Motorola to shift cell phone business to Android, Windows Mobile

Device maker reports $397M loss in Q3, will cut costs by $800M in '09

Motorola Inc. today announced a radical shift in its cell phone business, saying that it will ship fewer phone models early next year but that the company plans to ship its first Android smart phone by the 2009 Christmas sales season.

While officials did not discuss layoffs, Motorola expects to reduce its overall costs by $800 million in 2009, which includes $600 million in reductions from the cell phone business. Plans still include spinning off the cell phone division as a separate company, but that move will be pushed beyond 2009 because of the unfavorable climate in the global economy.

Sanjay Jha, Motorola's new chief of mobile devices, said the company will no longer develop phones on some operating systems, including Symbian, but plans to continue with Windows Mobile at the high end and its own P2K proprietary platform at the low end. The Android phone will hit the midtier market where Motorola has not done well, he said.

Jha said Motorola will work closely with Android engineers, including officials at Google Inc. in California, and will open an office in Seattle to work more closely with Microsoft Corp. engineers on producing phones on Windows Mobile 6.5 by mid-2009.

Jha told analysts during a third-quarter earnings call that Motorola could separate its new phones from others in the market even though it doesn't own the operating systems, as Research In Motion Ltd. does with the BlackBerry or Apple Inc. does with the iPhone.

"It's possible to deliver differentiation without owning the platform," Jha said. Motorola's longtime use of Linux and Java in developing software and applications will help in efforts to create unique and unusual devices, he said.

Jack Gold, an analyst at J. Gold Associates in Northboro, Mass., said Motorola's focus on differentiation will be critical. "Having Android alone is not enough. It must also be a compelling device that users want to buy, and not just a device that Motorola will compete with on price," he said. "Of course, the competition -- such as Nokia, Apple, Samsung, RIM and HTC -- haven't been sitting still. So it remains to be seen if Motorola can recapture the market share it once had by offering compelling devices that demand a premium, rather than commodity products."

Jha said that Motorola cell phone designers and engineers have done a "wonderful job in a limited sphere," but he added that "complete user services and the user interface are all becoming more important."

He said that even Windows Mobile has not delivered the user experience that Apple has delivered with the iPhone, but he predicted that Windows Mobile 6.5 and 7.0 "have significant new added features that will help."

"The platforms we have chosen will be capable of delivering better performance and a better experience. The new teams in California and Seattle have been chosen to deliver [user] experiences," Jha said. "That's where we have to differentiate. Our [competitors] have done that better than we have. We recognize that and are focused on it."

A report yesterday in the Wall Street Journal quoting unnamed sources said that Motorola plans to drop four phone platforms in all and dozens of phones under development, likely resulting in thousands of layoffs. But Jha and Greg Brown, co-CEO of Motorola with Jha, did not elaborate on any of those details. Jha would not say how many fewer phones would ship in the first half of 2009, but said it will be a "retrenchment."

Motorola also reported third quarter sales of nearly $7.5 billion, down from $8.8 billion for the same quarter a year ago.

Earnings at the communications equipment maker also fell $397 million, dropping 18 cents a share for the quarter, compared to an increase of 3 cents a share for the same quarter in 2007.

The company's lowest performing unit, Mobile Devices, had sales of $3.1 billion, a reduction of 31% compared to a year ago. The reductions came even as Motorola shipped 25.4 million handsets and introduced 16 new products.

By comparison, Motorola's two other divisions performed much better. Home and Networks Mobility sales dropped 1% over a year ago to $2.4 billion, but earnings in the division increased 65%.

Enterprise Mobility Solutions did even better, up 4% over a year ago, with sales of $2 billion and an earnings increase of 23%.

Gold said Motorola's enterprise business "seems to be doing fairly well, especially in their Symbol division," with ruggedized devices and Wi-Fi implementations. The WiMax business should also "start to kick in for them" in the next year, as Clearwire Inc. and Xohm, a division of Sprint Nextel Inc., launch more systems in more markets, he added.

"Overall, I think that Motorola is a tale of two cities - it is the best of times for enterprise and infrastructure and the worst of times for handsets," Gold concluded. "Can they improve their handsets division which they are planning on selling off or spinning out? This remains the big question."

Copyright © 2008 IDG Communications, Inc.

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