Motorola: Losing the Mobile Phones War

Pre-Release Version

Motorola: Losing the Mobile Phones War

This case was written by Philippe Silberzahn, Research Associate, and Morten T. Hansen, Professor of Entrepreneurship, both at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2009 INSEAD

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This pre-release version may be used for teaching purposes but it has not yet received an official case number by the European Case Clearing House.

Pre-Release Version

In ten years, Motorola - an American icon - went from undisputed technological and market leader of the mobile phone market to a declining number two, ceding the market leadership in 1998 to rival Nokia, a Finnish conglomerate once known for selling trees, shoes and toilet paper. In 2008, Motorola’s mobile phone division was fighting for its life, and would have long been bankrupt had it not been part of the Motorola group. Why did Motorola lose its leadership position?

Motorola history: 1928-1993

Motorola was a technology conglomerate founded by Paul Galvin in 1928 under the name Galvin Manufacturing Corporation (GMC). The company’s first product was a battery eliminator. In 1930, GMC introduced the Motorola radio, one of the first commercially successful car radios. This product was also the first in a long line of innovative products introduced by Motorola over the years in the area of electronics and communications. Such products included the world’s first FM Portable two-way radio for the U.S. Army in 1943, which became known as the “walkie-talkie”. In 1947, the company was renamed Motorola and introduced its first TV, a business that represented up to 70% of its sales until it was sold in 1974.[1]

In 1993, Motorola was one of the world’s leading providers of electronic equipment, systems, components and services for worldwide markets. The company’s products included two-way land mobile communication systems, paging and wireless data systems and other forms of electronic communication systems; cellular mobile and portable telephones and systems; semiconductors; information systems products such as modems, multiplexers and network processors; electronic equipment for military and aerospace use; electronic engine controls; and computer system. Motorola also provided services for paging, cellular telephone and shared mobile radio. By 1995, the company had 120,000 employees, and a turnover of $16 billion.[2]

Cellular communications: 1970-1993

The idea of cellular communications was introduced by Bell Laboratories as early as 1947 but it was not until the early seventies that the U.S. Federal Communications Commission allocated proper frequencies for the service to be developed. In a cellular network, the serviced area was divided in multiple cells, each served by a fixed transmitter, known as a base station. The phone connected to the base station serving the cell where the user was, and as the user moved from cell to cell, the call was transferred from base station to base station. Accordingly, there were two parts to the cellular business: The first was the infrastructure, i.e. the base stations that were sold to the carriers to operate their cellular networks. The second was the cellular phones, which were sold to end customers either through retail or through the carriers.

Motorola was the first to incorporate the technology into a portable device. Initially mobile phones were too big to be carried, and could only be used in cars (hence the initial name ‘car phones’).

In December, 1983, the world’s first commercial handheld cellular phone, Motorola’s DynaTAC, received approval from the U.S. Federal Communications Commission (See Exhibit 1). The 28 ounce (793g) phone became available to consumers in 1984. That same year, the Advanced Mobile Phone System (AMPS) network, developed by Bell Labs, was officially introduced in the US.

Europe was also active. Nordic Mobile Telephone (NMT), the first international mobile phone network, had been built in Sweden and Norway in 1981. It was extended to Denmark and Finland. In February, 1987, Finland’s Nokia, then a conglomerate present in a large number of industries, launched the Mobira Cityman, the first NMT phone.

With networks such as AMPS and NMT, the first generation of mobile telephony had been using analog technology. In the late 1980s, the industry started working on digital technology.[3] Digital telephony offered a much more efficient use of the spectrum, allowing more simultaneous phone calls over the same network at any point in time. Adoption of digital telephony was key to managing the growing use of mobile telephony and avoiding network saturation. Initially, there were two digital standards competing for adoption: GSM and TDMA. GSM, created in Europe, was imposed in 1987 by European telephone administrations as the sole standard in Europe for digital communications with an aim to go live by 1991. Unlike Europe, the US government decided not to impose any digital standard. GSM and TDMA started to compete for adoption until a new startup called Qualcomm introduced a third standard called CDMA, which quickly gained traction, mostly in the US and Korea.

With a strong European base, GSM gradually became the dominant standard across the world, but the US market remained fragmented, never unifying around one standard.

Thanks to its early moves, Motorola was the world market leader in mobile phones with a 40% market share in 1993. The company was profitable and its telecom business represented about 27% of its total revenue.

Motorola’s improbable Nemesis: Nokia in 1992

In 1992, there was little reason to think that little Nokia would one day overtake mighty Motorola in the mobile phone market. Nokia was the result of the merger of two Finnish companies going back to 1865. Over the years, Nokia had transformed itself into a conglomerate that was one of the largest companies in Finland. The company was active is such diverse businesses as trees, shoes, electric cables, toilet paper, electricity generation, etc. In the 1970s, Nokia had ventured in technology businesses, building on its knowledge in electricity. The company got involved in computers distribution, software development and eventually in radio communication. As a result, it was one of the leaders in the development of the NMT analog mobile telephony network in the seventies. It was also a leader in the development of the GSM digital standard in the late eighties. Nokia was a company with a strong international exposure, selling its products and services far beyond Finland.

