While the global struggle to tame the Year 2000 computer crisis will justifiably hog the technology news spotlight, 1999 promises to be far more than just a millennial warm-up act. Major business issues, among them the ongoing Microsoft antitrust trial, the government’s scrutiny of the AT&T-TCI mega-merger and, closer to home, the financial performance of Motorola Inc., promise to make ’99 a defining annum in its own right.
Start with the Microsoft antitrust case, which has taken a couple of unexpected turns and retains the potential to seriously crimp the style of the world’s biggest software company and even to alter the pace of innovation in the software world.
Beyond that, the Federal Communications Commission has taken up consideration of the $48 billion AT&T-TCI merger, a union that is likely to heavily influence the deployment of high-speed Internet access to consumers, as well as the intensity of competition in the local phone service marketplace.
Finally, 1999 is the year Motorola, the struggling, multifaceted electronics behemoth, and CEO Chris Galvin, the third generation of his family to head the company, need to show shareholders the money from a traumatic reorganization and downsizing.
In the Microsoft case, U.S. District Judge Thomas Penfield Jackson hasn’t been particularly friendly to Microsoft, and Chief Executive Officer Bill Gates seems to have hurt his company’s case with a sullen, recalcitrant performance in his videotaped deposition.
During the first two months of the trial, the federal government and 19 states, including Illinois, have managed to broaden the focus of a case that began as a relatively narrow challenge to Microsoft’s practice of requiring computer-makers to take the Internet Explorer Web browser as a condition of obtaining the Windows operating system.
The government’s case now is a much wider antitrust complaint in which the Redmond, Wash., company is portrayed as a rampaging bully, demanding that fellow technology Brahmins like Intel Corp. and Apple Computer Inc. stop development of products Microsoft deemed threatening to Windows.
But the government’s momentum appeared to slow just before the holidays when Jackson observed that the recently announced merger of two of Microsoft’s bitter foes, Netscape Communications Corp. and America Online Inc., “might be a very significant change in the playing field as far as this industry is concerned.”
The case resumes Jan. 4 after a two-week holiday recess.
If the government wins its case, “it seems possible that . . . a series of rules, or standards or norms could come out of this. It potentially changes the rules,” said Shane Greenstein, a professor at Northwestern University’s J.L. Kellogg Graduate School of Management.
In particular, Greenstein said, a government win could provide an opportunity to create a rulebook for the practice–common in the high-technology arena–of competing and cooperating with a company more or less at the same time.
Thus an Intel works closely with Microsoft to make sure Windows runs smoothly with Pentium microprocessors, but at the same time develops multimedia technology that would compete with a Microsoft product.
The government presented evidence at the antitrust trial that Microsoft pressured Intel to abandon its multimedia technology or face loss of Windows support for a new line of Pentium chips.
“That line between co-operation and competition is a very blurred line in this industry and Microsoft always took advantage of that blurring,” Greenstein said.
Another looming issue on the government regulatory docket, the FCC’s review of the AT&T-TCI merger, is part of a fight among telecommunications firms, cable companies and Internet service providers over what is known as `the last mile’–the connection of high-speed data lines to consumers’ homes.
If approved, and assuming it spends the $20 billion or so it will take to upgrade TCI’s infrastructure, AT&T could offer local and long-distance service, plus cable TV and fast Internet connections to about one-third of U.S. households.
The deal is especially important to AT&T because it is expected to face competition in its bread-and-butter long-distance business from local phone companies. An upgraded cable link to consumers does two things: It enables AT&T to bypass local phone companies and it provides high-speed Web access, one of the missing ingredients in turning the Internet into a true mass medium.
In addition, it would give consumers an alternative to digital subscriber line, or DSL, a relatively new technology for high-speed Internet access that local phone companies will push hard in 1999.
Chicago, projected to be TCI’s biggest market by mid-1999, would be front-and-center in offerings from a combined AT&T-TCI.
Some ISPs want the government to force AT&T and TCI to offer them access to their cable Internet delivery system.
“We believe AT&T and TCI will be approved, but they may be required to function as a common carrier (for ISPs),” said Jim Balderston, an Internet analyst with Zona Research.
After several months of tumult, 1999 also shapes up as a year for Motorola to begin reaping the benefits of a $2 billion cost-cutting and restructuring that includes lopping off 15,000 jobs.
Some factors remain outside the company’s control. The world market for semiconductors, which historically supplied about one-third of Motorola’s revenue, has recovered somewhat, but is still far from booming.
On the other hand, Motorola has reduced its exposure in semiconductors, shutting several plants and canceling plans for a new $3 billion chip factory in Virginia. Semiconductor revenue accounts for only about 20 percent of annual company revenues.
This fall, Motorola began shipping a much-anticipated digital version of its StarTac phones. Although the leader in analog wireless phones, Motorola is No. 3 in digital phones, behind Nokia Oy and Ericsson AB.
That’s a critical lag because in 1998 digital phones for the first time outsold analog.
But Motorola is gaining some ground. Its share of the U.S. digital market jumped to 11.5 percent from 6.3 percent last year. “The good news is demand is strong,” said Brian Modoff, who tracks the company for BT Alex. Brown in San Francisco.
That’s well behind Nokia’s 40.3 percent, but within hailing distance of Ericsson’s 20.6 percent. Ericsson has stumbled in recent months; its share price has dropped by about one-third since July and the Swedish company may slash as many as 30,000 jobs.
“We think Nokia and Motorola are likely to take market share from Ericsson,” Modoff said.
“They seem to be getting their act together on the phone side,” said Jane Zweig, vice president of Herschel Shosteck Associates, of Silver Spring, Md. The digital StarTac “is an important product for them,” Zweig said. “But they need more” especially on the budget end of the product spectrum. The StarTac sells for about $500, while a competing phone from Nokia is being sold for less than $200.
Iridium is a murkier matter.
CEO Galvin said last August that Motorola hopes to collect as much as $700 million from Iridium LLC, its spun-off satellite-based global phone network, for which Motorola is the chief contractor. The northern Virginia-based company began offering service in November. “Basically, the system is working,” said Armand Musey, a satellite industry analyst for C.E. Unterberg Towbin of New York, who has tested the service. “It’s a product they can sell.”
But the question remains, to whom?
Modoff estimates that Iridium has sold 10,000 phones, hardly a knee-knocking number for a worldwide network, but the service is still in its infancy.
Modoff noted that multiple mode phones that allow a user to call via landline and via several different flavors of cellular technology will be on the market by the end of the year, reducing the pool of people willing to pay $3,000 for an Iridium phone that has trouble working amid skyscrapers because it needs an unobstructed line to a satellite.
In addition, Musey, of Unterberg Towbin, pointed out that Motorola, which already was the guarantor for at least $625 million in bank loans for Iridium, recently agreed to back several hundred million dollars more of the company’s bank debt.
Those guarantees limit Motorola’s ability to book unspecified profits from Iridium.
In a recent Securities and Exchange Commission filing, Motorola indicated that it will spend from $240 million to $390 million from 1997 through 2000 to fix problems associated with the Year 2000 computer bug, but did not expect those costs to have a substantive impact on results. But in a caveat being issued by many firms to reflect the unpredictability of the problem, Motorola’s SEC document states that “there can be no guarantees that these estimates will be correct.”
One clue to Motorola’s financial progress will come in mid-January, when it reports the last quarter of 1998.
Motorola modestly beat earnings estimates in its last quarter, delivering 7 cents a share, compared with a consensus expectation of 1 cent.
Company President Robert Growney said at the time that he expected Motorola to meet Wall Street expectations of 22 cents per share for the fourth quarter.
