Motorola cuts investment in 4G

Motorola (NYSE: MOT) plans to temper its investments in both WiMax and long-term evolution (LTE) as the company looks to control costs after a challenged first quarter. Despite emphasizing last quarter that WiMAX would be key to improving its financial performance in 2009, co-CEO Greg Grown said the company expects WiMax sales to be lower as WiMax operators continue to delay rollouts. Moto will continue to support its existing LTE trials but is also adjusting it LTE spending to be more “reflective of the market.”

“We are moderating our investment in WiMax R&D to reflect current market conditions,” Brown said in Moto’s Q1 earnings call. “That said, we’ve had great success with over 2 dozen actual contracts. We will recognize, as expected, approximately $500 to $600 million in fiscal ’09, so we are well-positioned. I don’t think of WiMax and LTE separately, per se, because the way we invested in R&D and developed our architecture, there is a high level of reusability between the two investments.”

Brown and co-CEO Sanjay Jha spent much of Moto’s call emphasizing the company’s cost-reduction strategies, of which reducing spend on 4G technologies is part. The company today posted a net loss of $228 million, widening from $190 million a year prior. Revenues and shipments in its handset business continued to fall at a dizzying pace, and overall revenue fell 27% year-over-year to $5.37 billion.

While the company is struggling across its businesses, Motorola has been the market leader in mobile WiMax. It is one of Clearwire’s key equipment suppliers, having built its initial broadband wireless footprint and--along with Samsung--is building out its initial 4G mobile broadband footprint. Motorola is the vendor behind Clearwire’s launch in Portland and has built out the Atlanta, Charlotte, Chicago, Honolulu, Las Vegas and Seattle markets targeted for launch this year.

Moto also has its own LTE portfolio and has been conducting trials in Europe with Vodafone and other operators; it was even the only operator to have a live demo LTE network running in Las Vegas during CTIA Wireless. Very few commercial LTE contracts have been announced—just a handful in Scandinavia and Japan—but most significantly, Moto was left out of the key contract win on its home turf.

 “With LTE, Verizon selected two other providers for LTE plans,” Brown continued, referring to Alcatel-Lucent and Ericsson. “It’s possible they’ll select a third in 2010, we’ll see. But having said all that, the investment levels we’re making are a pragmatic reflection of where we are. We still have a couple customer opportunities. I think there will be another customer decision in Asia on LTE between now and the end of the year, of which we are competing for that business. We will always be diligent on the amount of spend and making sure we can make capital for the longer term. We’re not just in a segment to be in it.”

Alcatel-Lucent will be responsible for the radio-access component of the 4G network, beginning with two initial networks this year and plans for many more to come. Moto was one of six vendors competing for Verizon’s business in the joint trials conducted by Verizon and part-owner Vodafone. Ericsson, Alcatel-Lucent and Nortel built trial networks in the US, while Nokia Siemens Networks, Motorola and Huawei built theirs for Vodafone in Europe. Verizon Chief Technology Officer Dick Lynch said the operator ultimately picked Ericsson and Alcatel-Lucent because they were furthest along in the software development necessary to power the future network.

Motorola isn’t the only vendor reconsidering it LTE strategy after failing to win a piece of the Verizon contract. Facing pressures to divest units while in bankruptcy, Nortel is reportedly looking to sell off its LTE business or sell its stake in its joint venture with LG Electronics, which develops and markets 3G and 4G systems. According to the Financial Times, Nortel has hired Goldman Sachs to find a buyer for Nortel’s 50% stake in the venture, which could fetch as much $1 billion. The Wall Street Journal has also reported that Nokia Siemens Networks has made a bid on Nortel’s LTE, CDMA and switching businesses. Several vendor sources have confided that Nortel’s LTE technology and equipment is among the best in the industry, and Nortel itself claimed it was Verizon’s third choice in the selection process. But the uncertainty about Nortel’s future has likely kept prospective customers at a distance.

ASSESING MOTO’s FUTURE LTE CHANCES

Brown admitted that he did not expect Motorola to be Verizon’s vendor of choice, considering that the carrier only picked two companies. Moto is basically in LTE as a radio access network (RAN) provider at this point in time, having no 4G evolved packet core solution of its own, he said. Its focus will be on providing a low-cost architecture and competing in RAN build out. Brown, however, said its strategy may be tailor-made for China Mobile, which is expected to build out its LTE network rapidly.