Motorola Bets on Its Chips

New rule number three: Not every idea that is proprietary should be proprietary. Motorola used to keep all of its phone technology under lock and key, for use only in Motorola cell phones. Now it recognizes that some ideas are worth more outside the company than within. In January 2002, for example, Taiwan's Benq Corp. became the first customer to license Motorola's phone-chip set for use in its own handsets. By December, nine other phone makers (in addition to Motorola's own cell-phone unit) had followed suit. For each chip package, Motorola gets paid an estimated $20 to $30.

Within Motorola, this was a hugely controversial notion. Give away the crown jewels? Until recently, its top executives firmly believed that the company's competitive advantage resided in proprietary silicon technology. "But now," Burgess says, "a brand doesn't compete on chip-set count. Silicon isn't a differentiator." What's vital now is brand strength and distribution. "And if your phones aren't unique, you'd better make sure you maximize your value capture by selling your technology to everyone," says Burgess.

Imagine how that must have sounded to managers within Motorola's Personal Communications Sector. Motorola once sold 70% of all cell phones on the market -- that's why the company's cell-phone strategy drove its semiconductor business. But now Motorola's share of the cell-phone market is just 18%. Even as the phone executives try to lift their share back to 25%, they're being asked to give their technology away to any rival that asks.

But the notion isn't crazy. "Yes, we're enabling competitors to get into the business faster," Burgess says. "But if we don't, someone else will." Consider the early days of the VCR business. JVC pioneered the VHS standard, but it realized that it could make more money in the long run by licensing the technology to RCA and other manufacturers than by hoarding it in-house. It forfeited share -- but its VHS technology became the dominant VCR standard.

Early Returns How are Motorola's new rules playing out in real life? Already, capacity reduction and outsourcing have lowered the company's breakeven point by 30%, to about $4.8 billion in semiconductor revenues -- about what it did in 2002. And Motorola has created a manufacturing infrastructure that should prove resilient as the next capacity cycle plays itself out. The trade-off: According to Will Strauss, each chip that Motorola outsources will cost a few cents more than those made by Intel and Texas Instruments in their own 12-inch fabs.

The bigger question: As Motorola increasingly outsources manufacturing and licenses out proprietary technology, exactly what will it be good at? Where will it create value? Burgess predicts that a more robust capital structure will help his company weather the dramatic consolidation that many are predicting for the industry. But Merrill Lynch analyst Tal Liani notes that Motorola's revenues are not growing now and will not grow much in 2003. In the face of a starkly changed world, simply surviving certainly beats the alternative. But it's not the same as winning.