David Lammers

Michel Mayer and the Software Challenge
February 8, 2008

The problems at Freescale Semiconductor Inc. which forced CEO Michel Mayer to resign today (Feb. 8), and Motorola Inc.’s decision earlier this month to put its handset business up for sale, have one thing in common: software problems.

Freescale’s wireless IC division, when it was part of Motorola Semiconductor Products Sector (SPS), relied largely on Motorola software. When SPS became Freescale it was forced to develop its own software, and the result was less than satisfactory: overcomplicated firmware and layers of software that appealed to few external customers. Motorola and other handset vendors turned to Texas Instruments and Qualcomm for their chipsets, yes, but also for a more-solid software solution riding on the silicon.

Mayer’s resignation is linked to that inability to deliver new customers for Freescale’s wireless ICs. On the recent Freescale financial conference call, Mayer promised that a significant wireless design win would kick in during the second half of this year. That design win is Research in Motion, but the design win is limited to one of RIM’s Blackberry platforms and is not nearly enough to staunch the losses at Freescale, which lost $1.2B last year and close to $2B in 2006. Mayer saw that his RIM card carried little weight and opted to fold his hand and walk away with the $47M he earned from the private equity purchase by the Blackstone Group in late 2006.

While Mayer and other executives benefited from the private equity leveraged buyout, Freescale itself suffered from the turn to private equity. The worldwide credit crunch resulted in Freescale paying off an increasingly expensive bond debt, as well as management fees to the Blackstone Group which benefited no one in the trenches at Freescale. Private equity suitors, in hindsight, came to Freescale at precisely the wrong time. Much attention is paid to the financial problems at AMD, but Freescale has its own challenges.

Networking, automotive, and microcontrollers are steady businesses for Freescale, which will survive in some smaller form. However, the disaster in its wireless IC division has dragged down Freescale so far that Mayer’s decision should come as no surprise.  

One could argue that, beyond the software issues, Freescale also has wireless silicon problems: it is late to the game with an integrated baseband-RF chip, similar to what Texas Instruments offers with its CMOS-based “LoCosto” or similar single-chip offerings from Infineon or NXP Semiconductors. But the heart of the problem remains unattractive software, both on Motorola’s handsets and on Freescale’s wireless ICs.

To be sure, the wireless handset business requires more complex software than might first appear. Boot up a laptop computer, and a Dell or HP logo appears on the screen. The laptop’s chips talk to the operating system which talks to applications which talk to the Internet. In wireless handsets, there is another layer: network software from the Verizons and Sprints and AT&Ts of this world. Especially in the U.S. market, the powerful network operators cause another layer of complexity. 

There is a certain irony to this, from an Austin, Texas perspective. Dell Inc., the largest high-tech employer in Austin, is downsizing, laying off people in regular bites, though a larger layoff at Dell is said to be coming next week. With wireless handsets now the largest-volume consumer electronics product, Dell is one of the serious suitors for Motorola’s wireless business unit, which accounts for about 60% of Motorola’s total revenues. Motorola’s roughly $20B in wireless handset revenues last year is a sizeable business that probably could be snapped up for $15-18B by Dell, Google, or the fast-growing networking company Huawei Technologies Co. Ltd. (Guangdong, China), the three principal suitors.

Under new ownership the question then becomes: does Motorola narrow its focus to the North American market, where it continues to enjoy reasonable market share? With its aforementioned penchant for complexity and high labor costs, Motorola got killed in the developing world, where it lost money on every phone it sold. By concentrating on high-end phones running on 3G and Wimax networks, Motorola could return to profitability. Apple’s iPhone success has shown that by concentrating on a high-end niche, with excellent software, there remains gold to be mined in the wireless hills.

In low-end phones, there are new challenges.With Google entering the wireless market next week with its "Android," a low-cost, open-platform phone, the low-end of the wireless phone business is set for a shakeup. Motorola’s best bet under new ownership would be to take an upscale strategy, giving up volumes for profits.

Software is driving hardware. Google is replacing Motorola.

And software ultimately is what forced Michel Mayer -- a Frenchman who did his best to manage a Texas-based chip company -- to resign, ending a fascinating chapter in semiconductor industry history. Bon Voyage.

Posted by David Lammers on February 8, 2008 | Comments (2)