Falling Sales Continue for Motorola While Sony Ericsson Rises

Motorola has reported its preliminary results for the second quarter of 2007, which continue to return below expectations on the back of sinking handset sales. Losses have been further compounded by charges relating to restructuring and job cuts as the company continues the three-quarter slide (see World: 19 April 2007: Motorola Slides into Q1 Loss, World: 2 March 2007: Motorola's Strategy: Improve Low-Cost Handset Margins and Profits, World: 5 January 2007: Motorola Misses Q4 Mobile Device Targets and World: 31 May 2007: Motorola Announces More Job Cuts). 

For the second quarter of 2007, Motorola had expected sales to be flat with the first quarter of 2007 at US$9.4 billion. Instead, Motorola has seen a drop in the region of 8% to between US$8.6 billion and US$8.7 billion. Under generally accepted accounting principles, losses per share will now be between US$0.02 and US$0.04 per share after charges of US$0.03-US$0.04 relating to the reductions in workforce.

The low revenues and above-expectations loss are attributed to lower handset volume sales, now expected to total in the region of 35.0-36.0 million units, a massive year-on-year fall in the region of 32% from the second quarter of 2006 when 51.9 million handsets were shipped as the popularity of the RAZR handset range began to peak as it became targeted at a wider market. Motorola now expects the mobile devices business, which made up 66% of revenues in 2006, not to return an operating profit for 2007 after having previously expected a turnaround in the second half of the year.

Meanwhile, Sony Ericsson has continued to see the benefits of introducing Sony's iconic Walkman and popular Cybershot brands into its range of mobile handsets. Handset sales were up 58.6% year-on-year (y/y) and 14.2% quarter-on-quarter (q/q) to 24.9 million in the second quarter, and although average selling prices dropped from 145 euro (US$199.48) to 125 euro over the year, margins remained fairly stable, generating revenues of 3.1 billion euro (US$4.28 billion), up by 37% y/y; operating income of 315 million euro (up 54% y/y, down by 9% q/q); and a net income of 220 million euro. Production facilitates in India announced earlier this year and a R&D unit established in Chennai, India, will have facilitated lower production costs, maintaining margins, and will help to target the local markets. Sony Ericsson estimates its global share of the handset market to have grown by 3% y/y, to reach 9% of the overall market in the second quarter of 2007.

Outlook and Implications

Sony Ericsson has been putting more emphasis on pursuing the mid-to-low tier for phone pricing, a strategy that is ultimately what led to the problems that Motorola has been seeing. However, Sony appears to be adopting a slightly different strategy, maintaining a strongly differentiated handset range. Motorola used its flagship product, the RAZR—which had started life as a high-end handset—to enter mid-tier markets, cutting margins significantly and lowering the cache of its high-end product with strong physical design similarities between handsets at varied price points. Sony Ericsson has a strong product line-up ranging from the low-end W200 and K310 to the 8Gb W960 and the 5 megapixel K850—both of which are key features that will attract buyers, and the latter notably more highly specified than the high-end and well-hyped Apple iPhone, which has but a 2.0 megapixel camera and scant reputation as a camera manufacture (see World: 10 January 2007: Apple iPhone Launches, Cingular Gets U.S. Exclusive). 

Apple has a reputation for effective user interfaces and aesthetic design that drives the hype behind the iPhone. Sony Ericsson has performed well in usability testing and more recent handsets are attractive. Motorola has gained attractive industrial design over the last few years; however, it has languished in usable interface design which may well bear some responsibility for the slowdown in sales growth as users struggled with earlier generations of the mass market handsets and were reluctant to stay loyal to the brand. Motorola has re-designed the user interface in its latest range of handsets—including using Symbian UIQ in the Z8—but poor user experiences and resultant reputations take a while to shift (see World: 16 May 2007: Motorola Launches New Handset Range).