Tero. Living in the Past - rather sad, and a bit pathetic... Perhaps an emotional vent in the face of Nokia's decendancy. Forever the defender of GSM dominance in perpetuity - remarkably in defiance of IMT-2000 and OHG CDMA-centric certainties. I sincerely hope Tero fully relishes recent statistics.
He should press them in a book of memories - like childhood Autumn leaves, to savor through the cold winters to come...
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What Motorola Can't Admit, Part 1
By Tero Kuittinen
Special to TheStreet.com
10/13/00 3:55 PM ET
To some, Motorola's (MOT:NYSE - news - boards) earnings report was the latest
pulse check for global mobile-phone sales. But given the current state of Motorola's
consumer-product division -- this interpretation is hazardous. Motorola is wrestling
with a product line that is out of step with the overall market trends, especially the
different growth rates of the leading digital standards.
The company was successful in raising its third-quarter mobile-handset margins
above 6%. But the price the company paid for this achievement was way too high.
In order to boost margins, Motorola allowed its consumer-unit sales growth to slip
to a chilling 4%, year over year.
Fewer sales due to an unfavorable product mix were expected -- but that 4%
number sent shock waves across the industry. Motorola was known to be shifting
away from certain high-volume, low-cost product segments. But the impact of this
withdrawal turned out to be far worse than the management had indicated.
As has happened before, the company tried to place the blame on sluggish overall
mobile-phone market. But the problem isn't the overall market -- but the way the
growth patterns have shifted within the market. CDMA, which stands for code
division multiple access, once the most promising wireless network standard, is
headed toward last place. And Motorola put most of its chips on the CDMA bet.
(Other options are TDMA, time division multiple access, and GSM, global systems
for mobile communications.)
CDMA Falls Behind
CDMA and TDMA battle for second place among wireless
standards
((chart
Source: EMC World Cellular Database; data through August
Motorola's problem comes into focus when mobile-phone sales are broken down by
region: The Americas and Asia were humming along nicely -- but sales in Europe
were "very significantly lower." The reason for this can be seen in retail outlets
across the continent; Motorola began withdrawing from the low-end GSM phone
market starting earlier this year.
Unfortunately for Motorola, there has been a switch in the relative growth rates of
digital standards this year. Whereas the GSM subscriber base increased by nearly
19% between April and August, the CDMA subscriber-base growth during this time
period was below 17%. The difference may seem marginal -- but it's the difference
in base sizes that makes it crucially important.
GSM is now topping 380 million subscribers, while CDMA operators have fewer
than 80 million customers. Under these circumstances, even a slight growth
advantage of GSM translates into a vast difference in unit sales. The current
situation is a remarkable reversal of the 1998 market outlook, when CDMA cruised
far ahead of rival standards in subscriber growth. Many expected this growth
disparity to extend indefinitely -- very few guessed that it would be reversed within
20 months.
The growth of TDMA operators has been even stronger: During the April-August
period, the TDMA operators experienced subscriber growth of nearly 24%. Against
that, the 17% growth of CDMA operators during the same period must come as a
shock.
This cuts directly against Motorola's earlier strategic decisions as well -- TDMA
had been declared a has-been standard some years ago, and Motorola had
deliberately eased up on TDMA phone development to favor CDMA. Now TDMA
boasts a subscriber base of nearly 60 million, right behind CDMA.
What these trends mean is that suddenly the hottest product categories in the
global mobile-phone market in year 2000 are mobile phones for first-time GSM and
TDMA subscribers. These are the very product categories Motorola had decided to
pay less attention to back in the halcyon days of triple-digit CDMA subscriber
growth.
A Misstep Long Ago
The strategic decision of exiting the low-end GSM market this year was more or
less mandated by the miscalculation Motorola management had made years
earlier. Years ago, it appeared that CDMA would become the standard of choice
based upon its many technological advantages. According to this line of thinking,
TDMA would become a has-been in the Americas and GSM success would be
mostly limited to European markets. For all these reasons, Motorola began
deliberately easing up on TDMA and GSM development to favor CDMA.
That seemed to make sense back in 1998, when the CDMA subscriber base was
growing overwhelmingly faster than the GSM subscriber base. But what's clear,
albeit in hindsight, is that Motorola's withdrawal from low-end GSM phones is
happening at the worst possible moment -- before its CDMA
research-and-development spending starts paying off, but after its rivals have
launched a new generation of low-end models with a new range of features. One of
Motorola's unique problems is disappointing sales in China: In 1998, China looked
like a golden opportunity for Motorola's second-generation CDMA products.
Those dreams never materialized. Today, China has more than 60 million
subscribers -- but they are using the GSM standard, and that's nearly as many as
all of the world's CDMA subscribers. As the goal of turning CDMA into a volume
competitor of GSM faded, profitability has become an evasive goal. Blame it on the
break-even point: If a wireless standard fails to top a 20% market share of global
sales, the economies of scale can't kick in.
GSM subscriber base has swelled by more than 40% since the start of this year --
in just nine months. Based on the current figures, how can Motorola blame its
sales slowdown on a global phone-sales slump? They can't. The problem is
Motorola's shortsightedness -- basing its long-term strategy on whatever current
trend is in vogue. The result is a year 2000 product line tailored on year 1998 sales
patterns.
Milestones Coming Up
Overall, global phone sales for year 2000 appear to be able to come in at or slightly
below the optimistic 420 million forecast made at the start of the year. But the
surprising growth in GSM-based and TDMA-based phones is still beyond the radar
screens of most investors.
That will change, as several key numbers are coming up -- including those from
Texas Instruments (TXN:Nasdaq - news - boards), the major chipset vendor for
GSM and TDMA phones, on Oct. 18.
Meanwhile, a report by Siemens (SMAWY:Nasdaq ADR - news - boards) will
provide a gauge of the real strength of the European handset market, where this
company specializes. BellSouth's (BLS:NYSE - news - boards) upcoming
earnings report on Oct. 19 is going to show the state of the U.S. GSM/TDMA
market and provide a contrast to the sharp disappointment of Sprint (PCS:NYSE -
news - boards).
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