Will FirstNet Disrupt Motorola Solutions’ Cash Cow?

-3.69%
Downside
353
Market
340
Trefis
MSI: Motorola Solutions logo
MSI
Motorola Solutions

While Motorola Solutions (NYSE:MSI) has a wide range of customers and products, the sales of its land mobile radios (LMR) to U.S. government agencies accounts for a significant portion of the company’s revenues and a bulk of its profits. However, this segment looks somewhat vulnerable to disruption, as the U.S. government has started to build out an independent, interoperable communication system for first responders called FirstNet. In this note, we take a look at what this could mean for Motorola.

We remain neutral on Motorola Solutions, with a price estimate of $86 per share.

See our complete analysis for Motorola Solutions

Relevant Articles
  1. Up 30% In The Last 12 Months, Will Motorola Solutions Stock Rally Further Following Q4 Results?
  2. What’s Happening With Motorola Solutions Stock?
  3. What’s Happening With Motorola Solutions Stock?
  4. Motorola Solutions Stock Has More Than Doubled Market Returns Since 2018- Here’s Why
  5. Motorola Solutions Stock Has Almost Doubled The S&P’s Returns Since 2018- Here’s Why
  6. Motorola Solutions Inc. Stock Looks Set To Continue Its Rally

Motorola Has A Strong Position In The U.S. LMR Market

Motorola sells LMR products that include two-way portable and vehicle-mounted radios, accessories as well as systems such as radio network cores to various federal and state government agencies, including emergency services, 911 dispatch, and other first responders. Motorola is often the sole supplier to many agencies, as the operating costs and risks could be higher for communications systems that use multiple brands of hardware compared to a system that is more homogeneous. This ecosystem effect increases switching costs for customers while providing Motorola with an economic moat of sorts. The fact that these communication systems cater to mission-critical tasks has also made agencies reluctant to experiment with alternatives or change providers. However, the LMR system has some disadvantages, as many various local radio systems deployed across the country cannot communicate with one another, rendering them less useful during major disasters.

Government Is Looking To Overhaul The Public Safety Network

In 2012, the federal government began to make plans for a new system that allows first responders – including firefighters, emergency medical personnel, and police officers – to communicate on a single network in real time, instead of using multiple separate, incompatible systems. Earlier this year, the agency in charge of the new initiative signed a 25-year contract with wireless behemoth AT&T to build and operate the network countrywide. The government will provide a portion of the funds for the build-out ($6.5 billion out of the total $46.5 billion), while also providing valuable low-band spectrum. FirstNet is expected to match the voice capabilities of traditional radios while providing a host of new features such as video, encryption, mapping as well as other applications. Around 14 out of the 56 U.S. states and territories have already committed to joining AT&T’s network, and most other states are also expected to get on board.

How FirstNet Could Put Pressure On Motorola’s Business

The FirstNet system will support handsets and other devices from a host of vendors who can build on its standard,  bringing about significant competition and a more level playing field for device suppliers. While Motorola will also make devices for FirstNet, they are unlikely to be anywhere near as profitable as its LMR radios (hardware gross margins currently stand at over 50% ). For instance, FirstNet devices are expected to sell for hundreds of dollars, instead of the thousands that Motorola charges for its traditional two-way radios. While we don’t think that Motorola’s business with the government will face an immediate threat, given its deep entrenchment in the space and the long-term nature of many of its contracts, it could eventually see revenue or margin pressures as FirstNet deployment ramps up and gradually gains the trust of the first responder community.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research