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Motorola trying to repeat Razr's megahit formula

NY TIMES NEWS SERVICE, NEW YORK
Sunday, Feb 04, 2007, Page 12

"If [Scpl] really is radically different than everything else, the brand equity that Motorola had with the Razr will be back faster than you can blink."

Daryl Armstrong, stock analyst at Citigroup

When the sleek Motorola Razr V3 cellphone first hit the stores just over two years ago, it carried the price tag of a must-have status symbol: US$500.

Now? About US$30 with a two-year service contract.

Motorola's fortunes have plunged along with the price of its Razr. Its profits have collapsed, and it announced plans last month to lay off 3,500 workers.

Since last October, its stock has dropped 30 percent, attracting the attention of the billionaire investor Carl Icahn, who bought 40 million shares last week on a bet that he could push the company to do better.

At first glance, the company's troubles are puzzling. Almost 1 billion mobile phones are sold worldwide each year, and Motorola has almost a quarter of the market. Consumers are also replacing their phones faster, on average less than every two years.

But the cellphone business is still relatively young, and Motorola is learning a cruel new lesson about consumer tastes in phones. An industry that has focused more on microchips, screen size and data speed is finding it has more in common with the fashion business.

Today, a phone's value reflects not so much what it can do, but whether it is the envy of friends and colleagues.

Just ask San Francisco designer Robert Brunner. Brunner bought a Razr when it first came out, but he quickly noticed that others did, too.

"I started being one of six people at the meeting with a Razr," he said. "It went pretty quickly from a coveted object to a commodity-design thing."

He now caries a black Nokia 8801, which sports a stainless steel keyboard cover that glides open and elicits oohs and aahs from workmates. He winced when his 17-year-old daughter recently bought a Razr for US$50, a few hundred dollars less than he paid.

But while Motorola earned hundreds of dollars of profit on each Razr during its first year, it makes little on the newer, heavily discounted Razrs.

To replace that revenue, the company needs the same thing as every fashion giant: fresh hits.

Last year, Samsung unveiled the 6.9mm thick SGH-X820, which analysts dubbed the "Slvr-kllr" because it is 40 percent thinner than Motorola's skinniest handset.

Motorola hoped that its latest phone, the Krzr, would lure back style-conscious consumers willing to spend big bucks on a phone.

At US$199 with a two-year contract, the price tag gives Motorola the profit margin it needs to satisfy investors.

But the Krzr also looks a lot like a Razr, albeit with a slightly thinner body, rounded edges and glossy finish. Analysts say that consumers are unwilling to open their wallets for something that appears, at least on the surface, to be yesterday's style.

The wireless carriers seem to have suspected this. They have not promoted the Krzr heavily in North America.

Perhaps most worrisome to Motorola's fortunes, the Krzr does not appear to be eliciting a gotta-have-it reaction from consumers.

But analysts said that if new product Scpl gives consumers something they have not seen before, a Motorola comeback is possible.

"If that product really is radically different than everything else, the brand equity that Motorola had with the Razr will be back faster than you can blink," said Daryl Armstrong, a stock analyst at Citigroup.

Still, plenty of challenges lie ahead. The mobile phone industry seems to mint one blockbuster a year, and Apple's iPhone -- slated for release in June -- already has the inside track.

The iPhone may have locked up that small percentage of consumers still willing to fork over hundreds of dollars for a phone that will no doubt be obsolete a few months after it is released.

The larger question is whether the cost-conscious majority will still pay the kind of prices for phones that once burnished Motorola's profits.

Most consumers are now on their fourth or fifth cell phone, and implicitly understand that technology is quickly improving and wireless carriers are constantly slashing prices.

For many, that experience is making them leery of high phone prices. Bill Messett, a Miami insurance agent, sent his family's four Razrs to a recycling service.

He now carries a Palm Treo, an e-mail device, and said he'll think carefully about buying a high-end phone whose primary attribute is its good looks.
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