Icons No More

Motorola and Sun: Two once-mighty technology firms need to take radical measures.
Economist StaffNovember 11, 2008

“HAVE lunch, or be lunch.” The Silicon Valley mantra coined by Scott McNealy, the outspoken former boss of Sun Microsystems, a troubled computer-maker, still rings true as the technology industry heads into recession. At particular risk of being lunch are Sun and another once-mighty technology firm: Motorola, America’s ailing telecoms-equipment giant. Both posted dismal results on October 30th. Sun’s sales to Wall Street firms, which are among its biggest customers, fell by 20 percent in the most recent quarter compared with a year earlier, and it reported a loss of $1.68 billion. Sales at Motorola, meanwhile, fell by 15 percent, with unit sales of mobile phones down by a third, and a loss of $397 million. Yet even before the downturn, both firms were in serious trouble.

Sun styled itself “the dot in .com” during the internet boom, selling fancy servers to firms rushing to set up online. Motorola’s most recent claim to fame was its hugely popular RAZR (pronounced “razor”) handset, the first version of which appeared in 2004. But both companies focused too much on their clever hardware, and too little on software and services. Today Sun accounts for 11.8 percent of server sales (by value) worldwide, compared with 18.1 percent in 2000. Motorola’s share of the handset market has dropped from 22.4 percent at the height of RAZR mania to 9.5 percent in the second quarter of this year.

Both firms hope open-source software, developed by volunteers and distributed free online, will help them make a comeback. Sun has released an open-source version of its Solaris operating system and bought several open-source firms, notably MySQL, a database-maker. Motorola is building “smart” phones based on Android, an open-source operating system developed by Google, the internet giant.

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Investors seem unconvinced. Both companies’ shares have fallen even further than the rest of the market. Sun’s share price has fallen from nearly $24 in October 2007 to below $5; Motorola’s has fallen from nearly $20 to below $5. Both firms have a stockmarket value of less than one-third of their annual sales, prompting suggestions that they should go private.

Something radical is certainly required. One idea comes from AMD, another embattled American technology firm. Last month the chipmaker said it would spin off its factories into a separate company in which an investment firm, set up by the government of Abu Dhabi, would invest at least $2.1 billion, making it the majority owner. This will allow AMD to focus on designing chips. For Abu Dhabi it is part of a diversification away from oil.

Sun and Motorola do not need cash that badly, and it is unclear whether Abu Dhabi or other cash-rich countries would be interested in either of them. But Sun may be forced to spin off part of its business. In recent months Southeastern Asset Management, an investment firm, has bought more than 20 percent of Sun with the aim of unlocking its value. Sun could sell off its hardware business, perhaps to Fujitsu, a Japanese firm, and focus on providing new “cloud computing” services.

As for Motorola, it said in March that it would split off its mobile-phone division, creating two listed companies. But these plans have now been put on hold until the unit’s problems have been fixed, which is expected to take until 2010. Might it make more sense to let someone else clean up the mess, perhaps Huawei or ZTE, China’s rising telecoms-equipment giants?

The troubles of these titans suggest that the technology industry will look different after the recession. Open-source software will play a bigger role. Hardware-makers will have consolidated. And more of the industry will reside outside America, at least financially. In short, the recession will help the industry mature.