|Dr. Sanjay Jha's (and Motorola Mobility's) Challenges |
>> Moto Must Weigh Greater Scale
The Wall Street Journal
April 8, 2011
Sanjay Jha has achieved what seemed nearly impossible—a nascent turnaround at Motorola Mobility. But a more sustainable recovery may require more drastic action.
The CEO confronts daunting challenges in his two main businesses, cellphones and TV set-top boxes. In cellphones, he is competing with much bigger rivals like Samsung and Nokia. Without greater scale, Mobility's earnings power in the business will be limited.
In set-top boxes, 29% of Mobility's revenue, the market isn't likely to grow much. Cable operators, who would like to cut their spending on boxes, are looking at alternatives like streaming video through Internet-enabled TVs and tablets.
Deals might be the answer for both businesses. Mobility could sell the set-top box business, possibly to a private-equity player. Meanwhile, in handsets, Mobility's market share was 2.8% in the fourth quarter, says Strategy Analytics, seventh globally. Strong in North and Latin America, its European share is under 1%. Scale can, for instance, decrease component costs.
The handset business delivered its first operating profit since 2006 in the fourth quarter. However, the company expects another loss for handsets in the first quarter, due to the rollout of Apple's iPhone in Verizon stores. Verizon is Mobility's top distributor.
To return to long-term profitability, Mobility needs a stronger position in high margin smartphones. Rival HTC, which like Mobility makes phones running Android software, has 16% operating margin, compared with Mobility's 2% in handsets. While part of the difference is likely due to HTC's emphasis on cheaper Taiwanese labor, it also reflects the fact that HTC has 8% of the smartphone market, well ahead of Mobility's 4.6%.
One solution may be to merge with another Android phone maker, Sony Ericsson, suggests Sanford C. Bernstein analyst Pierre Ferragu. Its overall market share is 2.8%, and its smartphone share is 3.6%. Combining the two would offer cost-cutting opportunities in manufacturing and research. Plus, they complement each other geographically. Sony Ericsson's European strength and U.S. weakness is the mirror image of Mobility.
Mr. Ferragu estimates that investors value Mobility's handset business at 0.33 times sales. Putting Sony Ericsson on that multiple and adding a takeout premium would value it just below $4 billion, about the size of Mobility's cash pile.
The trouble could be persuading Sony and Ericsson to exit, to allow for a single, unified management. And using all its cash would leave Mobility little flexibility to spend on merging the companies and absorbing any further losses.
Trying to out-innovate bigger, better-financed rivals looks tough. Mobility needs to get bigger or get out. ###
- Eric -