margin for error will be slimmer and the stakes will be higher.

The company may learn that breaking up is, indeed, hard to do. --Phil

P.S. The Fierce editorial team is on the ground in Barcelona, Spain, for the Mobile World Congress trade show. Throughout the week, Sue Marek, Jason Ankeny and Mike Dano will be bringing you all the latest news from the press conferences, keynotes and show floor. Look for some interesting executive interviews and a few surprise announcements in our newsletters and on our Mobile World Congress mini site, here.

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