Motorola's Split: Is each better than the other?

Motorola (formerly MOT) split into two separate entities in a long-planned divestiture that was put off by the calamitous financial markets in 2008 and early 2009. The two new companies, Motorola Mobility (MMI) and Motorola Solutions (MSI) followed a fairly logical delineation where the cell phone and set-top boxes pieces will be with MMI and the enterprise and business equipment side including RFID scanners, emergency dispatch systems, and mobile radios will be with MSI.

Interestingly, before Motorola became the champion of all things Android in the past 18 months or so, I would have said the MSI piece looked a whole lot better. Motorola's cell phone business was absolutely hemorrhaging market share to its various rivals to the point it was scraping along at about 5% as of the end of 2009 in the conventional cell phone business:

Credit goes to MobileMentalism.com

 In 2009, sales in the mobile division were down a whopping 41% from a year earlier compared to 21% in their home network and set-top boxes segment and 13% in their enterprise segment. None of that was particularly much to celebrate, but business had clearly begun to stabilize in 2010 with third quarter results showing 20% sales growth in the mobile segment, 5% in the home segment and 9% in the enterprise segment.

Clearly, Android has good prospects going forward and Motorola's offerings in particular have a great deal to offer. I happen to have the original Droid myself so I am a little biased, but I'm a fairly big fan. Of course, Motorola's fortune's are not tied entirely to Android since other manufacturers, including HTC, can just take market share from Motorola and the others in the context of a growing Android pie. There's a good article in the Economist that expresses some skepticism on this point.

However, the profitability of the enterprise segment, which is now MSI, is on more solid footing at this point. The mobile division has been bleeding money, though at a slowing rate, for some time. With improved sales, that should reverse, but the current state of things is that the MSI segment is the more profitable one at the moment.

As a shareholder in Motorola, I now hold annoying amounts of both and have to decide what to do with the respective positions. When I originally bought Motorola, it was based on the idea that Android would help revive the fortunes of their cell phone division. This ended up not paying off as soon as I had hoped, but the indications are that they are really starting to hit their stride now. On this basis, I'll place the majority of my bets with MMI, though I have to round out the MSI position because it is a very irritating 12 shares right now.  I like what I see in both segments, but I'll continue to bet on the Motorola mobile turnaround. In some ways, though, each is better than the other. In case you are wondering where I got that from, watch this trailer for a Fist Full of Dollars and For a Few Dollars More double feature:

Does Google Actually Care About Its Shareholders?

I found an article from back in July discussing Google's (GOOG) seeming lack of love for its shareholders. I think that this does bring up an interesting point which is that Google's management does seem a bit more interested in some of its more transformative projects than necessarily routinely providing a good return to shareholders. Say what you will about Apple (AAPL), but Steve Jobs never enters a product area without a very good idea how he's going to make money for Apple shareholders.

Google, on the other hand, has sprawled into a variety of areas that I am not sure have yielded the highest possible return on investment for investors. One of those areas is, of course, YouTube. We all love YouTube, but it is a bit of a free lunch as the advertising dollars don't even come close to covering the vast operating expenses. In total, YouTube lost something on the order of $450 million last year. Now, Google may argue that somehow owning YouTube has boosted its ad revenues by X% elsewhere and that has offset the cost. Even if that is true, and that's a big if, it still was not likely the best return on investment Google could have embarked upon at the time.

With Android, Google is winning the war against Apple with Android, which should be fantastic news for Google considering the growth of the smartphone market. However, I think this is a case of where Google management wanted to embark on a more transformative path than a lucrative one. It doesn't charge a license fee for Android, which it developed (and still develops) so it doesn't make money up front. Further, its own attempt at a phone flopped badly while Motorola (MOT) is resurrecting itself on the back on Google's labors.  In the end, I am still not convinced that Google will get more ad dollars through greater usage of its search engine than it would have if it had not entered the market. After all, I think most iPhone users probably use Google's search engine.

Then there are the other projects like when Google planned on giving San Francisco free Wi-Fi, its plans to provide ultra-fast internet to a variety of US cities, a free web browser (which is awesome by the way), and so on. You add this in with not paying a dividend to shareholders despite a monstrous cash pile and you do sit there and scratch your head a bit. Since publicly traded companies have a fiduciary responsibility to try (though most fail) to earn the maximum possible return for their shareholders, I have to question whether or not Google management actually acknowledges this responsibility.

The stock price performance over the past couple years reflects that as well:

There is multiple compression in there to be sure as profit growth, despite the above mentioned problems, has been quite solid. However, this multiple compression is not just a function of a bad overall stock market, but possibly also because investors may not believe that management can continually deliver how they have in the past due to these diversions.