Static Ahead for Motorola Solutions?

A two-way Motorola radio Mike Hutmacher/Wichita Eagle/MCT/Alamy

When Mike Poth was a cop and in a tight spot, he felt that his radio was his lifeline to civilization. Today, Poth heads a federal agency tasked with rolling out FirstNet, a multibillion-dollar broadband network that could link every police, fire, and emergency medical officer in the U.S. Public-safety personnel currently rely on thousands of local two-way radio systems that can’t talk to one another, causing confusion in every major disaster since 9/11.

Last March, FirstNet tapped AT&T (ticker: T) to build the public-safety network and cover the country within five years. It’s a nice opportunity for AT&T, and for cellular infrastructure providers such as Crown Castle International (CCI), SBA Communications (SBAC), American Tower REIT (AMT), and CommScope Holding(COMM). But it could produce terrible static for the supplier of most traditional two-way radios: Motorola Solutions (MSI). Motorola’s Chicago-based radio veterans will be paid to connect the network to existing radio systems, but eventually FirstNet will supplant the old systems, which generate more than half of Motorola’s revenue.

With Motorola shares up at twice the rate of the Standard & Poor’s 500 index in the past couple of years, to a recent $87, many investors seem to think that its public-safety franchise is safe for the foreseeable future. But that sounds eerily like the onetime belief that the iPhone wouldn’t displace all those corporate BlackBerrys. As cops and firefighters get comfortable with FirstNet’s reliability over the next few years, demand for Motorola’s traditional products—and its shares—could fall by double digits.

Poth understands that first responders are loath to give up their traditional radio systems: “They tell me, ‘You’re not going to take my police or fire radio away. We’re not going to run into a burning house and try to transmit on an iPhone 7.’ ” Within a few years, Poth says, FirstNet devices will match the mission-critical voice capabilities of traditional radios, while bringing public-safety officers an “explosion” of new features like video, mapping, encryption, and automatic record-keeping.

Motorola tells Barron’s that FirstNet can’t provide the mission-critical voice connection that first responders need, and notes that Motorola’s existing customers continue to invest in its products.

The First Responder Network Authority, or FirstNet, was created by Congress in 2012 after the 9/11 Commission lamented that many firefighters died that day because of radio failures. If communications had been better, perhaps the loss of those lives could have been avoided.

The federal government will contribute up to $6.5 billion toward AT&T’s costs, along with valuable radio wavelengths that can reach long distances and penetrate buildings. AT&T itself expects to spend $40 billion to build and operate the network over its 25-year contract.

AT&T will earn returns by charging subscription fees to FirstNet users, which could reach several billion dollars a year, and by using any leftover capacity in the new spectrum for other customers. The company has other unused spectrum bands, say analysts such as Deutsche Bank’s Vijay Bhagavath, so it can activate those while it upgrades its antennas for FirstNet—with the government paying for the tower climb. He says the upgrade will generate significant revenue over the next few years for network vendors, including Crown Castle and CommScope.

Under the law covering FirstNet, each of the nation’s 57 states and territories has until mid-December of this year to opt in to AT&T’s network, or to opt out and make their own arrangements for a public-safety network that would operate with FirstNet.

The AT&T senior vice president in charge of FirstNet, Chris Sambar, says his company will handle all costs for designing, building, and managing FirstNet and its radio spectrum for states that join. Handsets and other devices will be available from many vendors (including Motorola), and each will cost hundreds of dollars, instead of the thousands charged for traditional two-way radios. Although a few states are exploring opting out, 14have already committed to AT&T’s network, as most are expected to do. That will be a small pain for rival cellular networks like Verizon Communications (VZ), T-Mobile US (TMUS), and Sprint (S), which each enjoy revenue from the public-safety agencies that have taken the initiative of supplementing their two-way radios with a second handset or an air-card modem for vehicle laptops.

MOTOROLA CEO GREG BROWN was unavailable for comment, but spokesperson Tama McWhinney replied to Barron’s emailed queries. Because FirstNet is based on the broadband cellular technology in use today, she contends that it might become overloaded, compromised, or damaged during major emergencies. Motorola’s systems are highly resilient, she adds, and have features like instant “push to talk” and the ability to radio directly to other handsets when tower connections fail.

Systems like Motorola’s, called Land Mobile Radio, are built and paid for by state and local agencies. LMR will remain vital long after the deployment of FirstNet, says Terry Hall, who runs emergency communications for three counties in Virginia. The commonwealth was the first state to opt in to FirstNet, but AT&T still must persuade each local agency to use FirstNet. Motorola has strong connections to its LMR customers. Hall’s agency just signed another 15-year service contract with Motorola. “LMR is solid,” he says. “We just invested money in it.”

AT&T’s Sambar has only nice things to say about Motorola, but argues that LMR will become secondary to FirstNet over time. AT&T’s cellular network already gives priority to public-safety transmissions, assigning available bandwidth to them ahead of other callers. By year end, says Sambar, emergency traffic will actually pre-empt other users, bumping them to other channels so that first responders feel like they’re the only ones on line. Hardened cell towers and rugged handsets will follow.

Benefiting from significant spending cuts and share buybacks, Motorola made $560 million, or $3.24 a share, in 2016, on $6 billion in revenue. Following a June 2017 quarter in which sales rose 5% year over year and its order backlog grew, Motorola trades at a market multiple of 16 times the consensus 2018 earnings estimate.

But as FirstNet rolls out and builds its mission-critical credibility, local agencies may wonder if they should keep investing in LMR and in Motorola Solutions. Stay tuned.

[“Source-barrons”]