RealMoney Silver - U.S. Phone Carriers Could Give Razr2 an Edge

U.S. Phone Carriers Could Give Razr2 an Edge
By Tero Kuittinen
RealMoney.com Contributor
8/13/2007 10:31 AM EDT

In a highly unusual development, all top five U.S. mobile operators have picked up Motorola's (MOT) Razr2 for their late August/early September launch frame. Such wide U.S. carrier support this autumn could signal a third-quarter revenue turnaround for Motorola's beleaguered phone unit, as I speculated here.

Sympathy for a Reason

Motorola has always been highly dependent on its North American strength; its U.S. market share soared above 40% in 2006 on the back of the Razr phone price cuts. But Motorola's U.S. share plunged to around 33% in the second quarter as U.S. carriers discontinued several disappointing Razr spinoff models; AT&T (T) , for example, stopped selling the Pebl a few months ago.

Despite the profoundly disappointing sales performance of last winter's Razr spinoff phones, American operators are now conspicuously supportive of Motorola. Interestingly, there is no sign of support for the new flagship phones of Nokia (NOK) , Samsung and Sony Ericsson this autumn in the U.S.

Both Nokia and Sony Ericsson have had troubled relationships with U.S. operators over the past five years -- neither focuses on CDMA phones, and that leaves Verizon (VZ) , Sprint (S) and Alltel (AT) in the cold. But both Nokia and Sony Ericsson have also fought with AT&T and T-Mobile, which tend to have long lists of tedious customization demands.

Meanwhile, Motorola has development teams attuned to the standardization and software quirks of U.S. operators -- that's why carriers from Verizon to T-Mobile want to ensure that Motorola stays strong.

Over the past six months, Verizon in particular has swung dangerously close to being dependent on Korean vendors Samsung and LG. AT&T has not had much success with the new Nokia models -- the N-75 has been a particular disappointment. Sony Ericsson has not been able to gain traction in the U.S. GSM market -- it's unclear whether this is a tactical decision to focus on Asia and Europe or whether there has been trouble in tailoring the Walkman range to AT&T and T-Mobile specifications.

The result is that both CDMA and GSM operators probably feel that they need to ensure Motorola's long-term survival. I suspect this is part of the reason why Razr2 has such a stunningly wide early support in America. The pricing looks just right: $300 for Verizon and AT&T, and $250 for Sprint with contracts. This is far below iPhone or Nokia N-95 prices but clearly at the higher end of midrange -- the sweet spot of the phone market where Motorola became nearly absent in America in the second quarter.

Plenty of investors feared the U.S. operator cancellations of older Motorola models may have reflected a long-term decision to yank support from the brand. Now it looks like the spring cancellations of Motorola models may have been preparation of a wide new Razr push. This might mean that 35.5 million units in the second quarter was the bottom for Motorola and that the company might rebound to 37 million in the third.

More Than a Pity Hug

Part of the reason for Motorola's exceptionally weak second-quarter shipment number of 35.5 million units can be traced to the U.S. operators canceling pretty much all Razr spinoff orders. Those models had weak display technology and no 3G support. But Razr2 leaps to the forefront of the display technology race by offering two QVGA-quality displays (240x320 pixels). The external display offers a new type of tactile feedback.

Razr2 packs strong 3G support (EV-DO for Verizon, HSDPA for AT&T) into a 13-millimeter-thin phone. This is more important than it sounds. Most HSDPA-quality 3G phones out there are really thick; the Nokia N-95 is 21 millimeters. And most thin phones do not offer 3G support.

At the moment, there is no sign of the hot new Samsung and Sony Ericsson flagship phones in the autumn launch plans of U.S. operators. Europe and Asia may be buzzing about the slim new 5-megapixel camera models such as the Samsung G600 and Sony Ericsson K850, but it doesn't look like they will debut in America in the imminent future.

The biggest direct rival for Razr2 might be the long-delayed Nokia N-95, which is finally expected to debut at AT&T in September-October. It is going to be extremely interesting to see whether AT&T sticks to the N-95 launch plans and how it positions the Razr2 vs. the N-95.

The N-95 has better features, including a 5-megapixel camera and GPS support. But it is remarkably thick, particularly for U.S. consumers who are clearly gravitating towards sub-15 millimeter phones in the upgrade market. The pricing may also be an important factor: Will AT&T subsidize the N-95 to Razr2 level or leave it in the $400-$500 range? The latter can be a kiss of death for mass-market sales in America.

The U.S upgrade phone market has not seen a lot of interesting products announced for August-September frame, and the success of Razr2 can hinge on how fast rival models get to the market. At the moment, the competitive environment seems surprisingly thin, apart from the iPhone (available only at AT&T) and a couple of Research In Motion's (RIMM) BlackBerrys.

In sum, I believe the markets have underestimated Motorola's third-quarter bounce potential. Motorola may well surprise markets by growing units from the dismal second quarter levels and there may be average selling price upside too, since the launch of the new high-end model is so wide -- both within and outside the U.S. market. Most key rivals for Razr2 seem to be a step behind when it comes to launch schedules.