Under the direction of Kari Kairamo, a visionary CEO appointed in 1977, Nokia had embarked on an ambitious strategy of acquisition and internationalization. However, the late eighties were difficult times for the company. In December, 1988, Kairamo committed suicide for a reason never clearly explained. Growing financial difficulties for the company and tensions among shareholders probably aggravated existing psychological problems. Then, two years later, the Soviet Union collapsed. Finland and the Soviet Union shared a border and a long history together. The collapse meant that about $200 million of Nokia’s revenue disappeared in just a few weeks. Added to this were substantial problems in its recently acquired TV business, and a severe recession in Finland[4].

In February, 1991, Nokia reported a substantial fall in sales (-16%) and swung to a $55 million loss for fiscal year 1990. Problems continued well into 1992, and in March 1993, Nokia reported a loss of $23 million for the year 1992, following the loss of $36 million the year before. By 1993, Nokia’s ability to survive was questioned and the company was the subject of takeover rumors.

Industry shift: from analog to digital

The mobile phone market experienced two big shifts in the early nineties: the transition from analog to digital technology, and the explosion of the consumer market. Motorola struggled to respond to both of them.

Market evolution

Unlike in Europe where GSM rapidly became the unique mobile standard, in the US analog remained the dominant technology for a long time. It was not until 1999 that the US digital subscriber base reached 50% market penetration.

As shown by Figure 1, the US market lagged the rest of the world in the transition from analog to digital by about 4-5 years. There were several reasons why the transition from analog to digital was delayed in the US. The main one was that in most countries, the decision to switch to digital was taken by governments with a clear and mandatory time table. One unique standard, GSM, was chosen, with few exceptions[5]. Given the role that governments played in the telecom sector at that time, there was little doubt about where the industry was going once the decision to switch was made. It was altogether different in the United States where the government never was involved in choosing one standard. In addition, just as the main industry body, the CTIA[6], was about to select the TDMA standard, a startup called Qualcomm unexpectedly entered the fray and pushed for its own new standard called CDMA. The game was reopened entirely, CDMA rapidly gaining significant acceptance, but then its delay further delayed the growth of digital networks.

Figure 1: Worldwide vs. US penetration rate of mobile digital technology[7]

As a result, when digital technology appeared in the late eighties, there was a high uncertainty as to which standard would emerge in the US. Adding to this uncertainty was the constant improvement of analog technology and network engineering techniques, which gradually became more efficient. It seemed to analysts that digital’s primary benefit, added capacity, was not so crucial after all. It so happened that in the early nineties, overall subscriber usage rates fell, further reducing the pressure for more capacity, and hence reducing digital’s appeal. Last but not least, the initial performance of digital telephony was poor. Users experienced many dropped calls, and the first digital handsets were 25% bigger and 50% more expensive, and therefore less attractive than analog ones. Everything seemed to conspire to cast doubt about digital technology’s interest, or at least about the need to quickly switch to digital technology.

Despite this, US carriers eventually decided to push for digital technology. The shift occurred around 1998-1999 when operators drove the conversion to digital. For instance, in May, 1998, AT&T Corp., the leading US operator with 38% market share, introduced Digital One Rate, a nationwide pricing plan targeting business travelers and subscribers who frequently made wireless long-distance calls. The plan was the first really simple pricing plan and a way for AT&T to migrate its customers to the TDMA digital service. The plan proved successful: Some 45% of its subscribers used digital service at the end of the second quarter of 1998, up 10 percentage points in two months, and compared to 21 percent at the midway point of 1997[8].

Motorola’s slow response to the analog-digital shift

Motorola had been developing digital technology for a long time. The company made its first TDMA call in January, 1991, and its first GSM call in March, 1991, very early dates indeed. Despite this, Motorola took a long time to switch its business focus to digital phones. In 1996, 65% of its handsets sold were still analog, and that figure was still 22% as late as 1999. Motorola was far behind the US market evolution in that regard.

Motorola’s slow response resulted in a small share of the US digital handset market. As evidenced by Table 1, Motorola’s US digital handset market share was significantly below its overall US handset share.

Table 1: Motorola’s US market numbers 1995-1998

1995 / 1996 / 1997 / 1998
Digital handset sales (units) / 431 000 / 2 558 000 / 7 166 000 / 16 425 000
Motorola sales (units) / 305 000 / 117 000 / 360 000 / 1 900 000
Motorola US Digital Market Share / 70,8% / 4,6% / 5,0% / 11,6%
Motorola overall US Market Share / 36,7% / 37,8% / 40,8% / 29,7%

This is also illustrated by Figure 2. Motorola’s US market share dropped in 1997, the year when digital handsets started growing quickly in volume. Motorola failed to introduce digital handsets in time.

