Will the Razr2 Save Motorola?

Implications: Razr2 is a nice update to the aging Razr, but Motorola needs a lot more than that for salvation. Nokia and Samsung are moving ahead of Motorola, and this will be only a brief respite unless Motorola changes their business model.

Analysis: The original Razr phone was a “game-changer” when Motorola introduced it in 2004. It became the hot fashion item and catapulted Motorola to a leadership position in the handset market (albeit still behind Nokia in absolute numbers). Nokia was caught napping without a comparable product and lost a lot of market to Motorola for the next year or so. Unfortunately for Motorola, they were unable to follow up and gradually slid backward since then. The updates to the Razr were nice incremental improvements that kept it viable for a couple of years, but now it is largely a commodity item. The Razr2, if it had been introduced in 2006, would have been a nice follow-on product that would have sustained the momentum built by the original Razr.

The environment in 2007 is rather different. Motorola has lost a lot of momentum (and money!) and fallen out of favor in the handset market, where the winners are determined by both functionality and fashion. At the same time Nokia has gotten its act together with a wide variety of attractive handsets, low manufacturing costs and growing market share. Samsung has quietly moved into the number two position in the handset market ahead of Motorola. Samsung has a wide selection of handsets sporting deep functionality and fashionable styling at very competitive pricing. At the same time Apple’s iPhone has captured the latest fashion buzz, while RIM’s various Blackberry offerings are strong in the business market and now starting to move into the fashion market as well.

With this ultra-competitive environment, the Razr2 is just not enough to re-capture the magic of the first Razr. It is a solid product that is selling well, so it will gain a respite for Motorola. It may even be enough to allow Motorola’s handset group to break even for a couple of quarters, but unless Motorola has another product coming out in a few months that is significantly better they will likely be no better than competitive. It appears likely that Nokia has sewn up the number one position and Samsung the number two, with Motorola in third.

The handset business can be successful for Motorola, but only if they can re-structure their business model to be profitable without a killer product. They cannot survive with a business model that depends on the margins from a killer product. The competitiveness of today’s handset market makes it unlikely that Motorola will ever again be able to repeat the success of the original Razr. Both Nokia and Samsung have lean cost structures that allow them to be profitable in competitive markets. It’s not clear whether Motorola today can boast of a similar cost structure, but they need it if they are to be competitive.