Can Motorola Stay in the Handset Business?

Implications: Motorola is struggling in the handset business, while at the same time Nokia is going from strength to strength.  Motorola’s new CEO, Greg Brown, has very limited time to rescue the handset business.  Motorola needs to be able to make a profit on low-cost cell phones.  Barring that, they may not have a future in the handset business.

Analysis: It is interesting in some ways to compare Motorola today with HP a few years ago.  Scott McNealy said about HP at the time, “Their printer business contributes 150% of their profits.”  That was a clever way of pointing out HP’s successful printer business was subsidizing the loss-ridden server and PC divisions.  HP has fixed those problems since and is now successful in all areas.  This is the same challenge confronting Motorola today.  Their handset business is losing so much money that their overall earnings are barely positive ($100M) despite nice profits from their set-top boxes and mobility divisions.

At the same time Nokia has just announced a tremendous quarter.  Their revenue is up, their market share is up (est. 40%), their profits are up, and their margins are up.  A few years ago when Motorola first introduced the Razr they were able to pose a real threat to Nokia.  Today they are struggling just to stay in the game.

The core of Nokia’s success, and Motorola’s problem, is the ability to manufacture and sell low-cost handsets at a profit.  In a nutshell, Nokia can do it and Motorola can’t!  This has become increasingly important  as much of the global market growth is in developing countries where low-cost handsets dominate the market.

To add to Motorola’s problems, their products are also weak in the European market, especially with phones utilizing high-bandwidth data.  Motorola does have some  good products, but not enough to stop the plunge in market share and profitability.  Nokia also suffers from some weakness in the US market where Motorola is doing well, but the US market is not enough to rescue Motorola.

Nokia currently dominates the low-cost handset market, they have compelling products in virtually every segment of the market, they are about to release a competitor to the Apple iPhone, and they have a music service that will available a minimal cost on their phones.

If Motorola is to stay in the handset business they must, at a minimum, become able to manufacture and sell low-cost, quality handsets at a profit.  They also need smartphones and high-end handsets that are competitive in the European market.  Achieving these goals will not be easy, and will likely require some hard decisions and perhaps corporate bloodletting.  Failing to achieve these goals will mean continuing losses and eventually an exit from the market.  Business as usual won’t be good enough, particularly with Apple now in the market with their  iPhone, which has essentially emulated the success the Razr enjoyed a few years ago.