Figure 2: US handset market share[9]

The lag is also reflected in the analog-digital product mix of Motorola, as shown inFigure 3. Motorola lagged the worldwide market until 1999.

Figure 3: Product mix, % of digital handsets sold[10]

This lag also existed in the infrastructure business: In 1996, Motorola had just 12% of the US digital equipment market, well below its 20% share in conventional cellular transmission equipment in the USA[11]. This was also the case worldwide: “The erosion of Motorola’s market share is shown by the fact that its digital handset volumes are trailing industry trends. While more than 50 per cent of net subscriber additions worldwide are selecting digital networks, Motorola’s digital handset sales account for just 30 to 35% of its total cellular telephone sales.”[12]

Expecting delays in digital deployments, Motorola tried to hedge its bets by promoting a dual mode technology called NAMPS in 1992. However, NAMPS was unsuccessful. When Motorola belatedly decided to push for digital, in 1996, it chose CDMA in the US, at that time a new and unproven standard. “We’re focusing on CDMA [as opposed to GSM] because we think it’s the best technology in features and functions” declared Jack Finlayson, corporate vice-president and general manager of Motorola’s Pan-American Wireless Infrastructure Division.[13] But it was not what carriers and consumers wanted: “Motorola has chosen to push only CDMA technology in the US market and does not offer GSM, even though a quarter of the new PCS [i.e. digital][14] operators plan to use GSM,”[15] wrote an analyst.

It only added to Motorola’s problems that CDMA was delayed significantly, so its share of the digital market lagged behind both GSM and TDMA. Another analyst commented: “Motorola has plumped for CDMA because it argues that it is the best technology for the new systems, even though it sells GSM throughout other markets outside the USA. The new operators have their doubts. There are only a handful of commercial CDMA systems in operation across the world, with just one in the USA, while GSM has been used for years in Europe.”[16]

By contrast, Nokia never had to worry about standards. The switch to the new digital standard in Europe was mandated by governments. GSM was the only standard allowed, and the decision had been made as early as 1987. So Nokia acquired an early lead in that standard. However, thanks to its international orientation, Nokia was aware that other standards existed. Because mobile telecoms were its new focus, the company decided it could not afford to bet on the wrong standard. In February, 1991, Nokia became technology agnostic and decided that its phones would be made for all the main standards: GSM in Europe, TDMA in the US, and PDC in Japan. This was part of a strategy to decouple Nokia’s brand from GSM only. As a result, the company could ride on the back of the GSM growth, most notably in Europe, and extend its lead to other geographies from this solid base.

By 1996, Nokia enjoyed a higher market share than Motorola in the US digital market:

Table 2: Market shares in the US digital handset phones (%)[17]

1995 / 1996 / 1997 / 1998
Nokia / 28.8 / 33.0 / 19.8 / 40.3
Motorola / 36.3 / 8.0 / 6.3 / 11.5

The democratization of mobile phones

Market evolution

Motorola struggled to respond to market changes and demands in the 1990s. One major change was the democratization of mobile phones marked by the explosion of consumer demand. When mobile phones were introduced in the early eighties, there were used by governments and large corporations. They were a business tool, and few could imagine that they would be a mass market less than ten years later: why would people want a mobile phone when phone booths were available on every corner of every street? The shift was gradual, but really started to accelerate around 1995 in the US, with more than 33 million subscribers, representing a penetration of 13% of the total population. The penetration had jumped to 31% by 1999.

This was accompanied by a decline in the average monthly bill resulting from increased competition around 1995. Between 1987 and 1997, the average cellular bill declined roughly 64%.

In 1996, personal and consumer users of cellular equipment represented the fastest growing segment of the overall market for Cellular equipment, which in 1995 was more than $7.14 billion and was expected to grow to over $15.78 billion in the year 2002[18]. The following trends, both reflecting and compounding the democratization, could be observed:

Figure 4: Total US mobile subscriber base[19]

Commoditization: Progresses in technology and increased competition led to a sharp decline in average phone prices. While in 1983 the average lowest price phone cost $2,628, it was only $53 in 1995[20]. As a result, network operators and retailers increasingly viewed the phones as little more than giveaway commodities, useful for signing customers up for services.

The “free-phone movement.” In 1995 the cost of a cell phone to a carrier averaged about $375. Around this time network operators bundled a “free” phone with a service contract, making them affordable to the everyday consumer.

Prepaid. In October, 1997, Ameritech Cellular Services introduced “Pick Up & Go”, a cellular service available in the Chicago and Detroit markets. With this new prepaid program, customers were able to purchase cellular airtime as they needed it, without having to sign a long-term contract or to deal with monthly bills. Prior to the introduction of prepaid cards, the cell phone was something available only to creditworthy customer, and carriers used to turn down about 30% of applications. With prepaid, this barrier disappeared, and a whole new segment opened.