Motorola's decline seen as cautionary tale

BARCELONA Thu Feb 14, 2008 3:58pm EST

A host holds a new Motorola Z8 mobile at the 3GSM World Congress in Barcelona February 15, 2007. REUTERS/Albert Gea

A host holds a new Motorola Z8 mobile at the 3GSM World Congress in Barcelona February 15, 2007.

Credit: Reuters/Albert Gea

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BARCELONA (Reuters) - Motorola Inc's MOT.N rapidly declining fortunes in the past few years have sent shock waves through the wireless industry, providing a stark reminder that what is cool one day may be deeply out of favor the next.

The news that Motorola may be driven into selling its cell phone business is a cautionary tale for any gadget maker that does not keep developing new models and technologies to appeal to fickle consumers, industry executives said at the world's largest wireless fair, the Mobile World Congress, in Barcelona this week.

"We have to work hard and smart. Otherwise a No. 2 company can face big difficulties in a very short period of time," said Chang Soo Choi, a marketing executive for Samsung Electronics Co Ltd (005930.KS), which overtook Motorola last year to become the world's second-largest mobile phone maker.

Three years ago, Motorola, which made the first mobile phone call in 1973, appeared to be sitting on top of the world. The Chicago-based company had produced the trend-setting, super-thin Razr -- a far cry from its first commercial cell phone, launched in 1984 and later monikered "the brick."

The Razr became the most talked-about phone in the world and sparked a new fad for slim phones. Motorola was openly considering whether it could overtake market leader Nokia Oyj (NOK1V.HE) by the summer of 2006.

But then the Razr aged and none of its successors were original enough to inspire consumers lured by music and video playing, picture taking or e-mailing devices from the likes of Nokia, Research in Motion's RIM.TORIMM.O Blackberry and -- more recently -- Apple Inc's (AAPL.O) iPhone.

By January 2007, Motorola was apologizing to investors for declining phone sales that worsened through the year. By the fourth quarter, its global market share had roughly halved to 12 percent, from 23 percent a year ago.

Chief Executive Ed Zander stepped down. Then last month, new CEO Greg Brown announced a strategic review that he said could lead to the separation of the loss-making mobile devices unit from Motorola's other businesses.

Analysts interpreted the news to mean that Motorola was shopping around its handset business, even though Brown said this week in Barcelona that the company remained fully committed to driving a product-led turnaround.

"The Motorola thing has rippled throughout the industry -- not just handset makers but all the suppliers," said Mike Rayfield, general manager of mobile business at Nvidia Corp (NVDA.O), which makes graphics chips for Motorola.

"Our largest customer was Motorola. When the ship goes down, everyone goes down with her," he said, adding that he saw a dip in sales coinciding with the fall in demand for phones from Motorola.

CAUTIONARY TALE

With Motorola's shares down more than 50 percent from a high in October 2006, it's no surprise that activist investors like billionaire Carl Icahn are demanding change.

What is not so clear is whether any mobile phone company would want to bail out Motorola. When asked if they were interested in buying Motorola, most of the executives at the show indicated little interest or declined comment.

After all, there's another cautionary tale in Taiwan's BenQ, now known as Qisda Corp (2352.TW), which bought the struggling handset unit of Siemens AG (SIEGn.DE) in 2006 and then went bankrupt because it could not compete in the cutthroat market.

Per Aspemar, head of strategy for No. 4 handset maker Sony Ericsson, saw Motorola's difficulties as a reflection of the fierce competition in the global phone industry, which has players from China to Finland jostling for market share.

"It's a reminder to everyone how fast-moving the industry is and how important it is to have a strong product portfolio," he said.

Sony Ericsson is an example of a more successful merger in the industry. A venture between Ericsson (ERICb.ST) and Sony Corp (6758.T), it was formed when the Swedish company found its phones were having trouble competing against larger rivals.

Aspemar, who used to work at Ericsson, said he would not be complacent, as Motorola was still a bigger competitor with talented employees and a strong patent portfolio.

"It would be dangerous to underestimate them," he said.

At the Barcelona trade show, Sony Ericsson, Nokia and Samsung held flashy events to unveil many new phones with high-quality cameras and touch screens. They were thronged by reporters and analysts.

Meanwhile, the state of Motorola's business could be seen with one glance at its stand. While attendees of last year's trade show fondly recall good food and lots of bubbly, Motorola this year held a low-key press reception, highlighting two phones it had already unveiled in January.

(Additional reporting by Georgina Prodhan and Tarmo Virki; Editing by Gary Hill)

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