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Unless Motorola can keep its costs down while continuing to roll out new, innovative phones that sell at a premium, it could meet the fate of so many other U.S. manufacturers: crushed under the weight of price competition. IBM sold its PC business last December to the Chinese firm Lenovo after failing to make a reasonable profit on ever cheaper PCs. A year after its launch, the price of the Razr has fallen from $500 to $200. Motorola has high hopes for such new products as the Q, a device similar to the BlackBerry that will launch early next year, and the Pebl, a curvy counterpart to the Razr. But its music-playing Rokr, which made its first appearance this fall, has been a disappointment. Meanwhile, competitors like Samsung are introducing their own superslim phones.
Motorola executives maintain that real innovation is not that easy to copy. Looking at the Razr on her conference table, Padmasree Warrior, Motorola's chief technology officer, sees a marvel of mechanical engineering. She points to the body, made of aircraft-quality aluminum, and notes that the keypad keeps its slim profile because the numbers are etched into it, not raised on buttons. She is proudest of something you can't see: a foldable antenna encased in the phone. That idea came from Motorola's designers, who wanted to create the first clamshell without an annoying pull-out antenna. Her engineers worked for months and eventually patented a J-fold design for an antenna that is supple enough to fit around the mouthpiece but can still carry a signal. "That's very hard to do," Warrior says. Motorola Labs, which once worked purely on such esoteric design challenges as those, will be brought into the process much earlier, and Warrior says its strategy will be better aligned with the rest of the company so that even the research engineers are always working on projects that eventually touch the customer.
Even if Motorola can keep its edge in innovation, it will not be able to escape the shifting economics of the mobile-phone industry. Today wireless carriers subsidize the cost of handsets. Thanks to rebates and discounts, some consumers brag about never having paid a cent for their phones. Indirectly, they do. Carriers make up the difference with charges for souped-up services or long-term contracts. "It's the biggest single drag on the carrier's income," says Ping Zhao, a telecom and wireless analyst for New York City--based CreditSights. Now, under pressure to improve their margins, carriers are cutting those subsidies, forcing handsetmakers, which rely on the carriers to sell most of their phones, to bear the cost while keeping retail prices low. Zhao calculates that since the beginning of this year, Cingular, one of Motorola's largest customers, has cut its subsidies to handsetmakers by two-thirds. Those savings accounted for $162 million of Cingular's $215 million in operating profit in the third quarter, and it could soon put pressure on margins at Motorola, which are already lower than Nokia's.