Doug---here is an interesting article- seems to give us a clear
picture of what is happening.
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Business & Technology 9/28/98
Digital phone wars
Motorola takes aim at scrappy Scandinavian rivals
BY WILLIAM J. HOLSTEIN
In the early 1990s, Motorola seemed all but invincible, a kind of Midwestern Microsoft. It so completely dominated the world of mobile communications that no one paid much attention to a couple of floundering firms from (of all places) Scandinavia. One of them, Swedish rival Ericsson, was in financial trouble and lacked a recognizable brand name in the U.S. market. The other, Nokia, based in Finland, was engaged in the improbable task of transforming itself from a paper-mill company into a telecommunications heavyweight. The two companies were betting their futures on a new European digital phone technology that was largely unknown in the United States. For both, it seemed like Mission: Impossible.
Well, mission accomplished. Today, Ericsson and Nokia are the leaders in the U.S. digital mobile phone market and mighty Motorola, which clung to an old analog technology for too long, is scrambling to recover. It had to take $2 billion in losses earlier this year and announce 15,000 layoffs. Its share price, even before the most recent financial gyrations, was trading below $50, a far cry from the days when it was a Wall Street bellwether. "Every major manufacturer has within the last 10 years been on the ropes at one time or another," says industry expert Herschel Shosteck. "Now it's Motorola's turn."
Motorola is finally launching a serious comeback bid, but it won't be easy. Ericsson and Nokia keep hitting with new products that are either smaller or offer more functions, such as jazzier liquid crystal display screens and infrared ports that talk to computers. A whole new raft of competitors also has sprung up around San Diego-based Qualcomm and its rival digital phone technology. Aside from making its own phones, Qualcomm licenses to titans like Japan's Sony and South Korea's Samsung, and they continue to roll out new products. Samsung, for example, is introducing a 5.4-ounce digital phone on which calls can be made by voice command.
Street rumors. For manufacturers, it promises to be a brutal showdown, and not everyone will necessarily survive. Wall Street has already begun speculating that a giant like Lucent Technologies will soon attempt a takeover of Nokia. But for now, the key fight is in the marketplace.
Roughly half of all mobile telephones that are sold each year typically change hands between the back-to-school buying season and the Christmas holidays. Those sales are expected to reach 26.4 million units this year and 33.1 million next year, according to Dataquest. Equally important, Dataquest estimates that digital handsets, which will account for about half of all sales this year, will dominate the market by next year, accounting for 70 percent of sales. As in the PC industry, intense competition has resulted in falling prices.
For consumers, of course, that's good news. The promise of the digital telephone--seamless mobile communications at a reasonable price--is drawing closer by the day. AT&T Wireless, Sprint PCS, PrimeCo., and others are rapidly building national and regional networks that will allow digital phones to be used much more consistently. That's important because the market is so fractured. In big cities like Chicago, for example, as many as six mobile telephone providers can vie to provide service with an alphabet soup of different technologies, both digital and analog.
But as the digital networks are built and prices come down for phones, there is hope that greater clarity will emerge. Some experts liken the current battles to the war between Sony's Beta standard and Matsushita's VHS standard, which eventually begat the videocassette recorder industry. Others compare it to the PC industry before Windows or to the Internet before browsers. Those developments all turned promising but imperfect technologies into something the mass audience could really use.
Right now, the biggest guessing game is how quickly Schaumburg, Ill.-based Motorola can snap back. The firm still dwarfs the two European companies--it had nearly $30 billion in sales last year--and it won an important $100 million contract from Bell Atlantic Mobile earlier this month for digital phones. But Motorola faces the daunting challenge of reordering itself for the digital era. For years, its divisions and other operating units have engaged in a "warring tribe" mentality in which engineers fought for their own technologies and wouldn't cooperate with other parts of Motorola. It bred an inward-oriented--some say arrogant--culture that overlooked what customers wanted.
Head start. While Motorola was insisting on its analog technology, Ericsson and Nokia were benefiting from a European governmental decision to adopt a single digital standard across Western Europe called Global System for Mobile Communication (GSM). That gave the two companies a head start in designing attractive multifeatured digital phones, which in most cases offer better sound quality than do their analog counterparts. Europe's common standard also has afforded them economies of scale. Qualcomm argues that its Code Division Multiple Access (CDMA) method is better than GSM and the closely related Time Division Multiple Access (TDMA). By Dataquest's reckoning, Qualcomm was third in digital mobile phones last year, Samsung was fourth, and Sony was fifth, all ahead of Motorola.
