Motorola was on top of the cellphone world shortly after it introduced the Razr. Today, it's talking about getting out of the business altogether. What happened between those two points has Motorola watchers looking for explanations.
The latest promotion from Verizon Wireless, the country’s leading carrier, features a rainbow of phones: a pearly pink BlackBerry, an orange LG handset with a full keyboard and a red Samsung camera phone whose display can swivel 180 degrees.
For followers of the cellphone’s creator, Motorola’s announcement last week that it may exit the mobile business was a brutal acknowledgment that the company has lost relevancy in the global handset game, marginalized by missteps that some believe are insurmountable.
Overseas rivals exploited Motorola’s torpor, manufacturing inefficiencies and lack of cutting-edge technology to gain global market share.
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Motorola watchers say the company clung to its engineering background for too long, unable to respond to consumer tastes. This was less problematic in the earlier days of cellphone adoption, when a more utilitarian approach was sufficient for the basic task of making calls.
Delivering on fashion
In contrast, European and Asian handset makers quickly realized they would have to win over consumers, and that meant delivering on fashion.
“You could see companies like Nokia, and eventually Asian manufacturers like Samsung and LG, creating stylish phones for retail distribution,” said William Markey, president of Chicago-based telecom consultancy RCBG, which was founded by several Motorola alumni.
Schaumburg, Ill.-based Motorola scored a high-fashion hit with its thin Razr flip phone in 2004, which became the world’s top-selling handset.
The company’s competitors took quick notice and churned out Razr clones, but they also recognized the importance of finding the next trend and getting it out fast.
Rivals “were able to figure out what [Motorola’s] doing and get mass volumes to market quick,” said Jim Suva, an analyst at Citigroup.
As competition among handset makers intensified, Motorola’s rivals honed their strategies, and Motorola coasted on its Razr success.
Nokia focused on low-cost phones, betting on large volumes to gain share in developing markets.
Niche players captured the high-end of the spectrum, with Research In Motion finding success with its business-oriented BlackBerry smart phone and Apple blazing into the industry with the iPhone. This left Motorola aiming at the middle market, an increasingly challenging segment as wireless-subscriber growth began to plateau.
“There used to be so much growth that there was room for many players,” said Shawn Campbell of Campbell Asset Management, a veteran Motorola observer who shed the last of his shares last year.
“Five years ago, that growth really started to slow. In order to sell to people who already have wireless service, you have to convince them to chuck the phone they already have. … Motorola was relegated to the middle, and it’s not a great place to be,” Campbell said.
Analysts say the key to catering to this broad range is pumping a wide array of phones into the market, with the hopes of scoring several hits across many demographics. Samsung and LG, schooled in the fickle tendencies of Asian electronics consumers, did precisely that.
“They’re trying to hit just everybody,” said Tina Teng, an analyst at iSuppli.
And the South Korean companies were able to produce a variety of stylish phones in high quantities because of more efficient platforms, something Motorola lacked. Suva and other analysts note that Motorola uses more expensive chips than its rivals.
Moreover, in the case of Samsung, the company created a common basic infrastructure to use in many of its phones.
This streamlined approach allows Samsung to “differentiate endlessly. … To do so requires that you change little, yet create the appearance of change,” Markey said.
The company was introducing several new phones a month, while Motorola, juggling several different software platforms and chip suppliers, was debuting only a handful of fresh handsets per quarter.
Some of the devices were well-received: The Rokr E8, a touch-screen music phone, garnered accolades at this year’s Consumer Electronics Show in Las Vegas. But as Teng pointed out, “one model is not enough.”
Last month, Motorola said it has a new agreement with Qualcomm to get chips for third-generation technology, which enables the data-intensive multimedia features that are taking precedence over basic calling and texting.
Chief Executive Greg Brown said securing the Qualcomm chips will help fix Motorola’s glaring shortfall in 3G phones, an area where Samsung was an early leader.
For many analysts, the Qualcomm announcement was just another example of Motorola lagging too far behind the pack. And the cellphone unit’s myriad troubles last year have served only to stir uncertainty and depress morale, rather than inspire Motorola’s deep pool of designers and engineers to be more innovative.
“I don’t think it’s a design flaw. I don’t think the people in the lab are idiots,” said Greg Gorbatenko, a telecom analyst at Jackson Securities in Chicago.
“I think creativity hasn’t been incentivized; cost cutting has been incentivized. You can only cut so much before you start cutting into muscle.”