What Happened to Motorola How a culture shift nearly doomed an iconic local company that once dominated the telecom industry.

On the 18th floor of the Merchandise Mart, in a soaring two-story space underneath a vast industrial-looking stairway, a small crowd of business types, pols, and journalists gathers. They’re here on this warm April day to check out the geek-chic new offices of Motorola Mobility, the mobile phone maker that spun off from then-struggling telecommunications company Motorola (now Motorola Solutions) in January 2011 and got snapped up by tech giant Google seven months later. A big, silver-haired man wearing a dark suit, a Silicon Valley–style open-neck shirt, and a high-wattage smile steps up to the podium. Rick Osterloh has been the president and COO of Motorola Mobility for all of 10 days, the fourth man to run the place since its split from the mother ship. In a few minutes, this amiable Stanford grad will launch visitors on a tour of the slick 14-acre space. They’ll see images and artifacts from Motorola’s storied history—the first car radios, the first handheld mobile phones, the first device to carry voice and video from the moon to the earth—interspersed with lots of glass and metal and Google-bright colors. They’ll visit a game room complete with retro pinball machines, seven big labs with see-through walls, and 10 kitchens with tech themes. (In the NASA kitchen, snack bags nestle inside an Apollo space helmet.) Advertisement But first Osterloh gives a short speech. He feels good about the future of Motorola Mobility and of Chicago, he says. The company’s growth rate, he claims, would be the envy of any startup: “Motorola Mobility shipped 6.5 million devices in the first quarter of the year, up 61 percent over the [same quarter] last year.” What Osterloh doesn’t mention is that those devices represent a paltry 2 percent of the global market for smartphones. Or that Motorola Mobility lost $198 million in the first quarter of 2014. Or that its losses just since Google took over have totaled more than $1 billion, even as the company has cut some 17,000 workers. Osterloh then cedes the podium to a dapper Mayor Rahm Emanuel, who had helped convince Google brass to move the business downtown from suburban Libertyville. “Motorola Mobility will act as a major economic engine,” Emanuel declares, “bringing 2,000 jobs to the city.” No one, least of all the mayor, acknowledges the elephant in the room. Three months earlier—less than two years after Google completed the deal to buy Motorola Mobility in the first place—Google’s CEO, Larry Page, agreed to sell the company to Chinese computer maker Lenovo for $2.9 billion. (Currently undergoing regulatory scrutiny, the deal is expected to be finalized sometime this fall.) Already, obsolescence haunts these halls. The Google colors were out of date before the place even opened. As for those 2,000 Chicago jobs? Lenovo CEO Yang Yuanqing can do with them what he likes. The future of Osterloh and his Google-anointed team, in particular, looks far from certain. Getting outflanked by tech upstarts, hacked in two by a fearsome corporate raider, and finally taken over in part by a Chinese company that exists largely because of the world Motorola made for it: Such a fate would have been unthinkable 20 years ago. Motorola was then one of America’s greatest companies, having racked up a stunning record of innovation that continually spawned new businesses, which in turn created enormous wealth. Motorola had the vision to invest in China long before most multinational companies. It even developed Six Sigma, a rigorous process for improving quality that would be embraced by management gurus and change the way companies nearly everywhere operate. However, as the history of many giant corporations (Lehman Brothers, General Motors) shows, great success can lead to great trouble. Interviews with key players in and around Motorola and its spinoffs indicate that the problems began when management jettisoned a powerful corporate culture that had been inculcated over decades. When healthy internal competition degenerated into damaging infighting. “I loved most of my time there,” says Mike DiNanno, a former controller of several Motorola divisions, who worked at the company from 1984 to 2003. “But I hated the last few years.” Motorola began as Galvin Manufacturing Corporation in 1928, just before the Great Depression, founded by a 33-year-old native of Harvard, Illinois, named Paul Galvin. Its small offices stood on Chicago’s West Harrison Street, a dozen blocks from the Loop. Two years later came the company’s first big breakthrough: commercializing the first mass-market car radio by figuring out how to eliminate static interference from under the hood. But success didn’t come easily, says Paul’s grandson Chris Galvin, who ran Motorola from 1997 to 2004. Paul was a serial entrepreneur, and two previous ventures of his had flopped. “The company’s success,” Chris explains, “was born of failures.” As Paul and his brother Joe built the company, they created an environment that drove people to invent and fail and learn and invent again. Motorola became known for its culture of risk taking, its investment in training and development, and its almost fanatical insistence on respectful dealings among employees.

