Motorola Has a Lot Riding on Android Phones

Sanjay K. Jha's odds of turning around Motorola's (MOT) beleaguered mobile-phone business appear to be growing longer, as the company's upcoming crop of phones that rely on the Google (GOOG)-backed Android operating system face challenges on several fronts.

Jha was brought in as co-CEO a year ago to rescue Motorola's phone business, which was once the dominant player in the industry but has since lost ground to Nokia (NOK), Apple (AAPL), Research In Motion (RIMM), and Samsung. The cerebral 46-year-old, who spent much of his career at chipmaker Qualcomm (QCOM), quickly tore up Motorola's playbook and began putting together a new strategy. He cut staff and narrowed Motorola's concentration, abandoning its existing plans for a wide variety of phones with numerous underlying technologies. Instead, he's putting pretty much all his chips on advanced phones that run on the Android software. "Our focus right now is Android," Jha said after Motorola's annual meeting in May. "We have to focus to deliver and compete."

It'll be a tough road. While Motorola's first Android phones are expected to hit stores in late September or early October, rivals are beating the company to market. Taiwan's HTC is already introducing its second Android phone, the promising myTouch 3G, while Samsung and LG are expected to unveil Android phones in the third quarter. Motorola's phones will also lag behind Apple's latest hit, the iPhone 3GS, and Palm's (PALM) Pre. "It's going to be a crowded space," says analyst John Jackson at researcher CCS Insight.

Motorola may have distribution problems, too. Sources close to the company say Verizon Wireless (VZ) and T-Mobile (DT) have signed up to sell Motorola's Android phones this year, but AT&T (T) has not. The wireless carrier had been expected to play a major part in Motorola's rollout, to the point that GC Research analyst Tero Kuittinen called AT&T "the cornerstone of its Android strategy." Analysts say Jha has had to work extra hard to regain AT&T's confidence after a couple of years of failing to deliver compelling products.

Jha still has a chance to pull out a victory. Analysts who have been briefed on Motorola's phones say they are impressive: Both are sleek touchscreen phones with qwerty keyboards that slide out of the body of the device for easier typing. Wireless carriers are also pulling for Jha and Motorola, in part because they want another strong mobile-phone maker to come up with promising devices. "The carriers are going to give Motorola a chance. The door is open," says Robert J. Laikin, CEO of Brightpoint (CELL), which distributes phones for most major manufacturers.

Motorola's success may depend in large part on how Android evolves. The operating system is one of several that power advanced phones running software downloaded from the Web. Apple's iPhone is attracting the most attention from software developers so far, with RIM, Microsoft (MSFT), and Nokia providing solid competition.

Android is coming from behind in this crowded field, but it is attracting many developers who like working with Google. Rani Cohen, CEO of a hot new music application called TuneWiki, calls Android "phenomenal." He says: "It was a very smart decision by Motorola to go with Android. They can have access to thousands of developers to put applications on their phones."

Analysts say that if the new phones fail to spark demand, Motorola's $6.1 billion in cash won't be enough to keep funding the phone business if the company continues to burn through some $1.3 billion a quarter. Motorola has said it expects to start generating cash toward the end of 2009. "Motorola has one bullet left in its gun," says Bank of America (BAC) analyst Tal Liani. "If it doesn't do well, the consequences are very bad for the [company's] handset business."

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