Motorola Inc.’s recent, sobering earnings report came with a number of explanations of how the American vendor would turn things around. Motorola executives mentioned, among several factors, their portfolio mix-and the role of 3G in a higher-average selling price, higher-margin mix of handsets.
Ed Zander, Motorola’s CEO, told analysts “there is . an opportunity for profit, especially with 3G and rich experiences. We just need to get our product line better in this area.”
Zander said the company’s 3G products-such as the Razr xx launched in Japan-began shipping in December and soon would rollout across the world.
With one of its major domestic customers, Cingular Wireless L.L.C., pressing ahead with network upgrades to UMTS and HSDPA, Moto execs even offered a mea culpa.
“We were not able to participate in the UMTS rollout of one of our largest operators here in the U.S.,” Ron Garriques, head of Motorola’s handset division, told analysts in late January. “We let that customer down. We look to rectify that in the first quarter of the year.”
Garriques also said that with Motorola’s UMTS portfolio rolling out, the company would continue to place emphasis on Europe where the company would “double down” on its footprint.
Analysts were mixed on the prospects for Motorola’s multi-faceted plan, with some expressing doubt that U.S. pricing pressures would allow improvements in ASPs and margins. Even bullish analysts, such as Mark Sue at RBC Capital Markets, said they awaited hard evidence.
“The proof will be in the revamped handset portfolio,” Sue wrote to investors late last month, “which implies catalysts (for improved performance) may still remain a quarter or two away.”
Analyst Maynard Um of UBS, however, suggested that Motorola’s announcement of a deal with Qualcomm Inc. for W-CDMA chipsets “could result in more meaningful market share in Motorola’s future 3G handsets than we originally anticipated.” Um said he was encouraged by Motorola’s point that 3G handset pricing is trending downward, because lower 3G prices are “a key element to adoption.”
“3G is clearly a key driver in the 2007 turnaround,” analyst Ittai Kidron of CIBC World Markets stated flatly to investors. “We believe (however) that the 3G lineup needs to be beefed up beyond the current (Razr) v3xx and Maxx phones before much headway can be made in Europe. With Motorola calling 3G a battlefield where it can gain share, we would look for pricing to remain under strong pressure until the portfolio is refreshed.”
Remember the drivers
So, what are the 3G challenges for Motorola and, by extension, other handset vendors that haven’t jumped on 3G?
“Remember, 3G is just an enabler-it’s about what it does, not what it is-and shouldn’t be the foundation of anyone’s go-to-market pitch,” said John Jackson, analyst with M:Metrics.
The two main drivers for 3G handsets, according to Jackson, are network operators’ desire to fully utilize 3G networks to pay off huge investments, which includes taking advantage of 3G networks’ voice capacity enhancements as well as the promise of improved, data-driven average revenue per user.
“The key with 3G is to make it look and cost like 2G, with 3G’s data benefits,” Jackson said. “3G handsets traditionally have been bigger and clunkier. So that trade-off is difficult to make in an increasingly fashion-centric handset market. So, there’s a race to deliver 3G in 2G form factors at 2G prices.”
New prospects for old players
As for the competitive landscape, Jackson said: “Motorola’s 3G portfolio historically has been weak. Nokia is running away with 3G volumes at this point.”
In fact, according to Nordic Partners Inc. analyst Tero Kuittinen, Cingular’s burgeoning 3G handset portfolio might present an opportunity for Nokia as well as Motorola.
Something of a 3G divide may be developing among chip vendors, Jackson added. Texas Instruments Inc., Qualcomm Inc., Freescale and Ericsson Mobile Platforms provide 3G products, while Broadcom, NXP, Infineon and Agere form “the 2.5G crowd.”
Strategy Analytics’ Neil Mawston said that the overall 3G market was small-only 9 percent of phones shipped last year were W-CDMA-enabled, for instance-but that number was double the year before. The fastest growing W-CDMA markets are developed markets such as Japan, Western Europe and the United States. In Japan, for instance, the analyst said 3G penetration is 100 percent, while the emerging market of South Africa has less than 5 percent 3G uptake. Mawston said both Nokia and Sony Ericsson Mobile Communications L.P., with about 10 percent of their portfolios, were 3G handset leaders.
