Motorola's gamble: Substance over style

Analysts and investors were pinning high hopes on Motorola Chief Executive Ed Zander in the runup to a May 15 announcement of his new mobile-phone lineup. Motorola is suffering losses and in the first quarter had its first sales decline in almost four years. In part, that's because it has failed to unleash a whiz-bang successor to the bestselling RAZR.

So Zander needed to refresh his lineup with new, better phones that would wow Wall Street and resonate with consumers. But rather than unveil devices that look and feel different, Motorola (MOT) unveiled a new iteration of the RAZR that harked back to the original RAZR's design. The message: It's what's on the inside that matters most this time around.

Downgraded

Putting substance ahead of style may do little to stem market-share losses, but the strategy could go a long way to moving Motorola back into the black. 'Motorola is really focused on whether they can be a thriving, profitable business,' says Albert Lin, an analyst with American Technology Research. 'You don't need a revolutionary product like the RAZR to get to profitability.' In a May 15 note, Lin wrote: 'Functionality appears high and is the first indication that [Motorola's] push for higher-end technology and capabilities"&brkbar;is taking shape.'

That's a far cry from the strategy that propelled the RAZR in recent years. Since its introduction in 2004, Motorola has sold almost 100 million of the ultrathin handsets. But as it stayed on the market, the price has slipped from about $500 at the outset to essentially free, after subsidies. That has sliced margins and tarnished Motorola's image (see BusinessWeek.com, 4/19/07, 'No Easy Remedy for Motorola'). The formerly cutting-edge, high-end phone manufacturer began to be perceived as a mass-market, lower-end brand.

Meantime, cool-looking models from Nokia (NOK) and Samsung bit into Motorola's market share, which dropped to 17% in the first quarter, from 22% a year before. Nokia said on May 14 it expects to widen its 36% share in the current quarter. Between January and March, at least three investment banks, including Goldman Sachs (GS), upgraded Nokia's stock to buy. Over the same period, at least 10 investment banks downgraded Motorola's stock.

'Underwhelmed'

Enter RAZR2. The new device boasts a large external screen that lets users check e-mail without flipping open the phone. It enables quick wireless song transfers and reads text messages aloud. The phone's stainless steel frame can handle pressure of up to 180 pounds. The phone also features a technology called CrystalTalk that provides for clearer conversations even when there's noise in the background. 'It's the biggest technological upgrade in two-and-a-half years,' Zander said.

While Motorola hasn't announced prices, the RAZR2 and other new models could help the company's handset business get to break-even as early as the end of 2007, Lin says.

As feature-packed as it may be, the son of RAZR may not do much to help Motorola reverse share losses. It's not clear whether consumers will pay a premium for phones that look like last year's models. 'I am underwhelmed,' says Neil Strother, an analyst with JupiterResearch.

Back to basics

Motorola's rivals are releasing their own radical changes to today's designs. LG Electronics and fashion brand Prada recently introduced the world's first touch-screen phone.

 

Apple (AAPL) will unveil its own touch-screen, music-playing handset in June. Samsung is experimenting with two-sided phones: Its UpStage candybar phone has an MP3 player on one side and a phone on the other. Even if the new phones aren't easy to use, they look hot, and their makers are seen as more innovative than Motorola.

RAZR2 wasn't the only new device in Motorola's new lineup: The company also updated its e-mail-centric Q to make it easier to use. Charter Equity Research estimates that 30% of Q users returned the device amid frustration with navigation. Motorola, long suffering from a lack of models for next-generation, super-fast wireless networks being built in Europe, also introduced several new phones for that market: the Q9 and the multimedia Moto Z8, which will compete with phones like Sony (SNE) Ericsson's Walkman and LG's Chocolate.

What was lacking was an announcement of a low-end phone for emerging markets, where Motorola has been losing share to Nokia. 'I don't think [Motorola's] competition is going to lose any sleep tonight,' says Richard Doherty, director at consultancy The Envisioneering Group. Nor are they likely to lose much share to Motorola, which for now appears more focused on the bottom line.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.


Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved.

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