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Motorola - prolonged crisis or what next

When you get to think that the market may lose Motorola and its phones will never be on offer world-wide ever again, a feeling of quiet disagreement arises from deep inside. The company that pioneered the market and forged the first mobile phone can’t stand up and leave, just like that. It feels like a whole era is passing away, even though over the past ten years Motorola has been surprising us in a good way only with sporadic, highly successful models or ideas, rather than a particularly consistent approach to the market. The faith in this brand is so enormous, that throughout all these years, the company’s management could afford countless missteps and still get away with them, whilst other companies, had they done those things, would have provoked consumers’ anger in no time. But, Motorola would take some hits, and get back to the top with another miracle in the form of a handset, or by a lucky chance alone. All these years the maker’s luck has been keeping it afloat – Motorola has been extraordinarily lucky, to say the least.

Back in 2002 I had a meeting with Ron Garriques, when he was still the company’s Vice President (then he went on to become the President of Personal Communication Sector). We had a really long talk about new products, strategies and Motorola’s future. Ron is an authoritarian manger to the core, in many ways dead sure in what he is doing and why. But even with this in mind it was extremely baffling to hear his answer to my question in regards to Motorola’s European sales being threatened by Samsung – “I don’t know what company you are talking about, never heard of it”. Even a leading question got the same response – “better take a look at the market – there is Nokia, and there is Motorola, I know nothing of other makers”. After this conversation it was really easy to start believing in all the stories about Ron floating around the company’s office. In particular, he once insisted on some product’s release, the one he personally believed in, that is, however all other involved parties didn’t share his enthusiasm and didn’t count on that solution at all.

Motorola’s foremost problem over the last 10 years has been its management that has lived in a cloud-castle, oblivious to the global market as if it has indeed been sitting behind some very thick walls. The truth is, Motorola is very solid on its home market – the US – and while, in theory, there are some threats and challenges coming from other players out there, in reality they all get shattered to pieces when facing deals with operators and connections that go way back. Even the world’s largest company, Nokia, that keeps making forays into the US market year in, and year out, can’t report any newsworthy advances there. Having over 40 percent of the global market in tow, Nokia maintains only a very weak presence stateside, moreover, some line-ups, including the NSeries, are unavailable over there. Actually, your only options in the US are Nokia’s own stores – one on the 5th Avenue in New York (Nokia Flagship Store), and the other one in Los Angeles (opened in summer 2007). Obviously, we can’t discount Internet stores; however, the sales they generate aren’t all that substantial. All in all, Nokia’s aggregated share on the North American market doesn’t go beyond 10 percent; in 2007, all players sold around 160 million devices there at that. A misstep in the strategy, unwillingness to release carrier-branded solutions, have led Nokia to a paltry 10-percent chunk of the market in 2007, which is an immense downfall from the 33 percent it owned in back in 2003.

Early in 2007, Nokia revised its plans for the US, and, revitalized, they tackled this market again. Their office in San Diego, with 200 specialists in different fields, though primarily engineers, has turned into an AT&T support center. Few know that the Nokia 6555 was the first fruit of the company’s efforts dedicated to this carrier. Based on my conversations with Nokia’s managers responsible for the US market, as well as this maker’s developers, located in Palo Alto, I can say that all these people truly believe that their company will be aggressive on the market in years to come, and will try to leverage Motorola’s weakness to fight a big chunk of the market back. Another solution aimed to struggle against Motorola is the Nokia 6500 Classic, a direct rival to the Motorola RAZR2 V8.

Nokia is looking for a payback, and this is an important part of the company’s strategy, especially given its focus on Internet services – everyone knows that the US market has the highest potential in this sense. But will Motorola just hand out its market share without a fight?

Definitely no. It is the saving grace that keeps Motorola afloat, as far as its Mobile Phone unit is concerned. Should they lose the US market, it will be a major disaster. Unfortunately, this maker has no Kutuzov-grade strategists, who surrendered the empire’s capital, Moscow, to Napoleon in the War of 1812, saved his army and then went on to win the whole campaign.