In its early years of nonstop innovation, the company would make plenty of consumer electronics, including home radios and TVs. But Motorola’s bread and butter was technologies and devices sold to other enterprises, particularly those charged with public safety and defense. Two-way radios used by police, walkie-talkies carried by soldiers in World War II, microwave radio systems for civil defense communications—under Paul Galvin, Motorola invented them all. The public safety business, says Martin Cooper, the electrical engineer who led the company’s development of the first cellular phone, “was really the essence of what we did.” Working at Motorola was more than a job. It was a mission. In 1942, tragedy struck: Paul’s wife, Lillian, was murdered by an intruder in their Evanston home. The case remains unsolved. After her death, the Galvins, citing inheritance taxes, took their company public. But Motorola still felt like a family operation. In 1956, when Paul decided to step down as president (the title Motorola then used to denote the head of the company), his 34-year-old son, Robert, took his place. Advertisement What the father built nationally the son scaled up globally. Charismatic, farsighted, and fiercely competitive, Bob Galvin would be hailed as one of the greatest American industrialists of the 20th century. From 1959 to 1990 (the year he stepped down as chairman), the company’s annual revenues ballooned from $290 million to nearly $11 billion, making Motorola one of the 50 largest companies in the nation. Bob Galvin, and the immediate successors he helped choose, firmly believed that competition drives excellence. Because Motorola faced little external competition back then, explains Chris Galvin, “we had to create our own competition internally.” For example, the CEOs pitted divisions against one another by dangling bonuses for top performance. Such internal competition helped two complementary businesses boom in the Bob Galvin years and just after: communications and semiconductors. Motorola’s communications division made networks, radios, and phones for government and corporate customers. Its semiconductor division supplied chips to the communications division and, later, to outside companies such as Apple. Not every important Motorola innovation during Bob’s time led to a physical product. For example, in the early 1980s—a period when American companies were struggling to compete with superior products pouring out of Japan—Motorola developed a system for total quality management called Six Sigma. (A Six Sigma process is one in which 99.99966 percent of products are free from manufacturing defects.) A good chunk of the Fortune 500, including General Electric, IBM, and Boeing, wound up adopting it. Long foiled in his efforts to enter the Japanese market, Bob began to see that China could someday overtake Japan. So when Chinese market reform began, he made his move. Stuck at a tedious state ceremony during a tour of the country in the early 1980s, he broke protocol and turned to the minister of the railroads next to him. Was the minister satisfied doing a serviceable job, Bob asked, or would he prefer to help make China a world-class society? Chinese officials eventually agreed to let Motorola set up manufacturing in the country, on one condition: that Motorola teach its Chinese employees and suppliers how to make products good enough for global customers. Bob knew that China would, little by little, copy the company’s technology and compete with Motorola. But the Chinese market would be so large, he figured, that even a small slice would be worth the investment. So Bob insisted that Motorola bring its best technology to China and that the company’s factories there manufacture to the strictest standards. Hundreds of Chinese suppliers, including state-owned firms, learned how to make things the Motorola way. Those suppliers, which had second- and third-tier suppliers of their own, spread that knowledge throughout a growing swath of China’s economy. Motorola also helped China build its national communications networks, using technology that leapfrogged that in the States. Altogether, Motorola did more than just about any other foreign company to create a market-ready Chinese industrial complex. No wonder Bob Galvin achieved almost godlike status among many Motorolans. Phil Cerney, who worked at the company from 1959 to 2009, rising to accounting director (he’s now the controller at Palladium Energy in Woodridge), calls him “the second greatest man I ever met, after my dad.” Of all Motorola’s inventions, none were as transformative as the cell phone. A request from Orlando Wilson, Chicago’s police chief from 1960 to 1967, provided the impetus. Violent crime in the city was surging. Wilson wanted his patrol officers out of their cars and on foot, but he didn’t want them on the street without a way to stay connected. Advertisement Cooper, among others, envisioned a solution: a handheld phone that functioned on a wireless cellular network. Bob Galvin realized that the market for such a device could extend well beyond law enforcement. So he committed $100 million to developing