Motorola handset unit, its a rough game in mobile

There are rumours about Motorola quitting the handset business. We've written here on this blog many times that its a very rough game trying to make profits with the technology that is most prevalent on the planet. As we reported last year, there are already over 3.3 billion mobile phone subscriptions worldwide, or one for half the planet.

Compared with the television, personal computer and other consumer technology industries, mobile is also one of breathtaking pace. The average replacement cycle for mobile phones is 18 months and declining, and in many of the most advanced markets like Japan, South Korea and Hong Kong, the replacement cycle has harmonized to two seasons per year - in line with the fashion industry; there is a fall season and spring season - and young adults do coordinate their phones with their outfits, replacing their phones every 6 months.

How big? The new handset sales market is a massive 1.13 billion phones per year. Roughly half of those go as replacements to people upgrading their existing phones, and roughly half go to new users mostly in developing markets in China, India, Indonesia, Brazil, Africa etc.

So its a big, lucrative market. But its also a very demanding market. The electronics and software inside a modern mobile phone are the most complex digital gadgets that are offered to the consumer market. The design parameters for a handset have to balance a continuously shifting customer expectation of size, weight, feature set (better camera, larger screen, 3G and WiFi connectivity, TV reception etc). These need to fit the current fashions in form factor - how quickly the Razr style was the must-have, and how quickly it was no longer the cool phone. There are technical requirements in radio performance, internal storage, removable storage, memory and CPU. And all these impact on the demands of the current worst bottleneck, the battery performance; and that all adds up to price. Get any one of the items wrong and your phone is dead in the market.

Currently there are five giants who split 80% of the market - in size they are Nokia from Finland, Samsung from South Korea, Motorola from the USA, SonyEricsson joint venture Sweden/Japan and LG from South Korea. About 30 next tier manufacturers have custom devices of miniscule market shares, including the famous Blackberry by RIM, Apple's iPhone and such former phone giants as Alcatel, Sharp and Panasonic.

So now we have rumours that Motorola might exit the phone business. First of all, on a strictly historical note, Motorola invented this industry and was the giant handset maker for most of the time there ever were phones. It would be a shame if they cannot remain competitive in the industry they invented. But their market share has been slipping and this past year they lost the second place position to Samsung. And Motorola's handset unit is making losses while Nokia, Samsung and SonyEricsson are all profitable. I'm not sure how LG is doing right now (they had some profitability problems a while back).

I do think Motorola has suffered from its home market. The American mobile phone (cellphone) market is behind Europe and Asia so Motorola's own home field has been a poor test lab. The engineers at Motorola have to live with their expectations and assumptions, and it is easy to dismiss some "silly" innovation that might come from Finland (ringing tones, games on phones) or Japan (cameraphones) or South Korea (musicphones, TV phones). Its too easy for USA based executives to say these countries are "not like us" and a silly idea in those markets would not likely become a success in America or the rest of the world.

Ever since the second generation (digital) mobile phones - GSM launched in Finland first in 1991 - Motorola has lost the plot and has remained the most popular phone model in the USA market, while that fell back to be on par with third world telecoms markets by penetration rates, customer service, innovation etc. And Motorola lost its market leader position in most other markets. By continent, Nokia is the best-selling phone on all other five inhabited continents except North America.

I honestly do not know what the real reasons are, but I do think, looking at it from the outside, that its domestic market has been a major factor. Motorola's R&D has failed to capitalize on new opportunities. Note that each of the four giant rivals to Motorola have homes in the four countries where mobile phones, networks and services are most advanced, and have been for the past 17 years: Finland and Sweden all through the 1990s, and Japan and South Korea now in the 2000s. So in Finland for example, in 1998, the total mobile phone penetration level shot past the fixed landline penetration level. This only happened last year in the USA. So already 10 years ago in Finland teenagers were getting phones, and that age limit came down very rapidly so it was children by the early part of this decade. In America still very recently parents would buy a first phone to their teenager only when they went to college. So Japanese, Korean, Swedish and Finnish mobile phone engineers have seen in their own families how children interact with phones. Thus videogames and MP3 players and youthful colours and interchangeable covers etc, these "silly ideas" were much easier to adopt in the markets that were very mature.

Meanwhile Motorola was struggling watching its global market share in steady decline and didn't know what to do.

So then there was the Rokr. The ill-fated iPod-phone, Motorola's first MP3 playing musicphone. I again do not know this as a fact, but have heard rumours from people who were close to the project, that the Rokr was an utter project disaster. Apple had certain expectations and desires, and Motorola quite different ones. By the time the phone hit the streets, it was greeted as a dog and had very poor market success.

Now, then Apple alone designs its own phone, and we have the iPhone !

Now, from an engineering point-of-view, could Motorola have designed an iPhone? Of course it could have. It would not have had the Apple marketing blitz, but had Motorola released something like the iPhone in say late 2006 (they could have made it in somewhat less time than Apple, because Motorola knew the phone business much better than Apple did at the time) - it would have been quite a state-of-the-art phone for the American market even without 3G back then. And Motorola would have had a big hit.

But that would have been a radical departure from Motorola's approach. A far "too expensive" phone, no doubt, would have been the market research findings. No matter that Nokia, Samsung and SonyEricsson all sold MORE expensive phones than the iPhone at the time - but those top-of-the-line phones were not brought into the US market.

So, what do we learn. Its a very difficult market. Philips was the world's largest consumer electronics company in the 1970s and early 1980s. They were in the mobile phone market but pulled out. Siemens is the world's largest engineering company. They made handsets. They quit. Sony is now the world's largest consumer electronics company, they could not go it alone making handsets. Ericsson was the world's largest telecoms company (I'm not sure if the Alcatel-Lucent merger makes them bigger than Ericsson, so they might still be today) and could not go it alone making handsets. So Sony and Ericsson joined forces.

