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Motorola Inc. (NYSE: MOT) was the world's fourth largest provider of wireless handsets in fiscal 2008.[1] This is the third consecutive yeat that Motorola has moved down in the rankings, as they were second in 2006 and third in 2007. Most of the competition for Motorola has come from smartphones such as Apple's iPhone.[1] Motorola's Mobile Device segment (net operating loss for 2008 was $2.2 billion) lost money in 2007 and 2008 and has had net sales decrease 57.37% since 2006, stemming from Motorola's lack of technological innovation within the segment.[2] In addition to producing wireless mobile devices, Motorola also competes in the wireless infrastructure market and provides two-way radio systems and networking systems for government and industrial customers. Motorola has also developed end-to-end broadband systems that deliver entertainment, communication and information systems into the home, though competition is fierce and growth in 2008 from 2007 was 1% as compared to 9% the year prior.[3]
The Enterprise Mobility Solutions and Home and Networks Mobility divisions are the two profitable divisions of Motorola, while the Mobile Device division continue to operate at a loss. In the first quarter of 2009, all three divisions did worse than the same period in 2008 contributing to a 66.91% increase in Motorola's operating losses of $449 million.[4] In December 2008, S&P deemed MOT's debt below investment grade, making it more expensive for MOT to borrow money.[5] Management has also warned that the wireless mobile handset market could decrease in size in 2009, providing additional hardship for MOT.[6]
[edit] History
Motorola was founded in 1928 by Paul Galvin. It started out as Galvin Manufacturing Company and the name Motorola was adopted in 1947. Most of Motorola's products have been radio related, starting with a battery eliminator for radios, the first walkie-talkie, defense electronics and more recently cellular infrastructure and mobile phones. Motorola also used to have a stake in semiconductor technology, but this was spun-off in 2003 as Freescale Semiconductor Inc..
[edit] Products and services
Motorola can be broken down into the following three businesses segments:
[edit] Mobile Services segment
Motorola’s main business driver in 2006, Mobile Services, which generated nearly $3.0 billion in operation revenue, is now the largest drain on the company. Accounting for 52% of net sales in 2007, the mobile services segment, which includes wireless handsets, has drained more than $1.2 billion from the corporate coffer throughout 2007. Motorola currently the third largest worldwide supplier of wireless handsets, behind leaders Samsung and Nokia. The largest of the segment's end customers (which includes sales through distributors) include China Mobile, Verizon, Sprint Nextel, Cingular and T-Mobile . Sales to these five carriers represent about 39% of the segment net sales. Furthermore, this segment also sells mobile devices through third party distributors, which account for another 38% of next sales. The most important customer is Brightstar Corporation. Although the U.S. is the largest individual market, 65% of the segment’s sales are outside of the U.S.
[edit] Networks and Enterprise segment
The Networks and Enterprise segment comprises 21% of the company’s net sales in 2007, bringing in $1.2 billion in operating revenue. This includes:
- cellular infrastructure systems
- wireless broadband systems
- analog and digital two-way radios
- voice and data communication products
This segment also includes the installation and service of these products. Due to the nature of this segment, many agreements are long-term contracts that require sizable investments by the customers. Motorola's top five commercial customers, Sprint-Nextel, KDDI (a service provider in Japan), China Mobile (Hong Kong) (CHL), Verizon and Alltel plus the U.S. government accounted for 34% of the segment’s sales in 2006.
[edit] Connected Home Solutions segment
Connected Home Solutions accounts for 27% of the company’s net sales in 2007, bringing in $709 million in operating revenue. It designs, manufactures, installs and services:
- cable television, IP video and digital entertainment devices
- end-to-end digital video system solutions
- broadband access networks
- IP based data and voice products (modems)
The vast majority of sales for this segment are in the US. Since a few large cable television providers own a large part of the cable systems, revenue from this segment is dependent upon a small number of customers for its sales. Comcast is Motorola's biggest customer in this segment and accounted for 29% of the segments net sales in 2006. Collectively the largest 5 customers of this segment account for 54% of the segments net sales. The opportunity in this market segment is expected to grow as carriers around the world expand to offer video services.
[edit] Business Drivers
The demand for most of Motorola's products largely depends on the growth of the industries in which Motorola competes in. A market decline in any of the three industries would have an adverse effect on Motorola’s financial performance. In particular the rate at which the telecommunications industry is growing is critical to Motorola’s ability to increase overall financial performance. Motorola’s business was very negatively affected by the economic slowdown and a corresponding reduction in spending of the telecommunications market from 2001 to 2003. Motorola’s business and suppliers are located throughout the world. As a result, the company is well diversified, but also faces global risks that other companies that are not global may not face. In particular, Motorola is vulnerable to a slowdown of the current high growth in emerging markets.
[edit] Mobile Services segment
[edit] Overall market growth
Motorola's main customers for wireless handsets are companies that provide mobile phone service. The companies buy Motorola's handsets and resell them (often at a subsidized cost) to their cellular subscribers. Motorola's wireless handset sales are thus dependent upon the number of overall state of the mobile phone market. As of Q2 2008, Motorola had a 25.8% market share in the US handset market.[7]
Mobile handset sales have been growing at a rapid rate (close to 20%) during the last four years. Continued growth in this industry will be driven by demand from new subscribers in emerging markets and replacement sales from the current subscriber base. However, growth in this industry is likely to slow down as markets becomes saturated.
