Thursday, October 12, 2006

Early Indications October 2006: Who will build the “Internet of Things”?

(NB: As usual, the author holds no direct financial position in any of the companies mentioned.)

“The network is the computer”
Sun Microsystems, circa 1983

Ed Zander was already a seasoned tech executive when he arrived at Sun Microsystems in 1987. During his tenure of over 15 years there, Zander saw Sun enjoy great success in the Internet infrastructure boom, building in part on its semi-retired but still-prescient slogan. He also saw Sun struggle after 2000 as the company turned in a variety of directions, in part toward the market’s emerging need to manage systems of sensors, associated information, and identity. Servers had, however, become a commodity item, and Sun’s current position is substantially weaker than that of a decade ago.

Zander retired from Sun, then was hired as CEO at Motorola a short while later. The company he inherited was not noted as a tech powerhouse as of 2003. Decisions were heavily second-guessed, in part because the most recent in a line of leaders from the founding family was not delivering results. Moto had missed two big shifts, first by overestimating the desire for satellite telephony with its Iridium bet that lost $2 billion and is still the subject of a lawsuit by creditors that could cost the company an additional $1-4 billion. Second, Motorola underestimated the shift in mobile voice from analog to digital. Its StarTAC cell phone was a worldwide leader in the mid-1990s, but after that Motorola gave up handset market share to Nokia, LG, Samsung, and others. Many business units were fragmented and/or redundant, and speed suffered amidst indecision, bureaucracy, and the impact of major job cuts.

The turnaround has been sudden. Since January 5, 2004, when Zander came aboard, Motorola stock has risen from about $15 a share to a solid $25. The company’s instantly recognizable RAZR phone is hugely popular, with over 50 million units sold. The follow-up products have generally done well, and both market share and handset margins are rising by meaningful increments.

But this is more than a consumer device popularity story. Zander has streamlined decision-making, reoriented the hiring process to include an emphasis on interpersonal skills alongside technical ones, and crafted a very Sun-like overarching vision. Whether in the public safety, handset, telecom equipment, or enterprise business, everything is connected to what Motorola is calling “seamless mobility.” According to the 2005 annual report, “Seamless Mobility means people have easy, uninterrupted access to information, entertainment, communication, monitoring and control.” While key technologies -- such as sensors, metro-area and mesh wireless broadband, and voice and video over Internet Protocols -- are certainly maturing, one clue to the power of this vision lies in Zander’s putting people at the center of the Internet of Things.

The branding and expertise that come from leadership in handsets and set-top boxes no doubt fuel some of this positioning. Out of view of consumer markets, however, Motorola is creating a compelling portfolio of both wired and especially wireless broadband plays: it is the only vendor to be part of the two major WiMax trials in the U.S., which are Clearwire (Craig McCaw’s newest startup) and Sprint, which announced a $3 billion investment in the technology earlier this summer. Motorola also has significant market presence in wide-area wi-fi, various cellular standards, and wireline broadband to the home. In short, if there’s a broadband connection, whether in the air or over a wire, or connecting a person or a device, Motorola probably has a solution in the market.

The company augmented an already robust patent portfolio with the September acquisition of Symbol, which makes a variety of sensors, software, and network equipment for enterprise mobility of the stock-clerk and forklift variety. Symbol also will augment Motorola’s enterprise sales channel and expand its foothold in vertical industries including retail, travel, and transportation.

While there are good reasons to be bullish on a combo platter of sensors, consumer and government handsets, and broadband, risks are embedded in nearly all of the company’s major plays:

-Qualcomm owns a formidable portfolio of wireless patents and could build on its strength in cellular to attack other facets of mobile broadband.

-One company - Sprint - represented 12% of Motorola’s total market in 2005. Sprint has not executed the Nextel merger particularly effectively and is losing market share. The COO was asked to leave in August and the executive chairman announced his departure earlier this week.

-The WiMax “family” of technologies (fixed vs. mobile wireless broadband) is not yet a product suite, and 4G is not yet a standard. Intel’s place in the wireless ecosystem is not yet clear either.

-The investment made by Motorola’s large customers -- telephone carriers and cable companies -- in both wireless and wired broadband, particularly in laying fiber closer to the end customer, could be affected by technology change, regulation, or availability of capital.

-Supply-chain products like bar codes and RFID may remain niche offerings rather than as parts of a conceptually unified “Internet of Things.”

Getting Motorola, which had lost prestige and shed thousands of jobs, to accept risk-taking has been a core aspect of Zander’s mission. As a result of the company’s focus, patent holdings, and coherent product footprint and market positioning, it’s hard to see a head-on competitor. Cisco has more wireline clout and a bigger set-top box presence after acquiring Scientific Atlanta but no WiMax or cellular business, much less consumer design expertise of the sort embodied in the RAZR. Tag manufacturers including Texas Instruments, middleware companies such as BEA, or identity managers like Sun or maybe Microsoft may well play important roles as components in the cloud from sensors through computing to people, but it’s hard to see any of these companies taking a leadership position. Many, many piece-parts will be required for anything resembling the science fiction vision to come to fruition, but given that personal communications and computing platforms, a variety of broadband networks, and sensors in many shapes and sizes will be involved, in the near term Motorola appears to have rebounded and assumed a leadership position in a market it is helping to invent.