There are two opposite trends in the handset space. Those who have a phone already, who renew their contract and upgrade, tend to upgrade the feature set of the phone. So we tend to get a more expensive phone when we renew. This helps sell high-end phones in advanced markets, all of Western Europe, and much of the industrialized Asia. Then there is the vast market of the developing world - China adds 6 million new subscribers every month, India adds 7. So for the developing world there is a demand for low cost phones, the under 100 dollar (and even under 50 dollar) phone.

Some makers specialize on the top end - SonyEricsson's Walkman musicphones and Cybershot cameraphones are in this area. Samsung is pursuing this market. Nokia's N-Series aims here. Here design, branding, features and a constant innovation cycle are vital. And then there is the low cost phone - those need to be made in large quantities to get volume benefits out of scale.

Motorola was stuck kind of in the middle. Not really efficient to fight the low end phones, but clearly not innovative enough to do great top-end phones. The Razr was really the only hit Moto phone of the decade. That is not good enough.

Now, on the one hand we have giants of consumer electronics, engineering and telecoms getting out of the handset business. And then we have the newcomers from the RIMs (Blackberry) and Apples (iPhone) to for example the rumours that Dell may release their own line of phones.

There is a big market out there. Motorola should know this market inside out. They are synonymous with mobile phones in every single market in the world. They have all the contacts to all the mobile operators (telcos, wireless carriers) in all the countries. Motorola has huge R&D abilities and knowhow. I see them presenting at conferences and they have a wealth of insights and research etc. But they are somehow stuck in neutral, unable to succeed in this market which they should own.

How would I advise Moto today? I would say, take your best and brightest and send them to school. Make long pilgrimages to Japan, to South Korea, to Scandinavia, to Italy, to Israel, to Singapore, Hong Kong and China. Study Generation C (Community generation) and how vital the mobile phone is to that generation today. Learn how the cutting edge (and in case of Korea and Japan, bleeding edge) of the mobile industry works. Don't think that Sprint or Verizon or AT&T (or Bell Canada) are the expectation level. Understand NTT DoCoMo and KDDI, SK Telecoms and KTF, TeliaSonera, Elisa, Tele2. Be insipired. Forget the USA-based prejudices, and try to recapture the future. Motorola invented this industry. It was once an engineering world, but today it is purely a consumer-driven marketing world. Americans invented marketing and are enormously competitive. If they put their minds to it, and focused on what the customer wants, they could become big again.

Obviously, they should also read my latest book, Digital Korea, ha-ha, to get into the right mind-set about the digital future where the mobile phone will be the key central item. Like BJ Yang the CEO of Aircross the South Korean mobile advertising arm of SK Telecom, says: "Mobile is a very close personal playground." That is a radically different mindset that I hear always when I speak in America, "well, we must remember that the phone will always be primarily a voice device". That is symptomatic of thinking from the last century. When you hear UK based Blyk talk about mobile, they say "of course the phone is primarily a texting device, with voice coming second". That is in Britain today. Can you imagine what they think in Japan today?

I do wish Moto stays in the phone biz, they will get their heads around the problem sooner or later, and once they really get it that the phone is the 7th mass media device, they will come back strong. And as the USA is the home of most of the giants of the other six mass media, no doubt a USA based handset maker could bring great contributions still to the industry. But it would require boldness to be able to release something like the iPhone was last year. And that level of courage is very difficult to achieve in the intensely engineering-led industry that is telecoms.

Comments

[yunho]

hi tomi interesting observation on Moto.
By looking at the Global Major 5 companies' recent business performance, I found LG's part missing and hope I can add.

LG in 2007 achieved quite good financial result. LG has sold nearly 80 million handsets. And their operating profit ratio was more than 10%. Ofcourse much lower that Nokia which is more than 20%. 4Q hanset revenue was more than 3 billion dollars and 2007 annually will be more than 10 billion dollars.

[Dimitar Vesselinov]

Japan is the future, right?

NTT DoCoMo Vision 2010 Part I-1
http://www.youtube.com/watch?v=eXuXBROyV-g

NTT DoCoMo Vision 2010 PartI - 2
http://www.youtube.com/watch?v=zQZDhOoPfeI

NTT DoCoMo partI-3
http://www.youtube.com/watch?v=CqFkQswOoTE

[Tomi T Ahonen]

Hi yunho and Dimitar

yunho - Thank you for the LG numbers. Looking good, and all the more worry for Moto. Why are they the only one losing money in this biz today?

Dimitar - thanks, yes certainly..

Thanks for writing

Tomi :-)

[alex]

Hi Tomi,

good sales pitch!
Seriously, very good points about Motorola, and I also believe that the home market is the reason for Motorola's demise, if I had to pick only one.

What do you think about following advice to them?
Forget about "old and done" mobile success stories like ringtones and games, but be on top of the next disruptive wave... the "true" mobile Internet for "generation C", hybrid mobile-PC applications and youth behaviour. Twitter is my prime example of a rising star in this new category.
This origins in Motorola's home market, and I think could carry over to Europe, looking at teenager's use of PC Internet. Do for communications what Apple has done for browsing - unite the mobile with the PC! Innovate the ultimate texting oriented phone that combines SMS and Internet chatting!
True, this advice will not lead to Motorola's immediate resurrection in the developing world or Japan & Korea, but better to get one strong leg back onto the ground than vanishing to the history books.

Just food for thoughts; I have no book to sell ;-).
It's clear who are the leading mobile markets now; the big question is who will lead the next big thing.

Alex from a leading mobile market :-)

[Mika]

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