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Dismal Q2 evidence of deeper problems at Motorola?

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Comment Having seen off the challenge to his leadership from billionaire activist investor Carl Icahn, Motorola CEO Ed Zander is under renewed pressure as the company warns of a dismal second quarter and a full year of losses in the core handset unit.

While the infrastructure and Connected Home divisions are faring far better, they need to be integrated far more quickly and creatively with the devices to deliver on the promise of Motorola’s marketing tag, ‘Seamless Mobility’.

But while that strategy offers hope, in the short term there are deep problems to be addressed in handsets, which may lead to a crucial decision on future approach to this market - does Motorola want to regain and boost its second placed position in handsets, temporarily at least ceded to Samsung, which will require more drastic attention to supply chain and economies issues to emulate the skills of Nokia; or does the company need gradually to reduce its dependence on devices and deliver a platform for convergence and quad play, an emerging market in which it has unique strengths in its mix of products and its routes to market.

Before such strategic decisions can be made, Motorola certainly needs to recover from two fundamental mistakes of the past year - over aggressive chasing of the ultra-low cost handset space, which has killed margins, and failure to diversify the range sufficiently as the iconic RAZR comes to the end of its phase as a premium product.

The runaway success of the RAZR perhaps obscured some of the deeper issues within Motorola, structural and cultural, which Zander inherited and has made considerable progress in addressing. The shareholders may not tolerate this, but Zander should be allowed to stay and do this work, and give the new head of handsets a chance to work some magic - while appointing some lieutenants who can learn some lessons from Nokia in terms of supply chain excellence, without which volume will be impossible to sustain with profit, and of truly creative rethinking of the future strategy and identity of the company.

With the iPhone carrying all before it, Motorola CEO Ed Zander must be haunted by memories of his company’s aborted attempt to co-create a music phone with Apple two years ago, and of possible opportunities missed. As the giddy heyday of Motorola’s own super-phone, the RAZR, fades in the memory, the world’s second largest handset maker is also under siege from another music device, the Sony Ericsson Walkman phones, which are leading that vendor’s current race up the mobile ranks.

This is not just about handsets and which company has this year’s most fashionable model though – Nokia hasn’t had a truly iconic device for years, despite the all-round impressiveness of its N and E ranges, but looks almost unstoppable in its march to its coveted 40 per cent market share.

Motorola’s current crisis points to problems that run far deeper, and that were perhaps obscured or taken too lightly amid the headiness of the RAZR’s success. Motorola lost its second placed position in its largest sector, handsets, to Samsung in Q2, and there are now two very real possibilities facing it – that the drop to third position becomes permanent, and that its reforming CEO, Ed Zander, might be forced out.

To avoid both outcomes, Motorola needs to do more than come up with a killer handset. It needs to accelerate the move to turn its ‘seamless mobility’ strategy – which in theory at least leverages a combination of skills and products that is unique to Motorola – into revenue generating reality; it needs to be more aggressive in addressing lingering weaknesses in its supply chains and structure; and it needs to grasp the initiative more firmly in driving industry trends rather than following them, taking a leaf from Nokia’s book.

Last week, Motorola revised down its sales forecasts for the second quarter from $9.4bn to between $8.6bn and $8.7bn, with the firm making another loss in the quarter. It no longer expects its mobile division to make a profit this year. This led to speculation that CEO Ed Zander would soon lose his position, something that sent stock up three per cent. So far this year, the firm has eliminated 7,500 jobs. Motorola said that second quarter results in its Connected Home Solutions and Networks & Enterprise divisions would meet the company’s expectations.

In a market estimated at 260 million units in the quarter, Motorola said it had shipped only 35 million to 36 million, which would represent about 13 per cent and so was overtaken by Samsung on 37.5 million. And Sony Ericsson, which saw a 59 per cent increase in volume shipments year-on-year in the quarter, now claims to be on nine per cent share, up from six per cent, and so in biting distance of Motorola too, even as Nokia is set to consolidate its lead and take some advantage of its challenger’s ailments.

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