Motorola's Market Share Mess

The company's lack of compelling new phones continues to depress market share, which threatens plans to spin off the handset division

By Olga Kharif and Roger O. Crockett

Motorola's phones once held so much cachet that mammoth wireless carrier AT&T clamored for the exclusive right to sell the best-selling Razr. This year, AT&T (T) has taken only one new Motorola phone, the Z9 slider.

The company's falling star at AT&T, the largest U.S. mobile-phone carrier, underscores Motorola's persistent failure to release handsets that grab the attention of consumers and the service providers whose marketing is crucial to sales. It only reinforces concern over Motorola's ability to spin off the leaderless, money-losing handset division.

Once having commanded more than one-fifth of the global handset market, Motorola (MOT) likely ended the second quarter with 8.5% share, from 9.3% in the first quarter, according to Avian Securities. In June, Avian analysts surveyed 100 representatives of AT&T, Verizon Wireless, Sprint Nextel (S), and T-Mobile USA (DT) retail locations and found that Motorola phones no longer even make it onto the list of the top 10 best-selling handsets. Motorola's shelf space at the major carriers declined to 15% in June, from 18% in May, according to the survey. "They lost a lot of scale," says Avian's Matt Thornton.

Motorola's ability to gain share is being hampered as rivals including Apple (AAPL) and Research in Motion (RIMM) step up their attack on the market for smartphones, multifeatured handsets that deliver e-mail, productivity applications, and other advanced services. Motorola has yet to deliver AT&T an update to its smartphone, the Q, which debuted in 2007. In roughly the same time frame, Apple has delivered two versions of its popular iPhone.

BlackBerry maker RIM has released two new smartphones with AT&T this year alone. Samsung's recently released Instinct is another device grabbing buyers' attention. Some analysts see Motorola losing further share. Motorola may end up with as little as 6% global market share by yearend, Thornton estimates.

No Guarantee of Spin-Off Success

Greg Brown, who succeeded Ed Zander as Motorola CEO last year, has acknowledged that Motorola needs a fresh lineup of phones—and that the company was working diligently on getting new products to market. Still, Motorola lags competitors in doing just that. Motorola's few releases—such as the Z9 slider—have fallen relatively flat. "Motorola is taking aggressive steps to improve the performance of the mobile devices business," company spokeswoman Jennifer Weyrauch says in an e-mailed statement. "We are working more closely than ever with customers to tailor our innovative products to meet their needs. We're also sharpening our focus on product development to deliver the mobile experiences consumers desire."

Aggressive as those steps may be, they're doing little to assuage the concerns of investors such as Eric Jackson, who until recently held the stock in hopes that recent changes that handed a board seat to financier Carl Icahn would catalyze a turnaround. But Jackson dumped his holding a month ago, despite a 30% loss. "As an activist investor, you have to be ready to find out the situation is worse than you thought," says Jackson, founder of Ironfire Capital. "Then, you've got to be able to cut your losses."