it. In 1973, Cooper made his first call—to a rival at AT&T’s Bell Labs—on a boot-size prototype. It wasn’t until 1984, two years before Bob Galvin retired as CEO, that a model—the DynaTAC—was ready to go to market. After that, the cellular business “exploded,” says DiNanno: “It was the glamour sector of the company, the industry, and the country.” But it also introduced a toxic element into Motorola’s corporate culture. Employees in the public safety division, who were chugging along selling to cops and firefighters, watched and seethed as the handset division lavished riches on its own. Handset people bought luxury cars the day they got their bonuses. At one celebratory party during the go-go years, the division’s marketing department hired male models to paint themselves green, wear big dollar signs, and sing “We’re in the Money.” ‘Top management believed in letting the sector guys run the businesses their way. If that rubbed others the wrong way, tough luck.’ Former Motorola executive Mike DiNanno The era of “warring tribes,” as Motorolans refer to it, had begun. Screaming fights between sector heads rattled the corporate halls. CEOs William Weisz (1986–88) and then George Fisher (1988–93), committed to the strategy of stirring up internal competition, did little to stop them. “Top management believed in letting the sector guys run the businesses their way. If that rubbed others the wrong way, tough luck,” recalls DiNanno. As a result, he says, there was “no cohesive plan for network technology and handset technology. The two operated totally independently, in totally different directions.” On the network side of the business, Motorola had been an early developer of the digital cellular technology that was supplanting the old analog cellular system in Europe and Asia. Its digital network patents were yielding a lucrative stream of royalties. Yet, incredibly, the handset division saw no urgency to switch from analog to digital. So Motorola’s network engineers simply went their own way. DiNanno describes working with “a thousand” of them in the 1990s, all using digital phones made by Qualcomm, one of Motorola’s bitterest rivals in telecom semiconductors. “There was not a Motorola phone anywhere in the building,” he marvels, “even though the other side of the company was engaged in a bloody fight against Qualcomm that went on for years.” It took a while for the looming disaster to show up in the company’s numbers. Indeed, thanks largely to its still-growing cellular business, in 1994 Motorola rose to 23rd on the Fortune 500 list of the nation’s biggest public companies, with revenues of $22 billion and profits of nearly $2 billion. By 1994, 60 percent of the mobile phones sold in the United States were Motorolas, with the wireless business making up nearly 65 percent of the company’s revenues. But Motorola was about to fall off a cliff. Because Finnish rival Nokia had wisely retooled for digital, by the time Gary Tooker’s four-year run as CEO ended in 1997, Nokia had surpassed Motorola as the world’s largest mobile phone maker. It had become a newly powerful competitor in building networks, too. Nokia would remain the world’s largest maker of mobile phones by volume—if not by revenue—for the next 15 years. In 1997, Motorola’s board summons another Galvin to turn things around. Bob’s son Chris, a Kellogg MBA, knew the company as well as anyone: He had spent nearly two decades there, working his way up the ladder his father had built for him. Chris Galvin inherited a bureaucratic Goliath with 60 different businesses spread throughout the world, nearly all of them weak. (Phones were the biggest drag of all.) And another problem hung, literally, over his head: Iridium. Bob Galvin had championed the Iridium satellite system in the late 1980s as a way to provide the universal coverage that cellular systems could not. Motorola poured $2.6 billion and countless engineer hours into a $5 billion consortium to develop it. But once Iridium was finally operable in the late 1990s, its bulky $3,000 phones and $7-a-minute calls proved prohibitively expensive. Iridium declared bankruptcy in 1999 and sold off the bits for $25 million. World events seemed to conspire against Chris Galvin, too. The tech and telecom crash that began in 2000 hammered Motorola’s stock. (Its price fell nearly 40 percent during his seven-year tenure as CEO.) The 2001 World Trade Center attacks and the 2002 SARS scare halted the company’s international supply chains and crushed sales. In 2001 alone, Motorola’s revenues plunged by nearly $8 billion, to $30 billion; its losses neared $4 billion. To limit the damage, Chris eliminated 56,000 of the company’s nearly 150,000 workers. He closed plants, including a new $90 million one in Harvard, Illinois, the town where his grandfather Paul grew up. One bright spot: the public safety division, where orders were picking up following 9/11 and where margins were high. Still, says DiNanno, “by the early 2000s we were in trouble, and everyone knew it.” Chris pinned his hopes on developing and marketing a sexy new digital-ready phone. The Razr would be thin and nearly all metal; it would