Motorola's Promising Comeback

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Jha understands the challenge. "We are all anxiously waiting to see how consumers respond," the co-CEO told BusinessWeek in an interview. "We have to support them the right way—get the message out about what the devices can do and position them right, and make sure consumers leave the store with their accounts set up to deliver a really good out-of-box experience. So there is a ton of work left on these products. They are our first steps and we have to deliver on 2010."

Twenty More Models

To pull its handset division out of operating losses—a $183 million operating loss on sales of $1.7 billion in the third quarter—Motorola will need to pump out a lot more well-designed products and sell 10 million smartphones a year, estimates Tavis McCourt, an analyst with Morgan Keegan & Co. While that may not seem like much, considering the business shipped 13.6 million phones in the third quarter, the vast majority of them are basic-feature phones. Motorola expects to unveil 20 more smartphone models in 2010, including with AT&T (T), Jha tells BusinessWeek. The company is also looking to expand its presence in Japan, Europe, and China.

Motorola also faces the risk of losing its economies of scale with component suppliers and carriers. The company may, sometime next year, wish to exit its unprofitable feature-phone business altogether, McCourt believes. If that happens, that would further reduce Motorola's production volumes and market share—and its ability to pressure its suppliers on prices. At the end of the third quarter, the company held 4.7% of the global market, down from 5.4% in the prior quarter and 8% share in the third quarter of 2008, estimates Neil Mawston, a director at consultant Strategy Analytics. "They are at a record low," he says. And its share could slip further in 2010, to as little as 4%, he estimates.

That drop doesn't worry most analysts, as Motorola may have to let go of unprofitable sales to return to making money. An average smartphone generates three to four times the revenue of a feature phone, and offers more than double the profits, with margins in the low 30% range, says McKechnie. So as Motorola's product mix becomes more heavily weighted toward smartphones, its financial performance should improve as well. Jha guided for at least one break-even quarter for the division next year. And many analysts believe that's conservative: "He is giving himself an easy hurdle to jump over," McCourt says.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore. Crockett is deputy manager of BusinessWeek's Chicago bureau.

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