What the company’s major omissions of the past? Without being overly specific with dates, I will just list a couple of factors that were crucial for Motorola’s mobile phone business. We had a bevy of pieces on these, so you should be able to find these articles on Mobile-Review.com with easy. So here is the list (unsorted):

  • Focus on market share, boosting sales with entry-level solutions. This hurt the brand’s image of a player that can roll out luxury phones, making its less cherished. Late in 2006 they dumped this strategy, and started aiming at higher margins thus profit, without bothering about their market share. This strategy, however had not allowed the maker to get the maximum out of some products, for example, the Motorola RAZR, whose price had rushed down in not time – by the time it had to be withdrawn, it retailed for half as much.
  • Small product portfolio. This issue has always been characteristic of Motorola, as the company’s strategy hasn’t taken account of the booming market and various needs of consumers. As the manufacturer’s managers saw it, a small portfolio made for lower production costs and thus better financial statistics on the whole. Staring from 2002, Nokia’s and Samsung’s ranges have been expanding, whereas Motorola has decided to shun from this race and gave away huge price-segments and phone types this way – basically, it just doesn’t have the right solutions to fight back. A fine example of that is Motorola’s first slider, the Z3, that debuted in 2007, when that segment had already been well under the thumb of Samsung, Nokia, Sony Ericsson and a couple of other manufacturers.
  • Misunderstanding of the global market. Surprisingly, the American management of the company is notable for misunderstanding the competition and the global market in general. They have always reacted to the market’s needs with delays and only because they had no choice left. It is quite phenomenal, but the company that pioneered this industry and is still maintaining this image in the sense of product marketing, positioning and functionality development has been trying to catch up all this time. A plain example. In the 90-ies Motorola's solutions boasted appealing designs, yet came with no business features or games (they came much later than on the competition’s products). The reason was quite simple – the company did not see the reason why the user might even need these applications, since they made phones after all. But it is exactly their sluggishness coupled with innovations in design and materials that have made Motorola’s products interesting, albeit not always brimming with technological talents. Or, where do you think the myth about the complexity and awkwardness of the menus found in Motorola-branded handsets comes from?
  • No control over R&D. Motorola is doing a lot of research work, and has a strategy for development of various products. What is bad about it, is, that, there is little to no control over these developments, lack of feedback, with the company’s marketing department ,and, in fact, disorder in efforts. A good example of this is how the JUIX platform got buried after they had put a lot of funds and resources into it, but never managed to turn it into a finished product. Effectively the maker had lost two years of time, then the LJ came along, and devices running on this OS are set to become the company’s highlight in 2008. The problem with the LJ is that this platform has been in development not as Motorola’s main solution, but a niche offering for selected products, to be more precise, originally, it had no 3G connectivity (which was the domain of the JUIX). So now, they are busy tacking 3G options onto the LJ, as fast as they can. This way, lack of proper control over R&D has pushed Motorola a couple of years back, made its products uncompetitive, forced them to look for new solutions, buying a 50 percent share in UIQ, only to patch up their range with an array of niche-aimed devices. Find more cues on the company’s portfolio strategy here, or learn more about the future of the LJ platform.
  • No strategy for promising fields. All phone makers are striving to turn into service-centric companies these days - a promising field that will ensure sustainability in today’s waters. Nokia has gone even further and announced they are an Internet company now, which is in fact the ultimate goal of the Finnish manufacturer. In its turn, Motorola has always been suspicious of this type of projects and the reason lies in its home US market. This region is overrun by carriers, who think and govern their business along the same lines as Motorola’s management does. Back in the days, these were the US carriers who, while protecting their investments, made sure that GSM didn’t make it stateside, for they were considered as “showing no promise”. And everyone knows the end of this story – over the last couple of years the same carriers have been trying to catch up with Europe and keep investing into GSM networks. That said, Nokia’s efforts in Europe looked so much more interesting, as this vendor, in collaboration with local carriers, brought about whole new niches, be it mobile advertising, mobile TV or something else. Conversely, all Motorola’s projected were given a go on the home market and inevitably ran into counteraction from carriers, who were content with the way things were going. It turned out that many potent services were hampered by the stubbornness of local carriers and Motorola’s inability to see that they would be more than welcome on other markets. Remember the iRadio feature we looked into in our ROKR E2 review – it effectively died and never found its target audience, although it had all the makings of a solid and popular offering.

