Michel Mayer and the Software Challenge

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.