THE MOBILE HANDSET BUSINESS plays out in a dynamic and sometimes cruel landscape. Opportunities abound, yet conditions can be harsh. Giants may rule, or be humbled by ambition and prevailing winds. Nimble competitors with practical prowess can seize the day. A bewildering array of factors makes predictions precarious.
Hence the stage for fourth-quarter and full-year financial results last week for Motorola Inc. and Sony Ericsson Mobile Communications L.P.-two very different beasts with widely disparate results. Both open a window onto the handset landscape.
Motorola, locked in combat with Nokia Corp. for global hegemony, pursues a dual strategy of growing market share while earning profit through innovation, style and brand. Market share is gained, at one’s peril, in low-margin emerging markets; profitability is wrung from higher-margin mature markets. At least that’s the plan, based on prevailing conditions, that put Motorola on a roll to giddy heights by last July-and, when the winds shifted, left it bereft of profits six months later, forced to shed 3,500 employees.
Sony Ericsson, the offspring of two companies rich in intellectual property-one of them blessed with a consumer electronics heritage-was born five years ago with little hope of ruling the world. Thus it focused on more modest goals. Combining music and cellphones gave Sony Ericsson a path to profitability, which it pursued in lieu of market share. That path is well-lined now, but there’s a fork ahead: one way leads to the killing grounds ruled by Nokia and Motorola and requires heft in perilous pursuit of market share, the other path leads to a murkier land of mid-sized opponents, where Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. rapaciously grab every opportunity. Meanwhile, a shadow crosses the sun: a new competitor-Apple Inc.-has signaled its presence.
Motorola’s competitor: Motorola
What are the implications of last week’s results for these two companies and what do they reveal about the business landscape for handset vendors?
Motorola’s results for Q4 and all of 2006 formed a single pattern-unit volumes, market share and revenue were up, yet net earnings, average selling prices and operating margins suffered. Raging sales of low-cost, low-margin handsets in emerging markets earned the company more market share-by its own accounting, more than 22 percent, up 4 percent from 2005-but little profit. Its well-laid plans for a successor (the Krzr) to the long-ruling Razr in the more lucrative, mature markets, however, encountered changing conditions and may have foundered on its own perfect logic.
First, mature markets began to cool, awaiting drivers for the next replacement cycle. According to Albert Lin, financial analyst with American Technology Research, the handset market in general will stagnate until late this year, because network operators are in an “implementation phase, rather than a deployment phase”-thus consumers lack incentive to upgrade handsets. Three drivers will revive it: broadcast mobile TV (i.e., MediaFLO and DVB-H), location-based services and upgrades to network speeds, Lin said.
Second, the market had become crowded by imitators and innovators; Motorola’s differentiators suffered. And there was the company’s own success.
“Motorola has become, in some sense, its own worst competitor,” said Lin. “When you make a derivative product that shares the same look and feel, you’re forcing consumers to make a choice based on price and other issues.”
Lin was referring to the Motorola Krzr, positioned to pick up where Razr was expected to leave off, but didn’t. As CEO Ed Zander reported, Motorola sold more Razrs in the fourth quarter last year than any other quarter. Its mass appeal continued in the United States, for instance, at $50 retail prices and lower, while the Krzr entered the market at $200 last fall at Verizon Wireless and, possibly, got steamrolled by cheap Razrs.
Success in low-margin markets and failure to secure premium prices in higher-margin, mature markets has battered Motorola’s operating margins, Lin said. He added that new data from Motorola promised for this week would probably reveal operating margins as low as 3.5 percent, lower than the company reported last week.
“The problems are more messy and complicated than Motorola is telling everyone,” the analyst said.
Thus Motorola’s announced job cuts suggest that the giant is girding for a longer-term struggle for stronger profitability than its stated plan to regain momentum through a better mix of 3G handsets and other portfolio tweaks, according to Lin.
“I believe Motorola is preparing to give up market share,” Lin said. “Lowering head count means long-term change.”
Sony Ericsson battles smart
Sony Ericsson’s story presents a stark contrast, in part based on its size.
“It’s a little easier for Sony Ericsson to pick their battles,” Lin said. “Luckily for Sony Ericsson, it picked the right battles to wage.”
In Lin’s view, Apple’s iPhone represents a direct threat to Sony Ericsson, which should “prepare for battle.” But Sony Ericsson’s success in Asia, the boost its music phones have gotten from low-cost availability of handset memory and its more open approach may give it an edge against the computer giant-turned-consumer electronics innovator and its closed iPhone, Lin acknowledged.
Analyst Tero Kuittinen at Nordic Partners Inc. takes the latter view. In a column last week on The Street.com, he wrote:
“Sony Ericsson is no longer a niche player. It is now a real contender to be the lead brand in an important device segment. Music phones . are now a vitally important part of the handset upgrade market.”
The title of Kuittinen’s column? “Sony Ericsson poses an iPhone Threat.”