Some bare numbers or market shares

Redefining its course as focus on higher margins, rather than market share, couldn’t be a painless process for Motorola. It is hard to say what came first – the developing crisis and a shift in the strategy in these circumstances or real revaluation of own actions. One thing is for sure – going for margins was the only possible way to get things straight within Motorola.

As far as this write-up goes, it doesn’t really matter that had been happening with the maker years before, so let’s take a look at a short time span, when the crisis was already there. Luckily, we won’t have to go beyond plain statistics on Motorola’s global market share over a two-year period:

  1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Nokia 34.14 % 33.36 % 35.4 % 36.97 % 36.15 % 36.15 % 39.19 %
Motorola 20.95 % 22.09 % 12.28 % 22.92 % 18.02 % 18.02 % 14.95 %
Samsung 13.18 % 11.19 % 12.28 % 11.16 % 13.81 % 13.81 % 13.05 %
Sony Ericsson 5.91 % 6.68 % 7.92 % 9.07 % 8.65 % 8.65 % 9.09 %
LG 7.09 % 6.51 % 7.4 % 5.93 % 6.27 % 6.27 % 7.68 %
Others 18.73 % 20.17 % 15.52 % 13.95 % 17.1 % 17.1 % 16.04 %
Source: Mobile Research Group              

Motorola’s centerpiece back then was the Motorola RAZR and all other devices that ensued in this family. Its sales hinged entirely on stand-alone solutions, while up-and-coming models, such as the Motorola Z6, Motorola Z8 and some others ended up in the shadow of this range and generated no fuss among ordinary consumers. The growth of the global market, coupled with passiveness of other players, specifically Samsung’s weakness on some European markets, mediocre sales in the US and China – all this played into Motorola’s hands. As strange as it sounds, but you actually start believing in the company’s incredible luck, as its foremost rival was Nokia that didn’t show considerable growth with its already-big chunk of the market in hands. Motorola was losing the market primarily because of the competition with Nokia-branded solutions, and only then because of being pushed by the rest of the market. This statement may make little sense now, but take a gander at local markets, think of what’s been happening over there, and you will get the big picture.

The main question many are asking is whether Motorola’s free fall will go on? As far as I can see, there are no reasons to believe its global market share will settle at some particular level. The maker is rapidly losing markets in Europe, CIS countries and Asia, where the only exception is China (its share decline against the backdrop of the booming market can be left overlooked). To restore their market share, they need products, and unfortunately, that’s exactly the thing that the maker doesn’t have. A great chunk of Motorola’s sales is centered around select solutions, which are quite few at that. In Q1 2008 they will roll out only around 7 new offerings, with the Motorola U9 and Motorola ROKR E8 being the most appealing of them. Since such a poor portfolio won’t allow them to maintain substantial sales, the results of Q1 2008 will shake the ground for sure – if Motorola will actually manage to keep 9-10 percent of the world market to itself, it will be a colossal achievement, however it is more likely to slip down to the 6-7 percent mark.

So the answer to the question whether Motorola’s downfall will end, largely depends on what moves they will make in the near future. If they will be drawn in by politics again, trying to make some manager look smart, and clear him or his team of what’s been going on, then Motorola-branded handsets will be no more. The market just won’t allow for a miracle. It is more like an old joke, when all of his life, a man was begging God to help him win a million in a lottery. After 30 years of prayers, God finally came to him, in his sleep, and said: “Please, give me only one chance to help you!! Buy a lottery ticket already!!!” Motorola is exactly the same – without changing something inside the company they won’t be able to pull off a miracle.