In response, Motorola this summer launched a massive reorganization, smashing four divisions that deal with mobile communications into a single enterprise headed by Executive Vice President Merle Gilmore. Those four divisions encompass 75,000 people and represent $22 billion in sales, a majority of the firm's overall revenues. It is CEO Chris Galvin's most decisive managerial step since taking over in January 1997. Since Gilmore can now manage the four divisions as a single entity, he says he is shifting engineers and other resources from less promising units into the digital fight. As a result, Gilmore is promising that digital versions of the company's popular StarTAC will be on sale in October and that a new generation of even smaller digital products called the V series will hit the shelves by the holidays, ahead of the originally planned launch in the first quarter of 1999. These V series phones are about the size of an economy-size pack of chewing gum. "There is a sense of urgency in the organization," says Gilmore. "We know the world is watching us."
But deep skepticism persists simply because Motorola is starting out so late in digital. True, Motorola has an excellent manufacturing capability and distribution system. "We've got enormous resources to bring to bear in winning," says Gilmore. But can Motorola move fast enough in a world in which product cycles last just six or eight months? "We're on our third-generation product and we haven't seen their [Motorola's] first generation yet," scoffs Samsung Telecommunications executive Pete Skarzynski.
Not only are the technologies and products changing at a dizzying pace, but the way digital phones are sold also is shifting in a way that makes brand name more important than ever. Traditionally, a service provider such as Bell Atlantic or Omnicom gave a phone to a customer, often subsidizing it as part of a long-term service deal.
But as demand for mobile phones keeps growing, customers are increasingly making the decision about what phone to buy as they stand in the aisles of a RadioShack, Circuit City, or Office Depot. Motorola so far hasn't demonstrated that it can cater to that mass audience. Its current $100 million advertising campaign dubbed "Wings" focuses on corporate image, not people using products.
Playing the image game, however, is what Ericsson has excelled at. It enjoyed a coup in the James Bond flick Tomorrow Never Dies: Agent 007 used an Ericsson phone to maneuver his car at high speed and escape his attackers. More recently, the company won the right to sponsor the 1998-1999 "Let's Talk About Love" tour of pop chanteuse Celine Dion. Overall, Ericsson is spending $80 million on advertising and marketing in the United States this year.
Ad strategy. Ericsson's big marketing splash is partly defensive. Nokia has been faster to market in recent months with hit products such as the 6100 series, and its alliance with AT&T Wireless also is helping give it a big boost in sales. Nokia says it is "moving toward a leadership position," meaning it hopes to knock off Ericsson as No. 1 in digital. Ericsson acknowledges that it has lost some U.S. market share, but as the overall pie keeps growing, the firm says it can continue reaping sales growth and stay ahead of the pack. "Ericsson is in between product cycles," says Matt Hoffman, senior analyst for Dataquest. "When you're at that point, you rely more on advertising to pull the product through. It's a good strategy."
Apart from cheaper, smaller, and better phones, the consumer's best hope is that sheer competitive pressures will force manufacturers toward greater standardization. There is evidence that is already happening. Based largely on Ericsson technology, a consortium that includes both Scandinavian firms, Intel, IBM, Qualcomm, and Motorola is working on a new open standard nicknamed "Bluetooth" that will define how cell phones communicate with laptops, personal organizers, and other devices. Right now, they can communicate through an infrared system, but only if the phone is in eyesight of its companion device's infrared port. Bluetooth hopes to use wireless short-range radio to make it easier.
The big question is whether the leading manufacturers can agree on a common standard for so-called third-generation phones, with analog being considered first and existing digital technologies being second. It's a messy multisided fight, but the Europeans appear close to agreeing on a standard that is similar, but not identical, to Qualcomm's CDMA. If the manufacturers can overcome their fragmentation, making digital phones as easy to use as, say, a microwave oven, sales could boom even more. More consumers would have to ask themselves, "Why do we need old-fashioned phones that are plugged into the wall?"
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