A string of cutting edge products such as the Xoom tablet and the Atrix 4G smartphone, both of which use Google Inc.'s (Nasdaq: GOOG) Android operating system, have reversed Motorola Mobility Holding Inc.'s (NYSE: MMI) downward spiral.
The success of its new hardware, combined with strategic acquisitions that show Motorola's desire to offer its customers cloud-based services, has breathed new life into a company that was on life support just a couple of years ago.
Motorola's Droid line of smartphones helped turn a $1.6 billion operating loss in 2009 into a $76 million operating profit in 2010. The recently-launched Xoom has earned rave reviews and has given MMI a critical foothold in the tablet market.
Motorola Mobility has positioned itself to become "the vanguard of launching quad-core tablets and phones in the second half of 2011," Tero Kuittinen, an analyst with MKM Partnerstold MarketWatch.
If Motorola Mobility can avoid the mistakes of the past by maintaining a robust product pipeline, the company has a credible shot at regaining its stature as an industry leader.
A Telecom Turnaround Play
Motorola Mobility lives and dies with its cell phone business, which brings in about two-thirds of its revenue.
Back in 2005, the thin RAZR clamshell phone set off a craze for slim, sexy cell phones – a craze dominated by Motorola. But in the years that followed Motorola failed to make major improvements to the RAZR or develop a worthy successor.
When the iPhone debuted in 2007, suddenly making touch-screen phones the hot ticket, Motorola had no answer. Its market share plummeted from 23% in the fourth quarter of 2006 to just 12% in the fourth quarter of 2007.
With its cell phone business in tatters, Motorola lost $4.3 billion between 2007 and 2009.
Motorola Chief Executive Officer Ed Zander, who stepped down on Jan. 1, 2008, was the first casualty. Then, a few months later in March, the company announced it would split in two – Motorola Mobility Inc., a cell phone and consumer tech-oriented business; and Motorola Solutions Inc. (NYSE: MSI), an operation focused primarily on selling two-way radios and other public safety equipment to local governments.
The separation became official Jan. 4 of this year, forcing the demise of its familiar MOT ticker symbol and essentially marking the end of the American tech industry legend that invented the cell phone and was responsible for such communications icons as the World War II walkie-talkie.
When Motorola Mobility set about healing its cell phone business, it realized it needed to standardize on one platform instead of spreading its resources among more than a dozen platforms. It chose Google's Android, even though the operating system was still untested in the market.
"We were spending too much on plumbing, and not enough of differentiation," Christy Wyatt, Motorola's vice-president of software platforms and ecosystems, told the Financial Post, calling the company "platform promiscuous."
MMI also needed Android's rapidly growing ecosystem of software to give it a fighting chance against Apple Inc.'s (Nasdaq: AAPL) iPhone and iPad, which benefit from the Cupertino, CA-based company's huge App Store.
The strategy worked. With Verizon Communications Inc. (NYSE: VZ) promoting its Droid phones, the huge losses have subsided.
But Motorola isn't sitting still.
Its new 4G Atrix phone boasts a dual-core processor that's twice as fast as those found in most other smartphones, and can serve as a full-fledged computer with a $300 laptop dock (it comes with an 11.5-inch screen and keyboard).
At the company's earnings conference call in January, CEO Sanjay Jha said Motorola would seek in 2011 to add more carriers in the United States such as AT&T Inc. (NYSE: ATT) and T-Mobile, as well as try to expand in foreign markets.
"We will deliver world-class products at Verizon, at other carriers in the United States," Jha told Bloomberg TV. "We will introduce tablets and we'll grow inChinaand Latin America."
Shares Set to Xoom?
While reviving its cell phone business has been vital, Motorola's greatest opportunity to grow its business lies with its recent entry into the touch-screen tablet computer market.
The Xoom was compared favorably to Apple's iPad when it was unveiled Feb.24, but immediately lost momentum when Apple launched the iPad 2 on March 2, about a month earlier than anyone expected.
Nevertheless, within the arena of Android-based tablets, Motorola has achieved one key goal: establishing itself as an early leader. Whatever portion of the tablet market remains after the iPad takes the lion's share will mostly be divided among the Android players, so getting to the front of the pack early was essential.
And Motorola has already said it's working on more tablets, particularly less expensive 7-inch models, to keep expanding its presence in a market that research firm IHS iSuppli (NYSE: IHS) expects to grow from 17.6 million units in 2010 to 202 million in 2015.
Stock analysis site Trefis has calculated that Motorola will win 30% of the Android tablet market by selling about 4 million units in 2011. Trefis believes tablet sales account for about 20% of Motorola Mobility's stock price, which has been beaten up in recent weeks.
After hitting $36.34 on Jan. 19, Motorola has dropped 27%. The problems started when the company reported weaker than expected fourth-quarter results, and gave weak guidance for the current quarter. The positive reaction to the iPad dealt MMI its latest blow, shaving 13.4% off its share price last week.
No doubt, Motorola is not out of the woods yet.
When you consider the fierce competition in the mobile computing segment, not only from Apple but also such heavyweights as Research in Motion Limited (Nasdaq: RIMM) and Hewlett Packard Company (NYSE: HPQ) and Samsung Electronics Co. Ltd. (PINK: SSNHY), the odds against MMI look daunting indeed.
Industry observers generally agree that whoever succeeds in differentiating their mobile computing wares will succeed in winning the most customers. And on that score, Motorola has been busy.
The company has made several recent acquisitions and investments that should give it a competitive edge.
Last month Motorola announced it had purchased Three Laws Mobility Inc. (3LM), which develops security software for Android smartphones. The lack of such software has hampered the adoption of Android by corporate customers. Though 3LM also is expected to provide its technology to other cell phone makers, owning the company will make it easier for Motorola to incorporate it into its own products. It also stands to benefit from licensing the technology.
Still, two other acquisitions make it look as though Motorola is placing its largest bet on cloud-based service.
Last month, Motorola invested in Catch Media Inc., which provides technology that allows customers to access their digital content from smartphones and tablets.
Prior to that, in December, Motorola acquired media streaming company Zector. The company said it planned to incorporate Zecter's ZumoCast cloud technology – which, like Catch Media, allows users to access content via mobile devices – into its MotoBlur syncing service.
Although we're not seeing it in the stock price now, MMI has worked hard to turn itself around. Trefis says that $11 of its share price is based on the company's cash position, and the average price target for 34 analysts covering the stock is $36 a share. The severity of the current pullback could present a prime buying opportunity.
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