one trick pony?
price cutting cuts yourself
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Motorola falls victim to its own success
By Paul Taylor in New York
Published: March 19 2007 02:00 | Last updated: March 19 2007 02:00
A few years ago, Nokia, the world's biggest mobile phone maker, stumbled badly. The Finnish company had been slow to recognise the demand for mid-market "clamshell" phones and was caught with an ageing product portfolio that, unlike Motorola's slim, sleek Razr, failed to fire the imagination of consumers.
Nokia responded by undertaking a two-year strategic makeover aimed at turning the company into the most nimble and efficient manufacturer of handsets in the business. The strategy worked and Nokia's market share and profitability started climbing again.
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Now it is Motorola's turn to feel the pain, and analysts fear it may be just as tough for the world's second-largest handset maker to get back on track.
While Nokia was struggling, Motorola and chief executive Ed Zander rode the Razr wave, lifting market share from 14 per cent in 2003 to 22 per cent last year.
But the latest gains came at the expense of profit margins, forcing Mr Zander to acknowledge that the company's fourth-quarter results were "unacceptable" and blaming miscalculations on pricing and product lineup.
"Motorola has become a victim of its own success," said Madhu Babu, an analyst at First Global.
"The company's aggressive focus on increasing market share by making steep price cuts in the mid to high-end phones and selling more low-end phones had a negative impact on the operating margin and profitability of its handset business."
Profit margins in Motorola's phone division - which now accounts for a full two-thirds of its revenues - shrank to 4.4 per cent in the fourth quarter from almost 12 per cent in the preceding three months. Analysts, including Credit Suisse, believe the current quarter could be worse.
Ed Zander and other key executives including Casey Keller, a consumer goods industry veteran who joined Motorola as chief marketing officer in October, have acknowledged that the obsessive focus on gaining market share was a mistake. "We need to get the balance between market share and margin right," Mr Keller said in an interview. "We cannot grow at the expense of driving premium products and margins down."
How quickly can Motorola turn average selling prices and margins around? Mr Zander says it will take until the second half of 2007 to return to double-digit operating profitability.
At the same time, analysts believe Motorola must cut costs to compete with Nokia and other rivals, particularly in the fiercely competitive emerging markets - the new mobile phone battleground. Mr Zander has announced plans to cut Motorola's workforce by 3,500, but that may not be enough.
"The company must remove approximately $3-$5 (per handset) in costs from its low-end devices and gain traction in the higher ASP (average selling price) 3G market to offset pressure from a greater mix of shipments coming from low-end emerging markets," Goldman Sachs said in a note to investors this month.
Indeed, most analysts agree that one of the core problems facing Motorola is a relatively weak product portfolio.
Motorola failed to capitalise on the runaway success of the Razr, leading some industry executives to suggest that the Illinois-based company, which derives 66 per cent of its revenues from mobile phones, was just a "one trick pony".
Not surprisingly, Mr Keller rejects this notion but acknowledges that, withthe benefit of hindsight, Motorola could have better exploited the Razr franchise and its premium image.
"We started thinking about the Razr as a product, now we know it is a franchise and brand and we are going to drive it that way," he said. That means maintaining the Razr as a premium brand with frequent upgrades, instead of allowing it to become commoditised and eventually fade away.
"We need to keep the 'wow' factor and enhance the customer experience," said Mr Keller.
While Motorola's troubles and its sagging share price have disheartened many of its investors, one at leasthas seen them as a big opportunity.
Just a few weeks after Motorola announced its dire fourth-quarter results, Carl Icahn, the billionaire Wall Street corporate raider,took aim at the company, acquiring an initial 1.6 per cent equity stake and suggesting that it use the bulk of its substantial cash reserves to accelerate its share buy-back programme.
Since then, Mr Icahn, who also signalled his intention to seek board representation, and his associates havefiled to buy more than$2bn worth of its shares, purchases that would make him one of Motorola's biggest shareholders, and - should he choose to mount a proxy battle - a potential thorn in Ed Zander's side.
Copyright The Financial Times Limited 2007
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