fold up and exude luxurious design. He didn’t survive in the job long enough to see it launched. One of the cruel facts about corporate life is the phenomenon of executive luck. “An executive who inherits a very challenging situation and makes a lot of the right moves can run out of runway before he or she is able to gain sufficient altitude,” says David Garfield, a managing director at Chicago management consulting firm AlixPartners. “Sometimes [a successor] gets the benefit.” Chris Galvin, it seems, had uncannily bad executive luck. A fit 64-year-old with Irish-blue eyes, Chris Galvin wears a custom shirt with a monogrammed cuff as he sits down to discuss his ouster. “One day [in September 2003], I was in my office and two board members came to see me and to apologize,” he says, recounting the moment deliberately. “One of them was genuinely remorseful. The company, they said, was in such terrible shape that the board decided it must do a shocking removal of the CEO. Typically, that only happens when a company is going out of business or there is an integrity issue. But not in this case.” Chris handed in his keys during the first week of January 2004. Seeing him walk through the Motorola cafeteria for the last time, Phil Cerney was overcome. “I turned to the person next to me,” Cerney remembers, “and said, ‘This is going to go down as the worst day in the company’s history.’ ” ‘I turned to the person next to me and said, “This is going to go down as the worst day in the company’s history.”’ Phil Cerney Shortly after the board showed Chris the door, the Galvin family decided to begin selling its 3 percent stake in Motorola, worth about $720 million at the end of 2003. A few years later, the Galvins were out of Motorola completely. Figuring out where to put the freed-up funds helped lead Chris to his current career. With a partner, he and his younger brother Michael founded a venture capital firm on South Wacker Drive called Harrison Street, in honor of Galvin Manufacturing’s first address. (Harrison Street invests mostly in software businesses and in real estate. “It’s the first firm to apply the principles of Six Sigma to the real-estate business,” Chris says.) Three months after Chris Galvin left Motorola, the company’s numbers began to turn around dramatically. The Razr proved to be a monster hit, with 50 million selling in its first two years on the market. By the end of 2004, Motorola’s market cap—the market value of its outstanding shares—hit $42 billion. The person celebrating was Galvin’s replacement, Ed Zander. Formerly the COO of pioneering computer company Sun Microsystems (now owned by Oracle), Zander was a skilled corporate showman who entertained with verve and humor. At a leadership seminar in Silicon Valley after he took the job, Zander joked to the audience that the Motorola he inherited was so slow moving, so blind to the coming convergence of telecommunications technologies, that he cried on his first day. With the success of the Razr, he could soon put his tears on hold. Motorola began generating billions in cash. In Zander’s first two years, the stock price doubled. The new CEO rode the Razr as long as possible, producing a dizzying variety in different colors and shapes and with slightly different features. The big carriers demanded it, says Zander, who currently sits on several boards: “Verizon would want the power button on one side, and AT&T would want it on the other.” Meanwhile, in arguably one of the worst decisions ever made by a major corporate CEO, Zander struck a deal with his Silicon Valley friend Steve Jobs, the CEO of Apple. Together their companies created a Motorola iTunes phone, the first phone connected to Apple’s music store. “We can’t think of a more natural partnership than this one with Apple,” Zander said at the time. Named the Rokr, the phone launched in the fall of 2005. Jobs, who introduced it, called it “an iPod Shuffle right on your phone.” Zander says he believed that by working with Apple, Motorola could become cool again. But much as it had taught the Chinese to compete with it years before, Motorola was teaching one of the most creative, competitive, and consumer-savvy companies of all time how to make a phone. Two years later, when Jobs introduced the first iPhone, Zander’s Motorola was still pushing Razrs, pumping up sales by taking new variations further and further downmarket. The result: ever-lower profit margins. One analyst calculated that the company made, on average, only about $5 per device. Partly because of the huge layoffs of recent years, Motorola’s innovation machine was stalling. The company had long numbered among the top 10 American firms registering U.S. patents, notes analyst Joan Lappin; by 2006 it dropped to No. 34. Zander insists that he saw the smartphone onslaught coming but that Motorola “didn’t have the DNA or the people” to understand the software involved. He also blames a less-than-speedy Motorola supplier that, he says, caused the company to miss nearly a year in the product cycle. “We should have just broken the contract” with the supplier, he says now. “The one regret I have is that I should have