While Motorola Solutions (MSI) could coast along for a while, it may soon have to make a big move to offset having most of its business leveraged in mature technologies that are transitioning to next generation standards. In 2011, agreements were made to sell Motorola's smartphone business to Google (GOOG), probably after seeing the writing on the wall in the saturation of the smartphone market.
MSI understood that for most growing markets, the future is in apps. That move left MSI with its enterprise business and core public safety business, leveraged heavily in the public sector. That was not a bad place to be after years of booming post 9/11 sales, international radio sales, interoperable P25 (public safety standard) networks, where MSI has had a lock on the market. MSI originally showed support for recently passed legislation giving public safety the 700 MHz D block of spectrum using LTE broadband to build a federally funded nationwide network (FirstNet), since MSI is the biggest public safety player and was early to market in developing LTE products. Ideally, this should be yet another strategic move for MSI to be involved in pushing a particular standard, and waiting for the bucks to flow as a captive market once again buys the next generation of hardware. This strategy has worked well for MSI over the years as it reaped more sales through every successive upgrade and standard.
In recent history, standardizing public safety radios to P25, and the FCC's mandate for narrow banding (FCC Mandate that all equipment must operate under revised standards by January 2013 or be replaced) have boosted MSI sales. Public safety has been at a crossroads, for the last several years, in moving from two-way land mobile radio (LMR) to broadband LTE (Long-Term Evolution), which is part of a broadband standard already adopted by the major mobile wireless carriers.
With the public safety move to a new technology standard, $7 billion already approved by Congress to fund a national broadband LTE network build-out (FirstNet), MSI should be singing all the way to the bank. In fact, in the short term, a nationwide broadband network may not be capable enough to handle mission critical voice and will still keep the MSI radios buzzing.
But, hold the phone-- or the two-way radio. The camel's nose is under the tent. The world has changed. It has taken longer for public safety broadband LTE to get out of the starting blocks, technologists are favoring open architectures rather than proprietary products, and MSI's product line is now looking like a commodity. Customers have slowed down their buying until they can determine how to get the biggest bang for their buck.
So, MSI's problems are multi-fold. On one hand MSI has its business in traditional Land Mobile Radio (two-way radio) networking gear that will slowly lose sales as public safety adopts broadband LTE, and on the other hand it has edge of network devices for both enterprise and public safety markets, which are approaching a market maturity cycle of commoditization and cheaper "substitutes." Here are ten reasons why MSI might be headed for tougher times, unless it develops substantial strategic offsets.
1) Sales are showing hints of contraction. The majority of MSI's revenues come from radio sales, with the bulk being in the U.S. public safety market, which is locked up in indecision as officials wait for public safety broadband (FirstNet) to make progress. MSI recently changed its accounting for "backlog" opting for a broader definition. Large U.S. Government customers, like Department of Homeland Security and Department of Justice have demonstrated some strategic pullback as they wait for LTE to mature and be rolled out.
2) Edge network devices are now fair game for competitors. LTE broadband opens the gate for LTE enabled mobile phone players like Samsung (SSNLF.PK), Nokia (NOK) currently in deal to be bought by Microsoft (MSFT), Apple (AAPL), and a host of other players to provide broadband data, voice and integrate edge of network products as long as they can adapt their products for public safety. Again, commoditization is on the horizon for MSI.
3) Newer players are nipping at MSI's heels. Companies like Lemko are already taking bites out of the market edge by developing niches in rural, satellite LTE applications in places like Alaska, taking out MSI's opportunity for next generation infrastructure.
4) Lower Cost/Lower Latency satellite will also steal market share. Gaps filled by satellite are fair game because other companies like Hughes have created solutions for public safety to gap fill places where LTE broadband cannot reach.
Raytheon (RTN) and Northrop Grumman (NOC) have an advantage. Working on mobile LTE communications projects involving transferring big data sets, adapting mobile communications, and scaling big data analytics for battlefield environments provides expertise and an appetite for serving up loads of R&D and tech transfer from the winding down of recent wars.
6) LTE's "plug and play" design could eat away at MSI's proprietary business model by opening up a host of "substitute" products. Broader bandwidth means more robust applications in critical, time sensitive environments. These applications include big data analytics that can be streamed rapidly across a network, and end user devices that can rapidly process imaging, textual, voice, and video data. As machines do more and humans do less, these applications will include data from unmanned aerial vehicles, sensors, and telemetry data. This technological turning point places experience squarely in the hands of MSI's defense contractor competitors who are salivating over markets to transfer oodles of technology gems from military downsizing and R&D springing out of the last decade of military conflicts.
Companies like Raytheon and Northrop Grumman have been working on integrating LTE broadband applications and encryption into rapid response environments for the last decade. As data analytics technologies for finding Bin Laden move from the war zone to the street cop, defense contractors may have a decided advantage in chipping off pieces of MSI's government public safety business.
7) MSI is not reacting fast enough. MSI's recent investment by its venture arm in Shotspotter, a company specializing in acoustic signatures for gunshots, while laudable, is still short of where the market is headed, as it may soon be eclipsed by less costly and complicated substitutes. Initial success by the Department of Defense in pinpointing gunshots using smartphones and acoustic software shows that this, too, will likely be another LTE app.
8) MSI does not have much control over the LTE standard or the ability to shepherd important iterations of the standard, like M2M (machine to machine), or LTE Advanced like it managed to do with P25 for Land Mobile Radio. The most relevant LTE standards committees are primarily dominated by European and Asian manufacturers.
9) MSI looks top heavy. This may add additional G&A drag to a product portfolio that is already trending toward commoditization. However, MSI appears to be recognizing that cuts are necessary and is taking action.
10) More than one third of MSI's revenues come from services related to installing and integrating proprietary products. "Services" will also be vulnerable to "substitutes" and new business models. As public safety technologies move to LTE, it is uncertain what level of integration and engineering will be required by MSI versus a systems integrator who may be able to cost effectively provide similar services.
MSI investors can likely expect to see some of these issues impact the stock price signaled by the potential down adjustments in revenue targets. The bright side is that public safety's transition to broadband LTE could take time, and the technology is still not perfect for rural areas, so MSI could benefit from some continued sales in its two-way radio market in the short term.