Motorola gets aggressive on phone prices

CHICAGO (Reuters) - Motorola Inc. (MOT.N: Quote, Profile, Research) is changing its tactics to take on competitors by getting aggressive in the market for phones priced for $50 and less.

In a bid to gain ground against industry leader Nokia and lock in a solid No. 2 lead against Samsung Electronics, its next closest rival, the handset maker is pressuring its tight operating margins to win market share.

By going downmarket, Motorola is treading on Nokia's traditional territory, which could bring more price competition to an already brutal marketplace. It is a surprising move by Motorola, which has the thinnest margins among the top three phone makers.

"I think it's a bold strategy, and with a bold strategy comes risks," said Ben Wood, an analyst with market research firm Gartner. "If it comes off, it's going to be spectacular."

Motorola aims to win more business in Asia and other developing markets, having secured a contract in February to produce 6 million phones for countries such as India and Malaysia at the ultra-low price of $40 each.

It has also been adding more affordable phones in Western markets like the United States, its home turf, with new clamshell models such as the V220, a camera phone that Cingular Wireless sells for about $80.

The strategy marks a shift for Motorola, whose comeback last year was centered on the launch of the high-end RAZR, an ultra-thin phone that sells for about $350. Motorola is extending the RAZR line.

The change appears to be helping Motorola win market share. In the first quarter, the company reported shipping 28.7 million handsets, up 13 percent from a year ago when it also had strong shipments. Motorola said it gained 1.4 percentage points of share for 17.1 percent of the global market.

CALCULATED RISK

RAZR and its offshoots, which analysts said carry healthy operating margins, give the company more wiggle room to build cheaper phones, helping to offset development costs and lower profits from less expensive phones.

Motorola and Nokia are now weakening smaller rivals such as Germany's Siemens AG (SIEGn.DE: Quote, Profile, Research) , which appears to be backing away from big markets like North America.

But Motorola's window of opportunity is small, analysts said. Nokia lacks a sexy model like the RAZR, but it remains a nimble manufacturing powerhouse, with a global supply chain that keeps costs low through sheer scale. Nokia is working on adding more popular clamshell models to its portfolio.

The Finnish phone maker posted a strong start to the year on Thursday, shipping nearly twice as many handsets as Motorola. It showed growth in strongholds such as Asia, with a 70 percent gain in unit shipments to China. Nokia's global share through the fourth quarter was 30.7 percent, according to research firm Gartner.

"The more successful (Motorola's) emerging market push is, the more (price) is pressured and comes under risk," Smith Barney analyst Daryl Armstrong wrote in a note last week.

Charter Equity Research estimates that the average selling price of a Motorola phone dropped to about $151 in the first quarter, down 3 percent from the fourth quarter and off 6 percent from a year ago. Motorola management last week forecast that the average price would probably remain flat this year.

WALL STREET SKEPTICAL

Though a Nokia phone is still much cheaper than a Motorola model, averaging about $110, Nokia's operating margins are 19 percent versus Motorola's 10. South Korea's Samsung has margins of about 17 percent.

"It's clear competition is heating up and pricing is declining," Charter analyst Ed Snyder said. "Motorola's costs of goods to build a phone are still high relative to its main competitors."

Wall Street appears to remain skeptical on the stock. Motorola's stock price has declined 21 percent since an intraday high of $20.03 early last December. The stock closed down nearly 1 percent on Friday at $15.78 on the New York Stock Exchange.

But Motorola Chief Executive Ed Zander told Reuters last week that the company "had clearly established No. 2 and had its sights set on No. 1."

And analysts have praised Motorola for taking measures to cut costs, such as the spin-off in December of its capital-intensive semiconductor business, Freescale (FSL.N: Quote, Profile, Research) . And the company has been steadily moving away from scattershot phone design toward making handsets on a common platform.

"Motorola is trading a bit of margin for market share," said A.G. Edwards analyst Greg Teets. "Motorola wants and needs to establish itself as the dominant No. 2. Part of doing that is getting the volumes up there."

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