[edit] Emerging markets and the MotoFONE
Strong growth in emerging markets such as India and China have contributed to the rapid growth of the overall market. Motorola currently trails Nokia in these markets. To increase their market share, Motorola has designed a sub-$50 cellphone called the MotoFONE. Analysts believe that if the MotoFONE is successful, Motorola could gain significant share from Nokia in the emerging markets.
[edit] Wireless handset as fashion accessory
Because wireless handsets have become a fashion accessory, replacement sales are dependent on both economic conditions (an increase in disposable income will increase the number of elective handset replacements) and the ability of Motorola to create an attractive product. Motorola has done well in the past with popular products such as the RAZR phone, but must continue to produce new handset designs with attractive features. Currently all top five vendors of wireless handsets constantly come out with new models and new technologies. In addition to pressure from competitors products, any established phone model may saturate the market and experience a decline in sales.
[edit] Wide customer base
Motorola has several large customers, and the loss of any one of these customers could have an adverse effect on the company’s performance. Motorola’s largest end customers are Sprint Nextel, China Mobile, Verizon, Cingular and T-Mobile. However, no single customer accounted for more than 10% of the company’s net sales.
[edit] Networks and Enterprise segment
The networks and enterprise segment has been growing at about 5% during recent years. Due to the nature of the industry, contracts are mostly long-term and require sizable investments by the customer. This includes contracts with the U.S. government which accounted for approximately 2% of net sales in 2007. This segment is less dependent on business cycles than the Mobile Services segment. Relationships with key customers, however, are crucial, since losing a single customer in this segment severely affects the financial performance of Motorola.
[edit] Wireless broadband: WiMAX versus WCDMA Market Share
The wireless broadband market is currently split between two technology standards: WiMAX and WCDMA. Currently WCDMA is more widely deployed than WiMAX. Motorola is the market leader in the WiMAX technology, but it only in 5th position for the WCDMA technology. Its competitors for WCDMA wireless broadband include Ericsson/Marconi, Nokia/Siemens, Alcatel-Lucent and Nortel. As with other instances of two directly competing standards, one of the standards is likely to eventually obtain complete market share. If WiMAX succeeds, Motorola will be well positioned in wireless broadband. On the other hand, if WCDMA succeeds, Motorola will be at a disadvantage as its market share is relatively small compared to its competitors (see graph). Motorola expects to release 5 3G handsets by the end of 2008.
[edit] Connected Home Solutions segment
Demand for this segment depends primarily on capital spending by providers of broadband services and the marketing of those services by the providers. The amount of spending by these providers affects Motorola’s sales and profitability.
[edit] Competition
Because Motorola operates in three distinct markets, it experiences competition from different companies for each of these segments.
[edit] Mobile services segment
This segment experiences intense competition in worldwide markets by numerous companies. The largest competitors include Nokia, Samsung, Sony-Ericsson and LG. Overall these five companies account for an 86% market share of the worldwide wireless handset sales. Motorola's market share has increased steadily over the past several years.
In emerging markets such as India and China, Motorola (20%) currently trails Nokia (33%) in market share.
[edit] Networks and Enterprise segment
Competitors in this segment include large diversified companies as well as state-owned telecommunication companies and small specialized firms. In the public networks industry Ericsson is the market leader, followed by Motorola and three other vendors with similar market share positions, Siemens, Alcatel-Lucent and Nortel. In the private networks industry major competitors include M/A-Com, EADS Telecommunications, Kenwood and EF Johnson.
In the WCDMA market, Nokia is currently the market leader, while Motorola’s market share has dropped to the #6 market position. Nokia is better positioned in the WCDMA market, while Motorola is betting on the WiMAX technology. Currently the WCDMA market is growing quicker than the WiMAX technology, which gives Nokia an advantage due to its 37% market share for this technology. Furthermore, Motorola faces a longer term challenge as its infrastructure business lacks economies of scale versus larger competitors like Ericsson, Alcatel-Lucent and the pending Nokia-Siemens joint venture, especially in the WCDMA infrastructure.
[edit] Connected Home Solutions segment
This segment is highly competitive and new competitors are expected to enter the industry as the technology rapidly changes. Motorola competes in the market for digital set-top boxes for broadband and satellite networks. It's main competitor in North America in this segment is Cisco Systems; other competitors include ARRIS, Harmonic and C-COR. Motorola's main market for Connected Home Solutions is in North America.
[edit] References
- ↑ 1.0 1.1 MOT 2008 10-K pg. 3
- ↑ MOT 2008 10-K pg. 121
- ↑ MOT 2008 10-K pg. 63
- ↑ MOT Q1 2009 10-Q (March 31, 2009).
- ↑ MOT 2008 10-K pg. 21
- ↑ MOT 2008 10-K pg. 18
- ↑ Seekingalpha.com, Motorola: Turnaround in Progress?
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