Competition can bury you or spur you to greatness.
In Motorola Inc.’s case, given its stellar performance in the second quarter, greatness is the result. And that has given the mobile handset vendor the proverbial Big Mo—as in momentum—which Motorola calculates will be further fueled by the unveiling of much-anticipated new handsets this week prior to its annual analysts’ meeting outside Chicago.
Motorola has not only ridden the phenomenal sales of its competition-slashing Razr handset to gain market share, garner record profits and stymie market traction for rivals’ best efforts, but it seems to have discovered its reason-to-be in the design process that created that hit.
Though the company has labored to position itself for a repeat of its Razr success with new handset models and an increasingly aggressive global strategy, a worldwide sales phenomenon is tough to top. Unveiling new models may draw oohs and aahs, but market traction ultimately will determine whether Motorola is the design leader it says it is—and whether Motorola’s stock will regain its 2005 value when the Razr climbed the sales charts.
The search for runaway hits can be costly and faces tough odds. Better to infuse each entry in your portfolio with competitive—even disruptive—elements such as design, functionality or price to gain the edge in competition and work the odds, while launching the occasional, would-be blockbuster. That mix seems to reflect Motorola’s approach, if one considers its decision to spin off “families” of designs based on its Razr, Slvr and Pebl handsets, the aggressive pricing of its new Moto Q smart phone and the comments of its Chief Executive Officer Ed Zander last week to analysts that “we’ve just begun with Razr.”
That these far-reaching observations could derive from merely second-quarter results underscores Motorola’s direct challenge to the market-leading position of Nokia Corp., which also did well in the past quarter, but now finds itself reacting to elements of its rival’s success. Nokia shipped more phones in the quarter than its rival (78.4 million vs. 52 million), recorded greater revenue ($12.4 billion vs. $10.9 billion) and earned a (slightly) bigger profit ($1.44 billion vs. $1.38 billion). Yet growth in all these categories—the Big Mo—cut in Motorola’s favor. Thus, on a conference call with analysts, Nokia’s CEO Olli-Pekka Kallasvuo felt compelled to reassure investors that “we need to improve on things like design and thinness, and we are doing that.”
Korean concern
Of course, robust performances by the two behemoths of the mobile handset industry come at a cost to someone. The two market leaders have taken a bite out of the hides of Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. (No. 3 and No. 4 in global market share), and Motorola and Nokia could see backlash to their own health if the Korean vendors initiate a price war that further degrades the industry’s average selling prices and, thus, constrains everyone’s margins, according to analyst Ittai Kidron of CIBC World Markets.
Strategy Analytics’ Chris Ambrosio, however, does not believe that the Korean vendors will initiate a price war. Nonetheless, Nokia’s CEO acknowledged in an interview with CNBC Europe last week that his own firm will have to produce even cheaper phones to hold market share in emerging markets, one of the global keys to growth, which might have a similarly erosive effect on ASPs.
For the record, if you missed last week’s headlines, Motorola’s $10.9 billion in revenue in the second quarter was a 29-percent increase from the year-ago quarter’s $8.4 billion, and its $1.38 billion in earnings and increase of 48 percent from $933 million in the year-ago quarter. The vendor’s nearly 52 million handsets shipped was up 53 percent from 33.9 million in the year-ago quarter. Two-thirds of Motorola’s sales derive from mobile handsets; thus, Motorola had reason to call attention to selling 50 million Razrs in less than two years, which has gone far in improving the vendor’s overall fortunes.
Nokia also garnered strong results by any measure except, of course, rival Motorola’s blowout performance. The Finnish handset vendor’s reported $12.4 billion in revenue and $1.4 billion in net profit were increases of 22 percent and 43 percent, respectively, from the year-ago quarter. Nokia’s 78.4 million handsets shipped was a 29-percent jump from a year ago.
While Nokia estimated its global market share at 34 percent, up 1 percent from the year-ago quarter but down 1 percent from the previous quarter, Motorola estimated its share at 22 percent, up more than 4 percent over the year-ago quarter and 1.3 percent over the previous quarter. In business, it’s all about the pace of growth—the Big Mo.
Taken together, Nokia and Motorola’s second-quarter results appear to have countered the concerns of industry observers who had worried that a possible slowdown in replacement handset purchases in mature markets such as the United States and Europe, and component buildup or order deferrals in the supply chain, presaged a slowdown in global demand. A number of analysts, including CIBC World Markets, have slightly reduced their forecasts for the year’s total handset shipments but the majority now are holding firm.