Saving the mobile phone unit

Life, just like business, is all about running good or bad. We first talked about the crisis Motorola was in back in 2005, however the company’s success reports kept everyone’s hopes up, and our words could not get to anyone’s mind. Interestingly, at some point in time, something that was previously deemed impossible and highly unlikely suddenly turns into a publicly acknowledged fact, with everyone nodding and ensuring that this was the only foreseeable outcome, frequently exaggerating it. That was the case with Siemens Mobile, and Motorola is no different these days.

The wider audience gets its hands on the information about the “crisis” only when it spreads all over the Web and press, which, in their turn, put it in the limelight only once the company starts showing considerable losses. That’s the moment when a bunch of analysts comes out of nowhere, claiming that they saw it coming and now the only way-out is to dispose of the mobile phone division. But the truth is, the time of trouble for Motorola began in 2005, and if it hadn’t for the triumph of the RAZR, it would have been right on the surface. However the first symptoms showed up only in Q1 2007, when the maker reported 181 million dollar losses. And then it was a cliche – Motorola’s shares kept losing in price on monthly basis, so only over the past year they have dropped around 28%.

The first thing they did in 2006 was a strategy on how to climb out of the crisis. One of the main points listed over there implied development of a platform for all new products, and the LJ assumed this role. Meanwhile they started changing the management roster, this was, on February 16, 2007 Ron Garriques left the position of executive vice-president and no longer governed the maker’s mobile division. With this shake-up they were trying to put an end to the issue with the vision of the market, but it was impossible, for it required a totally different approach.

It is worth noting that Motorola comprises various divisions, most of which show profit, however their business are smaller than that of the mobile phone unit. Nevertheless, this won’t matter much if the mobile division will drag the rest of the company down below along with itself, essentially making Motorola a bankrupt. In these conditions, a logical way-out is to separate the unit from the company. Many took it as a desire to get rid of the mobile phone division as soon as possible, however such an acquisition won’t be taking place any time soon for purely technical reasons – even if they find a buyer, it will take 6 to 12 months more to seal the deal.

So, who might want Motorola’s business? Let’s look at the competition and what their games are these days. Nokia occupies 40 percent of the market and is still growing, investing funds into acquisitions of various companies outside the telecom market. For Nokia, it is insanely crucial not to lose time and get valuable assets for a handful of silver coins; this goes for social networks, mobile advertising, software, and operating systems. Nokia has no real interest in its competition, what is more, buying Motorola, specifically, its mobile phone division, would bring only extra pain. The only reason they could have for that is the US market, which they have been trying to conquer, without much success, though, but it is not as clear-cut as it seems. The thing is, the company already has a product development strategy and has put a lot of money into it. They don’t need to forgo their own plans at that, since Motorola’s weakness only helps them to come true. And as far as technologies go, Nokia won’t see something it likes in Motorola. On the contrary, by buying Trolltech, effectively Nokia has put a damper on some of Motorola’s developments, since they are basing on Trolltech’s Qt platform. That’s what Nokia’s style is all about – they use little resources to obtain an edge over the competition.

As regards to Korean companies, for instance, Samsung, the philosophy of this maker is that they don’t form alliances, and prefer investing money into own R&D to get maximum efficiency. They have already gained from Motorola, showing weakness and jumped on to the second place worldwide without moving a finger. Buying Motorola’s division would mean throwing money away for something they wouldn’t be able to make use of. Neither the brand, whose value is extremely high, nor Motorola’s solutions will make all the difference for Samsung. On the other hand, LG would be happy to grab both, but they don’t have money to buy it, and they are very unlikely to raise funds; if only it won’t be a present with an additional payment, just like it happed with Siemens Mobile, when they offered BenQ 300 million Euro more just to get rid of that unprofitable unit.

