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Motorola’s path: in flux

TO OBSERVERS, MOTOROLA INC.’S GLASS is either half-full or half-empty.
“Ringing Start for Motorola Chief,” declared Barron’s last week after the ailing American vendor reported steep losses.
Barron’s had chosen to hail the straight talk and frank acknowledgements by the company’s new co-CEO, Sanjay Jha, on the challenges and new direction for Motorola’s handset division.
“Motorola’s Train Wreck,” sniped Seeking Alpha.
The financial-reporting Web site chose to focus on the dismal financial results from the third quarter. The accompanying story actually undercut the headline’s credibility, however, by disparaging the company’s progress under its new, co-CEO model of governance. As Jha noted last week, he has been on the job for 90 days.
Of course, both headlines were technically correct.

Shocking truths
The company is bleeding money and market share, struggling with its portfolio and refocusing on its core markets.
Yet Jha has swiftly brought transparency and made tough
decisions that have rekindled the company’s credibility, according to several analysts.
“He made the real problems public and did a very commendable job,” said Bonny Joy, analyst at Strategy Analytics. “It’s always better to stand up and fight than to undergo a slow and painful death.”
For some the transparency is jarring. How often does one hear a CEO make the following statement, as Jha did last week on his company’s financial outlook? (Motorola and its former CEO Ed Zander still face a shareholder lawsuit filed in August 2007 alleging that the company and its CEO misled investors as the company faltered.)
“Looking ahead to the fourth quarter, we expect lower than normal seasonal growth in the handset market,” Jha told investors and analysts. “Growth is primarily being driven by smartphones and very-low tiered product categories where our portfolio is more limited today. Consequently, in mobile devices, we anticipate sales and units to be down compared to the third quarter. Due to the lower volume, the operating loss is expected to increase sequentially.”
For the record, the company sold 25.4 million handsets in the third quarter (down 32% from the year-ago quarter), including more than 11 million W Series devices, 3 million Razrs, 1 million Rokrs and 1 million Razr2s. A positive metric, courtesy of Strategy Analytics: Moto’s average selling price (ASP) has improved year-on-year to $123 and has been stable for a year as the company focused on value over volume.

Tough decisions
Apropos of the urgency of his mission, however, Jha did not dwell on the bad news. He spoke to the company’s challenges and decisions taken to address them.
Jha mentioned the effort to reduce the number of software platforms and “system architecture” to focus on Google Inc.’s Android operating system, Microsoft Corp.’s Windows Mobile and the homegrown P2K OS; to rely on Qualcomm Inc. and Texas Instruments Inc. as chip suppliers; and to focus geographically on North America, Latin America and China, where the company remains strong.
Companywide, cost-management efforts should yield $800 million in annual savings by next year ($600 million in mobile devices), on top of nearly $1 billion in annual savings achieved in the past year. Some 3,000 new job cuts, two-thirds of them in mobile devices, will be completed by next year. Motorola will use more original design manufacturers (ODMs) for entry-tier handsets, cutting overhead. Also, it will consolidate three manufacturing sites to two: one in China, one in Brazil.
Motorola would no longer be obligated to Freescale Semiconductor Inc. for chips or to Symbian UIQ as a smartphone OS and it would drop a number of handsets formerly planned for the first half of next year.
“There is no quick fix here,” Jha said. “Consequently the first half of next year will be challenging.”
Jha said a new Android-driven smartphone is targeted to reach market for the 2009 holiday season. And “2010” is now widely cited by analysts for Motorola’s re-emergence with a competitive portfolio and profitability.
Thus, Jha added, the much-publicized effort to split Motorola into two publicly traded entities will take place when conditions warrant – not in third-quarter 2009, as previously stated.

Portfolio: in flux
Partly due to Motorola’s own acknowledgement that Jha’s influence on new handsets won’t be felt until deep into next year, there’s a sense that the raft of new products released or announced in the third quarter this year were developed before his watch and, like a number of post-Razr efforts, may be out of synch with the market. The company launched 16 new handsets worldwide in the third quarter. But the catch-up effort has produced some results, one analyst said.
“They’re starting to address categories they didn’t have (on the market),” said Avi Greengart, analyst at Current Analysis. “Some will be competitive in the U.S.”
The Krave ZN4, for instance, now at Verizon Wireless at $150, is a 3G touchscreen feature phone with virtual QWERTY keys and competitive company – the LG Electronics Co. Ltd. Venus and Samsung Electronics Co. Ltd. Glyde – both touchscreen feature phones – also sell at Verizon Wireless for $150.
“It’s entering a crowded market,” Greengart said. “But it does have some unique features.”
Greengart said that Motorola’s brand remains strong with U.S. consumers and the company’s distribution remains tops here. He pointed to Motorola’s W series, particularly several inexpensive clamshell models at T-Mobile USA Inc. and Verizon Wireless. The Moto Q at three of the four top U.S. carriers is a “good choice” for a business user who wants a Windows Mobile device with QWERTY keypad, but the Q doesn’t stand out for the prosumer, according to Greengart.
“Where they’re really falling down is in the ‘exciting’ categories such as touchscreen smartphones and QWERTY messaging devices,” Greengart said. “Their products lack the excitement created by market leaders like the iPhone, the G1 and the BlackBerry Storm.”

Software: in flux
The decision to focus on Android for high-end phones, Windows Mobile for enterprise efforts and the P2K OS for W Series devices – and develop software that delivers a differentiated experience to ride atop these platforms – is “extremely important,” according to Greengart.
“Somebody should have made these hard decisions three years ago,” the analyst said. “Instead, they didn’t do a great job on any of their efforts, which were too splintered.”
“It’s ‘Turnaround 101,'” Greengart said. “Make sales. Cut costs. Innovate on new products.”
“They’re going to be a much smaller player, that’s for sure – if they survive,” he concluded.

Market position: in flux
In a global context, Motorola’s market share has shrunk from more than 21% in the third-quarter of 2006 to 8.5% during the second quarter of 2008, according to data from Strategy Analytics.
The company remains strong in North America, Latin America and China, where it developed a distribution system to rival Nokia Corp.’s own. But Motorola is particularly weak in Western and Eastern Europe, the Middle East and Africa, where it is barely maintaining share. (Motorola derives about half its handset revenue from North America, about one-quarter from South America, under 20% from Asia-Pacific markets and less than 10% from Europe, the Middle East and Africa, according to Strategy Analytics.)
“North America and Latin America are key battlegrounds for Motorola to survive,” said Strategy Analytics’ Joy.
That means maintaining close relationships with the carriers to work on the typically year-long task of co-develop
ment of handsets running those carriers’ revenue-generating services, Joy said. Otherwise, maintaining or building share becomes “a monumental task,” the analyst said.

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