A few weeks ago, a contingent of Motorola Solutions’ senior executives flew to Silicon Valley to get a look at the latest and greatest technology by meeting some of the world’s top venture funds and their startups. It’s the sort of journey Motorola’s in-house venture-capital fund used to make by itself. But these days, the company’s chief technology and information officers, as well as the heads of software and innovation and strategy, also are hitting the road.
The field trip says a lot about what lies ahead for the Chicago-based maker of police radios and dispatch equipment. Two years after Motorola borrowed $1 billion from private-equity firm Silver Lake Partners for a stock buyback, the rest of CEO Greg Brown’s strategy is taking shape. Through technology acquisitions, investments and partnerships, he’s trying to prepare Motorola as it faces what could be the biggest disruption to its business since the company started selling police radios nearly 90 years ago.
The rise of the smartphone—which changed how we communicate, shop, entertain ourselves and get from here to there—is coming to the emergency dispatch center. AT&T was just awarded a contract by the U.S. Department of Commerce to build out FirstNet, a wireless phone network devoted to public safety. The idea dates to the 9/11 attacks, but work is only now beginning. The transition might take five years or as long as two decades. The expected initial impact on Motorola ranges from a blip to an existential threat. But no matter the exact changeover, Motorola needs to adjust.
“The point is, the industry is changing,” says Eduardo Conrado, chief strategy and innovation officer. To keep up, “you can either partner, buy or build. We’re using all three levers.”
Since 2015, Motorola has spent about $1.5 billion buying or investing in tech companies, up from about $100 million altogether between 2011 and 2014. It snapped up Airwave in the United Kingdom last year for $1 billion and in March purchased Interexport in Chile for $147 million to boost its services business. The company now gets 43 percent of revenue from services, up from 36 percent two years ago.
Services aren’t as profitable as selling radios, but acquisitions have helped push revenue growth to the mid-single-digit range that Brown promised when Motorola Solutions spun off its mobile phone business six years ago.
Motorola also is buying technology, such as dispatch software maker Spillman Technologies of Salt Lake City; push-to-talk software firm Kodiak Networks of Plano, Texas; and Australian productivity-app maker Gridstone. It has stepped up its venture funding as well, leading investments in companies such as Boston-based Neurala, which makes artificial intelligence for video, and Nok Nok Labs in Palo Alto, Calif., which makes security-authentication software for mobile devices.
Motorola also has partnered with several startups to offer new capabilities to customers. Locally, it invested $4 million in DevMynd, a contract software shop. “Ten years ago, we would have built it all in-house,” Conrado says.
But Motorola has beefed up its internal software capabilities, too, even as it cut about 400 jobs in the Chicago area in the past two years. Local headcount is about 3,100, and the company moved its headquarters out of Schaumburg to attract hard-to-find young software developers. It now has more than 200 software engineers and other tech workers doing R&D downtown. In April, it hired its first head of software, Andrew Sinclair, from Microsoft. It added its first head of data science, Dan Law, in early 2016 and today employs a dozen data scientists in Chicago and others in Israel, where it recently launched a startup incubator.
“The big change in the past three years for our technology organization has been moving from telecom to digital, with more focus on software, cloud and data science,” Conrado says.
Motorola is betting on a future in which public safety agencies want emergency radios supplemented by smartphones and other devices that will provide data, video, mapping and other features. “We feel like (they) are going to coexist,” Conrado says of traditional radio and the smartphone network technology called LTE. The question is for how long? The answers from analysts vary widely.
“We continue to believe that LTE/FirstNet is likely to be a meaningful net negative for Motorola’s business as voice (communication) transitions to LTE over time,” Wells Fargo analyst Andrew Spinola recently advised clients. “We haven’t seen it yet in the numbers. We still believe that we will.” He rates Motorola “underperform” with a $63 share price target versus $85.48 on Sept. 15. The stock hit $92.21 on July 27, the highest level since Brown broke up the company in 2011.
On the other hand, Tavis McCourt, an analyst at Raymond James who rates Motorola “outperform” with a $100 price target, sees a less imminent threat. “These guys all have LTE phones already,” he says of police and firefighters. “I don’t see FirstNet doing anything new. It will be a market shift from Verizon to AT&T.”
A PIECE OF THE ACTION
Motorola will get some of the $6.5 billion about to be spent on FirstNet because AT&T is relying heavily on Motorola’s sales force to sign up emergency services agencies. It also is providing push-to-talk software, which would allow phones on FirstNet to communicate with traditional radios.
In the meantime, Conrado says, customers will have to upgrade their 911 dispatch centers to better handle mobile phones to provide location and other data. “When 911 was introduced, it was set up with home phones in mind. Now 80 percent of the calls come from mobile.” Conrado also thinks more customers will pay Motorola to run their call centers.
But that might not be enough of a firewall at a company that is estimated to get half its revenue from the U.S. radio business. “If LTE cannibalizes their business, services isn’t going to save them,” McCourt says, though the company has time to reorient itself. “I don’t think it’s something Motorola worries about in the next five years.”
Motorola and its shareholders can only hope he’s right.