The only option left on our list is Sony Ericsson. And to my mind, that’s where things get interesting – the company is currently at its peak and has already slipped into the state of crisis that will surface in 2009-2010. This matter requires a close-up and some time in February we will be looking into it in a separate article. By very modest estimates, the assets of Motorola’s mobile phone division can’t cost less than 10-11 billion dollars; Sony Ericsson doesn’t have this kind of money either, if only Sony doesn’t decide to lend it to its subsidiary.

What would Sony Ericsson need Motorola for? First of all, for two markets: China and the US. One way or another, but both markets haven’t seen much from Sony Ericsson thus far, and the maker’s sales haven’t increased a great deal (let’s put it this way – they are going up, but they should have been doing better than that). But Sony Ericsson has no interest in technologies either – they have a lot of their own solutions and projects, so Motorola would be handy only in the short term, allowing them to foray into certain regions.

The scenario when Sony Ericsson accumulates market shares and makes a major leap forward, shoving Samsung down sounds good. However, this local victory will come at a great cost, and this leap will result in the maker’s market share decreasing on a monthly basis. Technically, Sony Ericsson will move to the third place worldwide without any help, since Motorola will continue to go down.

Nevertheless, this world has already seen a bunch of miracles, and if Sony Ericsson actually decides to go for Motorola’s assets, then we will have every right to mark it as a problem company. Due to various differences in culture and approaches to the market, Sony Ericsson will not be able to handle this acquisition properly and will inevitably fall right down into a slowly progressing crisis, although for the time being it is only on the horizon and isn’t all that discernible.

Among other possible bidders are Chinese infrastructure equipment manufacturers, including ZTE and Huawei. But in my opinion, both journalists and analysts have thrown these two in just for good measure, since neither of them has a strong interest in mobile terminals (what they are doing these days can only provoke an ironical smile), plus they won’t be able to pool such a sum of money. Furthermore, they are likely to be put off by Lenovo’s example, which dropped the IBM brand some time ago.

Some also speculate about Dell’s intentions to enter the market of enterprise solutions; thankfully, this maker is currently employing the infamous Ron Garriques. From a financial standpoint and in terms of management, these two companies are quite similar. And this is a good thing. The bad thing, however, is that Motorola doesn’t have a wide array of corporate solutions on offer that would draw Dell’s interest.

It turns out that all guesses (which they have always been) on Motorola’s mobile unit being up for grabs are obviously premature. Even if there will be a deal, it won’t take place sooner than 6-12 months, and will feature terms fundamentally different from what the community can only think of these days. The company is trying to survive in dangerous waters and restructure all processes taking place in it. At this moment the management of the mobile phone unit is meeting all regional head quarters, and only after this we will know what is going to unfold in the near future.

The solution when the mobile unit gets separated into a stand-alone company technically solves the problem and decreases the burden of financial losses on Motorola. And there will be no other side or implications to this way-out – the company will have to fight for its future on its own. Moreover, if those apologies for a journalist skimmed through the official press-release, they would have known that the separation of the mobile phone division is only one of probable outcomes. It hasn’t been done yet and for this to happen they will need a resolution from the board of directors (whose meeting will be taking place shortly).

On balance, there is a plain fact left – all rumors that Motorola is about to pass away are nothing but air. If the maker manages to settle down in some markets, launch an updated product range and start working its way up, then they will survive without having to depend on someone else. But if in 2008 they won’t manage to do these things, then there will be no sunshine and rainbows waiting the company down the road, and there will be a great likelihood that we will never see Motorola’s handsets ever again. Over the next couple of weeks the stream of bogus information around Motorola will get even stronger, more rumors will be fabricated on top of what's out there already. Be reasonable when evaluating facts, as many of them have nothing to do with how things really stand. We will do our best to keep you posted on the latest events related to Motorola’s mobile phone division future, stay tuned.


Eldar Murtazin (eldar@mobile-review.com)
Translated by Oleg Kononosov (oleg.kononosov@mobile-review.com)

Published — 18 February 2008

Have something to add?! Write us... eldar@mobile-review.com



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