Barbara Rose

August 17, 2003

Aug. 17--It has been more than two years since Motorola Inc. debuted a sleek little clamshell phone that quickly became North America's best-selling model, buoying sales well into last year and helping the Schaumburg company overtake its formidable rival, Nokia, in the United States.

It seemed Motorola finally was getting its act together, designing more stylish phones and manufacturing them more efficiently.

But rather than performing like a well-oiled machine, the world's second-biggest cell phone maker stumbled.

Important new models shipped late last year. Worse, Motorola lost market share this year when it failed to keep its pipeline filled with new phones offering such important features as large color screens and cameras.

Now, heading into the all-important holiday season, Motorola badly needs to regain momentum, observers say.

After releasing only nine new phones in the first half, it is introducing 31 models worldwide before the end of the year, including an important phone that analysts say has the potential to replicate the popular v60 clamshell phone's success.

At the same time, hoping to avoid a repeat of this year's disappointing first half, Motorola is working hard on next year's lineup. It aims to keep costs down by using technology already developed for its fall phones--chips, software, cameras, screens and the like--while generating excitement with novel designs.

"You'll see in the first quarter a very new look and new functionality," said Rob Shaddock, a general manager in Motorola's cell phone business. He declined to elaborate.

A lot is at stake in juggling the competing demands of innovation, style and manufacturing efficiency. Motorola is trying to defend its leading market share in North America and China while gaining customers in Europe, where it garners a low 6 percent.

The success of the new models, some of which already are shipping in Asia and Europe, will determine whether the company can increase its global market share by one percentage point to 18 percent by year-end while moving closer to its long range financial goals.

Motorola is still a long way from its target of 8 percent to 10 percent sales growth in its biggest business. Cell phone sales in the first half fell 6 percent compared with a year earlier, to $4.8 billion. Worse still, operating margins were down 1.6 percentage points to 3.9 percent--light years from its 15 percent improvement target.

Motorola's new phones are debuting in a hotly competitive world market in which Nokia, with rich margins in the 20 percent range, can afford to shave profits to battle Motorola and aggressive rivals such as Samsung and LG Electronics.

"Everybody is introducing lots of new models," said Jane Zweig, chief executive of Maryland-based consultancy Shosteck Group. "I don't think Motorola fully appreciates the hungry nature of their competitors."

For their part, Motorola executives say they understand what it takes to compete in a fast-changing market.

"Speed is how you make more money in this business," Tim Cawley, a cell phone general manager, said at Motorola's recent meeting with financial analysts. "Being first to market.... Getting the cool things that are coming out into our products first."

For now, Motorola is playing catch-up in camera phones, which swept Asian markets first and are rapidly becoming standard features rather than novelties.

Forty percent of Motorola's new models will have cameras.

"Cameras are going very quickly to become `table stakes,'" said Nokia spokesman Keith Nowak. "Over the next year, cameras will be on the majority of models."

For Motorola, more important than a single feature is the search for a new hit model such as the v60, with a novel look and feel that is instantly identifiable with the company's brand.

Motorola is looking for such success with its upcoming v600, the top-of-the-line model in a trio of phones that company executives call the "triplets" because they offer similar styling and features but at different prices.

All three are Web-enabled phones with cameras, large color screens and polyphonic sound. They use Motorola semiconductors, which means their success would drive chip sales as well as phone revenues.

"The triplets are the key for the company as it strives to build" momentum in Western Europe, said analyst Matt Hoffman of SoundView Technology Group.

They will start appearing in U.S. stores in late October, offered by three big carriers: AT&T Wireless, Cingular Wireless and T-Mobile.

"This is where Motorola is putting a lot of its eggs," said wireless analyst John Jackson of the Yankee Group.

The v600 "is very much appealing to the same audience that purchased the v60," Shaddock said.

These include "people who need a good-looking communications device," he added. "They're worried about style as well" as the latest features.

The v600 is quad-band, which means it operates anywhere in the world, and it connects with Bluetooth devices--such as a wireless earpiece--and accessories. It's initially expected to retail between $200 and $300, although prices will vary depending on carrier promotions and rebates.

Carrier promotions are key to whether a model becomes a hit, as did Motorola's first phone with a large color screen, the T720, launched last fall with Verizon Wireless.

This year, Motorola is looking to Verizon, the nation's biggest carrier, to launch another important phone, the v810.

The compact handset has similar capabilities to the v600 but without Bluetooth. It features a camera with built-in flash, plus a vivid color screen capable of displaying up to 260,000 colors for showing photos and playing games.

Launched first in Asia, "we've seen it begin to take off in Korea," Cawley said. In the U.S., the phone is scheduled to launch with Verizon in November.

Verizon only recently began offering its first camera phone, LG's VX6000, and about 1 million photos were transmitted over its network in the first month the service was offered, said spokeswoman Carolyn Schaumberger.

Color screens and cameras are expected to drive holiday buying, and that's good news for carriers who look for these features to make their networks more profitable by luring customers to buy special services.

At AT&T Wireless, for instance, about one-third of customers who use AT&T's advanced network sign up for a service that allows them to download games, sports and financial news clips as well as ring tones. Customers spend an average $8 per month on the mMode service.

"More people are starting to use the phone as more than a phone," said AT&T spokesman Ritch Blasi.

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(c) 2003, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News.

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