taken myself out of the CEO job and run the [phone] division [myself].” Another mistake: Zander never engaged in China the way the Galvins had, leaving the details to his division heads and country managers. When China upped its networks to 3G, his managers pushed what they had—older 2G phones—at steep discounts in order to preserve market share, unbeknownst to the CEO. The collapse of the China business in 2007 left Zander dumbstruck. That year the South Korean company Samsung topped Motorola in phone sales for the first time, and it never looked back. Zander’s poor performance pushed Motorola toward another sad rite of passage for many once-proud American companies: an incursion from Wall Street. In Motorola’s case, it came in the person of Carl Icahn, the man Fortune once called “the shrewdest investor on the planet.” Much of his $20 billion-plus fortune stems from his uncanny ability to see and exploit the untapped wealth inside companies that have weak leaders. “Ed Zander was not a bad guy, but he was doing a terrible job,” says Icahn in a call from his vast offices overlooking New York City’s Central Park, where he first faced down the CEO. The company “unfortunately went downhill very fast.”

The activist investor had but guarded hope for Motorola’s phone division—“it’s a very tough and arcane business”—but he saw a great undervalued opportunity on the public safety side. So, in 2007, Icahn began snapping up Motorola shares. He eventually owned more than 6 percent of the company and fought to seat board members of his choosing. His goal: get the board to agree to break the company into parts in order to maximize its value to shareholders. He succeeded. In 2008, Motorola set a course to split the phone division from the public safety and enterprise businesses. Zander, of course, was out. The reshaped board chose Greg Brown, who had run the latter business since 2003, as the new CEO. A polished man with a calm baritone who sits on lots of boards (including that of the Federal Reserve Bank of Chicago), Brown had run the software firm Micromuse, so he had the necessary experience. He kept his corners of the company steadily profitable, maintained high margins, and had a quality that mattered greatly to Icahn: He could see the potential that Icahn saw. But finding someone who could run the troubled phone business proved tough. “There were only a few people in the whole world who could do it,” Icahn says. “They all said no because they didn’t want to be anything but a CEO, and Motorola [already] had a CEO.” The phone business would soon spin off anyway, Icahn reasoned. So he finally suggested that the board hire a co-CEO to work alongside Brown. Brown agreed to the arrangement. Sanjay Jha, a former Qualcomm COO who possessed a deep understanding of both the software and hardware sides of telecom, accepted the position. Jha’s package would ultimately net him close to $60 million over the next three years. Explains Icahn: “The board needed him.” The Indian-born, U.K.-educated engineer walked into a marketing organization that seemed completely disconnected from what was happening in the market. “On my second day at Motorola in August 2008,” says Jha, “I did a portfolio review of all the company’s phones. I sat for three hours and looked at everything, flabbergasted. There were no smartphones.” Jha called a meeting of the engineers to see how current they were. “I was told that Motorola actually developed and patented a lot of the stuff the company’s phones didn’t have,” he says. “The company was the first with a QWERTY keypad, with color screens, with 3G and touch.” But few Motorola phones had any of those features. ‘On my second day at Motorola in August 2008, I did a portfolio review of all the company’s phones. I sat for three hours and looked at everything, flabbergasted. There were no smartphones.’ Sanjay Jha The only way to stop hemorrhaging money, Jha decided, was to slash both costs and the number of phones. At Motorola, 60 managers worked on dozens of different models. By contrast, Apple heaped all its genius into perfecting one phone. Jha figured he had one shot at saving the business: making a successful phone for Verizon, which was struggling to compete with AT&T, then the exclusive seller of the iPhone. First Jha had to decide what operating system to bet on. Motorola’s five in-house systems didn’t make the cut; none were mature enough to rival the iPhone’s. Jha says that Steve Ballmer, CEO of Microsoft at the time, presumed that he would choose Windows Mobile. “Steve told me that… I ought to devote 400 engineers to a Windows Mobile phone,” he says. “I told him that Microsoft’s success wasn’t my priority. I needed first to survive and did not have the resources to put even one engineer on it.” (Ballmer could not be reached for comment by press time.) The pressure was intense. Engineers told Jha—who was still commuting between his family’s home in San Diego and Motorola’s headquarters in Schaumburg—that they could not complete the new model before the spring of 2010. Verizon demanded a phone by October 2009. Meanwhile, his division was losing about $600 million a quarter.

