Research in Motion’s Jim Balsillie and Mike Lazaridis should send Motorola (NYSE: MMI) CEO Sanjay Jha a bottle of scotch: there’s a new whipping boy in mobile for the financial community. Following another lackluster earnings report in which it downgraded guidance and admitted that its margins were troubling, Jha and other Motorola executives faced several pointed questions that underscore how fierce competition in mobile can start to take its toll.
If nothing else, Motorola’s current situation certainly does puts the troubles of Research in Motion into perspective. Unlike RIM (NSDQ: RIMM), Motorola is struggling to make a profit from the basic business of designing, making, and selling modern mobile devices. The BlackBerry brand is fast losing favor with U.S. consumers and the company’s plan for the future is sketchy, but at least throughout it all RIM has continued to produce profits, albeit somewhat lower than they would like.
Motorola, on the other hand, had no profit to show from the $2.4 billion in revenue it earned during the second quarter. Even PC companies make a little money. Sales of its smartphones increased, but it was hurt by the delay of the Droid Bionic, which is now expected to ship in September. Shipments of the Xoom tablet continue to disappoint, and Jha admitted that tablet margins aren’t where the company would like.
The Bionic should help Motorola’s fortunes ahead of the holiday shopping season, but tablet shipments are now expected to fall as Motorola transitions to a new tablet design that was “designed with the more aggressive cost points in mind,” Jha said. Undercutting the iPad on price may be the only way to jump-start demand for the Xoom, but if the lower price is accompanied by skimping on features or build quality, it may not help.
The iPad is without question a great tablet. But one of Apple’s biggest advantages in the mobile market is its ability to secure huge quantities of components at prices that competitors simply can’t match. It’s not all that different from the profit advantage Dell enjoyed over its competitors in the last decade based on its relationship with Intel (NSDQ: INTC), except for the big difference that Apple (NSDQ: AAPL) pre-paid its suppliers to secure its component supply and pricing whereas Dell essentially received kickbacks for staying exclusive to Intel each quarter.
Motorola doesn’t have that luxury. Motorola has just $3 billion in cash and equivalents in the bank, whereas Apple said it planned to make payments of $1.05 billion to suppliers under a long-term supply agreement in the first quarter alone, which won’t even make a dent in the $76 billion Apple currently holds in cash and securities.
This creates a vicious cycle. Motorola is forced to spend heavily on research and development to try and stay even with Apple in the smartphone and tablet markets, and might have to pay more per component than its competitors. That eats away at profits, which then can’t be reinvested in new products, lather, rinse, repeat.
Add to it the legal costs of defending yourself against Apple and Microsoft’s patent onslaught, and it’s a tough time to be Motorola. The company might actually fare better than competitors in that fight due to a strong patent portfolio, which Jha made sure to highlight during his prepared remarks Thursday.
Motorola’s situation isn’t necessarily dire, but nor is it heading in the right direction, lowering third-quarter and full-year guidance below estimates and crossing its fingers that a combination of new LTE-based smartphones and tablets can lift its mobile division above the profit line by the end of the year.
Android was a lifeline for Motorola when it was first introduced, giving it a path to the modern mobile market that it simply couldn’t find after too many years of selling Razrs and other feature phones. But the problem with Android is that others can use it too, and if companies like HTC and Samsung can find ways to develop competitive Android products while also making money and funding future research, Motorola is going to have a hard time staying above water in a market that changes so quickly.