RealMoney Silver - Motorola Faces Moment of Truth in August

Motorola Faces Moment of Truth in August
By Tero Kuittinen
RealMoney.com Contributor
8/6/2007 11:27 AM EDT

Motorola (MOT) may have succeeded in getting an unusually wide selection of new phones slated for release in August with both AT&T (T) and Verizon (VZ) . The new models have interesting feature sets, though they use old design platforms.

This will be a key test of how well Motorola can start rebounding from its lows of the second quarter. I believe that the handset maker will succeed, and will have clawed its way back to 15% market share by year-end. If Motorola can edge back to 15% handset market share by the fourth quarter of 2007, the phone division might eke out a slight profit during the Christmas quarter -- something that is not widely expected.

The U.S. market is very important for Motorola. Even as its global handset market share crashed to 13% in the second quarter, the brand managed to hold on to about 33% share in America. That's down about 10 points from the highs of the second quarter of 2006, but demonstrates the brand loyalty Motorola has in the U.S. market.

August/September is an important period in the phone business. It's a key launchpad for many high-end models, and the sales mix tends to favor technologically advanced phones. People returning from vacations to offices and universities often buy new midrange or high-end phones in the fall.

In the fourth quarter, the mix swings to favor cheaper, design-oriented models as families buy phones as Christmas gifts. That's why Samsung and Motorola are often strong during the third quarter, and Nokia (NOK) typically experiences a market share pop during the fourth quarter.

AT&T and Verizon don't often launch new phones during the same month; key models typically launch at one of these top operators and then arrive to the rival operator with about six months' time lag. Unusually, it looks as though Motorola has managed to get two important new phones at both AT&T and Verizon for the end of August.

Both Razr2 and Q9 variants are planned to launch at both these operators at the end of August, according to operator sources. The timing is right, because the third quarter favors technologically advanced models. The Razr2 in particular finally shows the technological innovation Motorola has been unable to deliver during the past year.

One of the key factors that triggered the collapse of the Razr product family was the badly aging display technology. Spinoffs like Slvr and Pebl flopped partly because they featured the old, relatively weak pixel count of 176x220 even as Nokia and Korean vendors pushed aggressively into the QVGA era -- dense, rich displays with 240x320 pixels.

Motorola is now finally upping its game by packing no less than two QVGA displays into Razr2 models. The external display will also feature haptic feedback -- the consumer gets tactile feedback when tapping a virtual button on the display. It's an interesting technology that's garnering strong early reviews, and for the first time in a while, Motorola is bringing it to mass market ahead of rival brands. Also, the Razr2 is 13mm thick, a remarkable feat considering the two advanced displays it packs in.

The Q9 is more of a niche item, a Blackberry clone that will support 3G technologies (HSDPA for AT&T, EV-DO for Verizon) and is just 12mm thick. The camera is upgraded to 2 megapixels from the meager 1.3-megapixel quality of the first-generation Q.

If both of these models launch at both AT&T and Verizon within the next three or four weeks, it means that the leading American operators still have considerable faith in Motorola. Verizon in particular has recently depended heavily on Korean brands and has allowed its phone range to age pretty badly; there is plenty of pent-up upgrade demand in the Verizon subscriber base.

Both AT&T and Verizon possess more than 60 million subscribers, and both are in the top 10 globally for mobile data revenue generated. So they are an ideal combination of launchpads for relatively advanced new models.

The question is then whether the improvement of the feature sets of these models will outweigh consumer boredom with their designs. The original Razr models have grown badly outdated.

But I would argue that the outmoded display technology they feature is a big part of the consumer rejection. The new double-QVGA display combo in a 13mm phone looks impressive. I believe Motorola will be able to lure back some of the people it lost over the past year.

We need to remember the context: Motorola's volumes crashed from 65 million to 35 million between the fourth quarter of 2006 and the second quarter of this year. Motorola does not need a smash hit to get a bounce in market share; it just needs something moderately interesting. I think Razr2 has enough new hooks to deliver that bounce.

The Q9 is just icing. The original Q flopped hard, and the new one is likely to do better with the new specs if AT&T and/or Verizon gives it a decent marketing push.

This is where we'll see whether the consumer negativity that hit Motorola is purely design-driven or whether it had a substantial element of dismay over weak features. I believe the latter to be true.

And I believe that the new display quality of certain key phones, combined with better 3G support, will help Motorola rebound to around 15% global market share by the fourth quarter of 2007. With intense investor skepticism swirling around the company, that will likely count as a victory.