What's next for Motorola?

Now that its battle with investor Carl Icahn is behind it, the company can focus on rolling out new, innovative cell phones.
Written by Marguerite Reardon, Contributor
Activist investor Carl Icahn's bid to win a board seat at Motorola appears to have ended, but a lot of work remains for a management team struggling to turn around the No. 2 mobile handset maker.

Motorola issued a press release Monday evening after its annual shareholders meeting held in Chicago stating that early results indicated stockholders had re-elected Motorola's current board of directors and that Icahn, who now owns almost 3 percent of the company, was not elected to the board.

The fight had intensified over the past couple of weeks as Icahn and Motorola sent out dueling letters, press releases and advertisements to try to persuade shareholders to take their side.

Icahn, who initiated the battle in January after Motorola reported disappointing earnings, said he believes the company is being mismanaged. Specifically, he has attacked Chief Executive Ed Zander, questioning his performance and compensation, which totaled $10 million in 2006. He also criticized the current board of directors for not being accountable to shareholders, who have seen their shares in the company lose roughly $20 billion in value.

While Wall Street reacted negatively to the news that Icahn would not be on the Motorola board, sending the stock down slightly on Tuesday, some analysts say that Icahn's absence will likely have little long-term impact on a company that is struggling to keep up in an increasingly competitive market.

"I don't think the Icahn thing is that big a deal one way or another in terms of his ultimate influence," said Scott Swanson, senior analyst at Crowell Weedon & Co. "The principal issue for the company in the near term is getting new innovative products into the market that people are willing to pay a lot of money to buy."

A 3G issue?
Indeed, Motorola, the second-largest handset maker in the world, behind Nokia, is struggling to regain its footing in an increasingly competitive market. For the first quarter of 2007, the company reported a net loss as it resisted matching its competitors' price cuts.

But Zander has promised that the handset division will show a profit for the year. The company's biggest challenge moving forward is finding new products to excite the market that will help it compete against rivals Nokia and Samsung Electronics, which have made gains in recent quarters.

Motorola had seen big success with its popular ultra-thin Razr, introduced in 2004. That product helped Motorola increase its market share from 15 percent to 23 percent by the end of 2006.

After the phone became available on all four major cellular networks in the U.S. and the company cut prices, its margins for the fourth quarter of 2006 plummeted. Since then, Motorola hasn't found a high-end handset to replace the Razr and boost revenue and profit margins. Sales of the new Krzr and Rizr phones have largely been disappointments compared with the success of the Razr.

"Motorola's current product offering has been commoditized," Swanson said. "Pricing collapsed and there weren't any new, innovative phones to take up the slack."

As Motorola tries to develop a strategy to regain profitability, it will likely face stiff competition. Ultra-thin mobile phones are now common in most companies' mobile phone portfolios. What's more, Samsung and LG have beaten Motorola to the 3G party with thin phones that operate on next-generation wireless networks.

At the CTIA trade show in Orlando, Fla., earlier this year, Samsung and LG Electronics introduced several thin phones that can be used on 3G networks. Samsung debuted the r510 and the SGH-A727, two ultra-thin candy bar-style phones. It also introduced the Samsung Ultra Edition U600 quad-band slider phone. And LG showed off its ultra-thin flip phone called the LG VX-8700, which also supports 3G.

Meanwhile, Motorola will also soon face competition from a company with no cell phone expertise. Apple is expected to release its new iPhone in early June. That phone, which will be available only through AT&T's Cingular Wireless, is already attracting a great deal of attention.

Motorola is banking on a new generation of 3G-compatible handsets that feature advanced music and video capabilities to help spur growth in the future.

Still, analysts say it will take some time for the new devices to make their way onto the market. Bill Choi, an analyst at Jefferies & Co., said in a research note sent to investors Tuesday that he believes the company will start to see improvements in its handset business in the second half of the year, with sales returning to the $7 billion level in the fourth quarter.

But Choi said he doesn't expect any game-changing devices to come onto the market until 2008. Many of the new devices for 2007 are simply 3G variants of the company's existing products, such as the Razr. Zander said at the shareholders meeting that the company will show off new 3G and Java phones May 15.

While Zander has blamed the company's lack of 3G devices as one of the reasons for weak sales, Choi said he doesn't think 3G alone is enough to turn the tide for the company.

"The company has stressed its focus on 3G/WCDMA devices, but we do not see this as a differentiating factor from its competitors," Choi said in the research note.

Swanson agreed it will take some time before Motorola can get significant new products in the pipeline, but he said this is to be expected.

"The handset market is cyclical," he said. "The company just needs to find a way to smooth out those cycles to continuously produce new products that people are willing to pay for."

Editorial standards