Dismal Q2 evidence of deeper problems at Motorola?
The search for seamless mobility
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.
Comparison with Nokia
Motorola can learn some lessons from its Finnish rival though. Nokia, which had its own dark days a couple of years ago and suffered severe loss of shareholder confidence, has proved masterful at identifying and accelerating markets that play to its innate strengths, while also diversifying its revenue streams. The Finnish giant has put software at the heart of its strategy far earli
er than any other phonemaker and is using that advantage to drive standards and to move into sectors that are inherently software focused, such as mobile web services and enterprise mobility (this is an instinct it share with Qualcomm). This automatically pushes Nokia up the value chain and brings it closer to customers than it could be with pretty devices alone, and it is also enabling it to turn the potential risks of the open mobile internet model to its advantage.
While Motorola has been active in Linux and Java developments for handsets, Nokia has gone several steps further, creating user interfaces and browsers that will help define the whole mobile web experience and make it sufficiently friendly to drive commercial success.
All this places Nokia in a strategic position to which Motorola currently cannot aspire, and the Finnish company can also turn its famously efficient supply chain logistics and its phenomenal buying power to its advantage. Thus it has been able to strike the tricky balance between margin and volume more effectively than most, partly because of clever planning, but largely because of its efficiency, which enables it to have a massive market lead in the most priceaggessive market on earth, India, without resorting to ultra-low cost handsets or sacrificing too many points off its margins (they did slip a little in the last quarter, to shareholders’ consternation, but as nothing compared to those of the non-European phonemakers).
Motorola has advantages that Nokia does not have, though, but needs to exploit them better.
Most notably, if Nokia is creating what it hopes will be the de facto platform for one key carrier trend, the mobile internet, Motorola has in place many of the elements to make a similar platform for the other key trend, fixed/mobile convergence (FMC) and quad play. It has a unique combination of products, channels and customer experience that spans broadband wireless infrastructure – once seen as a niche, now becoming mainstream thanks to WiMAX; cable operator equipment; some fairly advanced IP Multimedia Subsystem work; enterprise systems such as the Symbol WLans and a key partnership with Microsoft; and of course the handsets.
On Motorola’s slideware, all these elements converge neatly to form an end-to-end system ideal for any FMC carrier, whether wireless, cableco or telco. In reality, the product lines still seem to operate rather separately, and there is the risk of losing a natural lead to another multi-faceted rival such as Alcatel-Lucent, and of overrelying on the flagship converged customer, Sprint Nextel (although a great stake in the ground for convergence, the Sprint-Pivot venture will have to grow at a very rapid rate to represent growth for Motorola, given that Nextel was always its largest customer through the iDEN system).
Convergence is the natural future for Motorola, and it is assembling a range of offerings that should be the strongest in the market, boosting this with acquisitions such as that of Leapstone (see separate item), and with a remaining heavy commitment to R&D, even to the extent of creating its own WiMAX handset chips.
Nobody doubts the company’s credentials in this area, or its engineering abilities, but logistics remain an issue, in a world where its largest business, handsets, must increasingly be run as a lean consumer electronics operation with heavy focus on cost efficiency and brand design, rather than expensive R&D. This is something Nokia understands, as of course do Samsung and Sony Ericsson, with their CE heritage.
Motorola needs to understand it too – unlike Alcatel and Siemens, and in some ways Ericsson itself, handsets are too large a part of its revenue for it to exit that tough consumer-driven market to focus on the more friendly waters of infrastructure and convergence. But the situation imposes a schizophrenia on the company that its rivals have backed away from – even Nokia, by putting its infrastructure into the Nokia Siemens venture.
Future of handsets
And the outcome of that schizophrenia could well be that Motorola relinquishes its number two handset position, in the interest of driving margins up and incorporating devices more tightly into an end-to -end convergence platform strategy.
That would be a brave decision for any CEO to make though, and Zander is not in the happy position of his Nokia counterpart, Olli-Pekka Kallasvuo, of being able to make radical changes from a position of strength. We still believe Zander has been what Motorola needed, identifying strengths buried deep in the company and highlighting them in order to effect a rapid initial turnaround. But the coincidence of his arrival and no-nonsense approach, with the success of the RAZR, did obscure just how massive a task he faced.
Beneath the shiny sales figures of the iconic flat device, the overall change in culture that was required, and the reorganization of the company’s manufacturing, sales and supply chain structures, all proceeded more slowly. Achieving these was never going to be an overnight job, and perhaps the scale of the task, and the likely ups and downs in carrying it out, were not sufficiently communicated to investors and customers, amid the euphoria of the RAZR era.
Here is one sign of hope in the fact that Motorola has finally replaced Ron Garriques as head of the handset division – with Stu Reed, who moves from being EVP of the supply chain organization. This at least reflects a prioritizing of practical and logistical concerns, and an attempt to find someone that can marry handset leadership with awareness of logistics, Nokia-style - although it could also be argued that Reed needed more time to complete changes in the supply chain, and that Motorola’s perception among investors could have been helped by a high profile hire into this critical job, perhaps from Nokia itself, as the US firm stands accused of being too Americacentric in its designs.
Over dependence on the RAZR was certainly a mistake. No manufacturer, not even Apple, can expect to create a killer device more than once every few years, and in the mean time, successful handset makers must spread their risks across a wide range of products that can be targeted to individual customer groups to maximize addressable market, while reusing as many components, reference platforms and R&D as possible. There has to be more focus not just on consumer marketing but also on the user interface, a combination of which has enabled Apple to storm the market with a 2G handset with dubious video credentials that most users remain convinced is a ‘multimedia phone’ to rival the N Series.
The other mistake, for which of course Zander must take some responsibility, was chasing market share with ultra-low cost handsets, without the cost and logistics structures to back this up. Even the hyper-efficient Finns were nervous of this sector, but Motorola leapt in, helping create the situation that the company is now in, with the handset unit no longer expected to make a profit for the year.
However, with the CFO and head of mobile devices departed, Zander should not be the next casualty, as some sources rumor is imminent. At this point Motorola needs a clear and detailed statement of direction for handsets and another one, with longer term focus for convergence, and these need to be sufficiently convincing to inspire shareholders again. But it also needs to accelerate its cost cutting and its efficiency drives and this needs stability and the man whose vision and style remain strong.
If Motorola chooses to keep a top two position in cellphones at the heart of its strategy, Zander needs a lieutenant who will understand how this is done logistically, and complement the CEO’s Sunderived focus on engineering excellence and feature sets. Some of the interesting acquisitions, such as TTPcom, need to be brought into more active play, and the company badly needs a software guru.
These positions need filling – but the CEO’s does not, at least not until Zander has been given a few more quarters to see the effect of his restructuring take (belated) effect, and to communicate a coherent vision at last of how Motorola can turn ‘seamless mobility’ from a marketing slogan into a real market that it can drive and shape.
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