Motorola to rely on Android to revive phone sales

Company pushes off phones using Windows Mobile 7 until 2010

Motorola Inc. today said its mobile phone revenues fell by 51% in the fourth quarter of 2008, and said it plans to improve phone sales in 2009 by developing fewer new handsets, but with a focus on smartphones that run the Android operating system.

The focus on Android will give Motorola a chance to capitalize on handsets that integrate social networking functionality, which is expected to sell well in the market, Motorola Co-CEO Sanjay Jha said in a conference call this morning.

By the same token, the Android news is not good for Microsoft Corp.'s Windows Mobile operating system. Motorola plans to build handsets in 2010 that will run Windows Mobile 7 when it becomes available, bypassing Windows Mobile 6, which is available now, Jha said. Last year, Jha criticized the Windows Mobile operating system for deficiencies in user functionality, but today he made it clear how Motorola intends to use, or not use, various Microsoft products.

The fourth-quarter earnings announcement did not surprise analysts, since Motorola last year began laying off 7,000 workers to lower costs, with 1,000 already let go, Motorola officials said.

However, the financial report was grim, with the company reporting a $3.6 billion quarterly loss, or $1.57 cents a share. For the mobile phone division, which is expected to be spun off in 2010 or later, revenue fell by 51% to $2.35 billion for the quarter compared to a year earlier.

Motorola also said it is suspending payment of dividends until further notice. It also announced that Chief Financial Officer Paul Liska had resigned.

In general, Jha said Motorola will make fewer launches of new mobile phones in 2009, with a greater focus on mid- and high-tier phones. Analysts have said a big part of the Motorola losses were because of flatness in sales of low-end phones, partly because of the poor global economy and the poor performance of mobile phone sales. The only bright spot has been in smartphone sales.

Jha gave some broad outlines of how Motorola will use Android, which is based on the Linux operating system and was developed with Google Inc. and the Open Handset Alliance. Because Android already has thousands of developers and won't require Motorola to build an operating system from the ground up, Motorola will be able to deliver a "differentiated" version in what promises to be a competitive market for both smartphones in general and Android phones, Jha said.

Also, Motorola teams have had years of familiarity with Linux Java, which will help in working with Android, Jha said. Motorola engineers are already working with Google developers to create a "tight hardware and software integration," he said. Jha estimated that up to 40% of development staffers at Motorola are devoted to smartphones, and noted that with prior successes like the MotoRazr phone, "we have world-class design capabilities."

One trick for Motorola will be to come up with an Android phone that is "lower down in [price] tiers and differentiated" from competitors, Jha said. He said the Android devices that Motorola develops will "deliver a much more highly integrated social networking experience."

Co-CEO Greg Brown said that layoffs and other cost reductions should save the company $1.5 billion by midyear. For all of 2008, sales at Motorola were $30.1 billion, down from $36.6 billion in 2007.

The executives said the company is still committed to spinning off the mobile devices division, but said the poor global economy has delayed any action. In the meantime, Jha said, "We are completely committed to making the handset business work. The path we are on is the right path."

The other two divisions at Motorola had different outcomes in the fourth quarter. Home and networks mobility sales for the fourth quarter were $2.6 billion, down by 5% from the same quarter of 2007. Enterprise mobility, which includes updated products from its acquisition of Symbol Technology Inc., had sales of $2.2 billion, up by 4% from the fourth quarter of 2007.

Phillip Redman, an analyst at Gartner Inc., said Motorola needs a full breadth of mobile device offerings, not just low-end devices, which have not sold well. "You don't see anyone using its phones anymore, and Motorola has to stop the slide before it becomes too late," Redman said. "The clock is ticking and its opportunity is closing."

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