Jha chopped 4,000 more jobs. The cuts devastated Motorola’s remaining pool of engineers. One star, Iqbal Arshad—who had extensive experience trying to get Nokia’s Symbian smartphone operating system onto Motorola’s phones overseas—was ready to quit. The pain of shutting his labs in Europe and firing his team had been too great. Jha convinced him to reconsider. On a flight from Europe with Jha, Arshad prepared a presentation for executives back in Schaumburg. The plan, code-named Mission Impossible, was to build a phone on Google’s new Android operating system. It would be only the second such phone on the market. The presentation, held in early 2009, grew heated. One top Motorola executive declared that choosing Android over Windows Mobile was madness. Google’s system wasn’t ready for prime time, he argued, whereas Microsoft was one of the most powerful software companies in the world. Jha would not budge. Motorola’s board faced two options: go with Jha’s recommendation or shut down the mobile phone business altogether. By a vote of 4 to 3, the board members chose the former. Quickly, Arshad handpicked a team of 200 in-house engineers to work closely with a Google team led by Andy Rubin, who had created the Android system. “They wanted Motorola to be successful and to prove everyone wrong,” says Arshad. “To save the company.” Save it they did—for a while. The new phone, called the Droid (Verizon licensed the name from movie director George Lucas, who had coined it for Star Wars), hit the market in October 2009. In the Droid’s first few months, through the holiday season, Motorola shipped more of them than Apple shipped iPhones, Jha says. By late 2010, after four years of huge losses, the phone division was profitable again. For longtime Motorolans, however, the success had to be bittersweet. Droid was not the kind of world-changing invention the company had been known for. Motorola had accepted that the most important innovations in phones were better aped than forged. It had latched its fortunes to a bigger, more powerful company and was surfing in its wake. What’s more, Motorola had shown the world how to make a good Android phone. Soon the company’s old rivals, especially Samsung, were once again dwarfing it in the market. By the time Motorola split in January 2011—nearly three years after Icahn’s activism began and much later than the board had anticipated—buckets of red ink had spilled back onto the phone division’s balance sheet. A couple of months after the cleaving of Motorola Mobility (the mobile phone company) from Motorola Solutions (the public safety and enterprise company), Google began overtures to buy the former. Sure, phone-making ability was one attraction; Google was easing into the hardware business. But the more valuable prize was Motorola Mobility’s portfolio of about 17,000 patents, largely created in the old days of feverish innovation. That intellectual property would make it easier for Google to defend itself against the spate of patent lawsuits that perpetually looms over the telecom sector. For Icahn, Brown, Jha, and Motorola Mobility’s shareholders, the deal—announced in August 2011—was vindication of the wisdom of the split. It was also financial deliverance. The guys from Silicon Valley offered $40 per share, a 63 percent premium over the market price for Motorola Mobility stock at the time. The total cost: $12.5 billion. Google took possession in May 2012, announcing on its website that “we plan to run Motorola as a separately operated business.”