Does Motorola Have Nokia's Number?

The No. 2 handset maker is vying for the top spot. But it will need to make devices that appeal to service carriers as well as customers

Motorola (MOT) posted another sizzling financial performance July 19. The Schaumburg (Ill.) communications company announced record quarterly sales of $10.9 billion for the period ending in June, up 29% compared to the $8.4 billion in the second quarter of last year. Net earnings were $1.4 billion, up nearly 45% over last year. And once again, the phone unit led the way. Motorola's mobile-devices segment saw sales soar 46%, to $7.1 billion over a year ago. And its operating earnings increased 62%, from $493 million to $799 million. "It is our unrelenting focus that makes our continued success possible," Motorola CEO Edward Zander told analysts during the earnings conference call.

Of special note: Motorola continued to boost its global market share, gaining ground for the seventh consecutive quarter and edging ever closer to its chief phone rival Nokia (NOK). Motorola now pegs its share at 22%. That's up from about 17% a year ago and from 20.7% in the last quarter. Nokia, which will release its second-quarter financials June 20, lead the industry with 33.3% of the market through the first quarter, according to Strategy Analytics. But Motorola's torrid pace has some believing Motorola could indeed reign in its competitor. "I think Nokia has opened the door to Motorola catching them-and I think Motorola will catch them." says Robert Laikin, CEO of mobile phone distributor Brightpoint (CELL).


  It's not a pie-in-the-sky notion. The fact is, as Zander says, Motorola is "the fastest-growing handset manufacturer on the planet." The world's No. 2 shipped 52 million handsets in the second quarter, up 53% over the previous year and 12.4% over the first quarter of 2006. Nokia certainly sells more phones, an estimated 80 million in the second quarter. But that's 6.5% more than it shipped in the first quarter and 31% more than it shipped in the second quarter of last year. If Motorola manages to keep doubling Nokia's growth rate it can close the gap in a few years.

With a hit like the RAZR, that is a possibility. Motorola has sold more than 50 million of the sleek flip phones, and it's announcing new upgrades by the month. When the company holds its annual analysts' meeting June 24 and 25, it's expected to unveil the RAZR II, an even sleeker, glimmering update of its top seller.

While there are plenty of other cell-phone makers, it has become a two-horse race in recent years. The No. 3 player, Korea's Samsung Electronics (SSNGY), held 12.8% share in the first quarter, while LG Electronics, also of Korea, followed with 6.9%. Sony Ericsson, a joint venture between Sony (SNE) and Ericsson (ERICY), ranked fifth with 5.9% share. Zander says that Motorola is clearly distancing itself from the rest of the pack. "Number 3 lost share. Number 4 lost share," he said. "We're shipping more units than the industry's Numbers 3 and 4 combined."

Nokia certainly didn't get to the top spot by sitting on its hands. While it stumbled a year ago after missing the shift to flip phones, it is now pumping compelling handsets out once again, including clamshell versions and thin designs that compete with Motorola's hugely popular RAZR. And those that keep tabs on the Finnish company know that its quietly stated internal goal is to reach 40% global share. "Moto will probably reduce the gap more," says Matthew Hoffman of Cowan & Co. "But catching Nokia is going to be tough."


  Indeed, there's plenty of reason to be skeptical. Perhaps the biggest is the fact that Nokia has shown its leadership in 3G phones. As wireless carriers launch new 3G networks capable of zapping data over airwaves at speeds comparable to those of broadband connections in the home, they're looking for phones well suited to the digital-data age. Nokia has earned raves for its N91 3G phone which handles high speeds and has a 4-GB hard drive. But analysts haven't seen products from Motorola that they think are similarly functional. "At this point we are waiting for products that are in the pipeline," Hoffman says. "We don't know if they are delayed or if it's simply that they haven't shown them yet."

The key is that Nokia has revealed a vision that has impressed its carrier customers. The carriers make money by selling phones that consumers can use to store lots of data: pictures, music, video, etc. The more a phone can hold, the more it can download from the carrier's networks and that means more money for the carriers. So Nokia's 4-GB phone shows "they get it," Hoffman says. "Motorola has to prove with product introductions that they understand 3G concepts."

Motorola also has to show it can stay in step with Nokia in emerging markets. Most of the growth in the handset industry is coming from Asia, Latin America, and Africa. After reaching China first, Motorola let Nokia pass it by. And Nokia is also stronger in India. To its credit, Motorola has rebounded handsomely in both countries, but it's an uphill battle. Motorola faces a climb in Europe as well, where Nokia is king, especially with inexpensive handsets. "The big battle for share is going to be in the emerging markets," says Forrester analyst Charles Golvin. "It will come from the low end, and the winner will be the one that can deliver 30 to 40 handsets to those markets."


  Motorola execs understand that they have a lot of work yet to do. "Clearly the single biggest thing Motorola must do is to bring [products] out that wow customers," Ron Garriques, head of Motorola's phone biz, told analysts. Industry observers like Brightpoint's Laikin say it's significant that Motorola isn't so high on its current progress that it's confident of plans to dominate Nokia. Instead, Motorola is focused on methodically closing the gap. "They don't want to crush Nokia," Laikin says. "They just want to catch Nokia. It shows the maturity of the company."

Motorola's challenge is how to follow up its current hits like the RAZR and SLVR with new powerful hits. When the PEBL, a rounded flip-phone, was launched earlier this year, company execs were expecting it to take the market by storm. Instead, it's been a disappointment. The Q, a thin QWERTY-keyboard email device that hit a few weeks ago, shows more promise, but it is unlikely to have the RAZR's impact. "They haven't had a phone with the wow factor that the RAZR had," Golvin says.

Zander snarls at such talk as if to say, just wait. He's realistic about the company's prospects but poised for the fight. "There's still lots of share to get," he says. "We're still motivated. Still hungry."

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