Analysis: Reality check for Motorola

Motorola Inc.'s history in the cellular handset market should hold a cautionary lesson for Sanjay Jha but all indications are that the co-CEO of the company is executing a strategy fraught with danger and likely to repeat mistakes made by previous management at the American electronics icon.

One year after joining the company from Qualcomm Corp., Jha has whittled down operating costs in the mobile devices division and recently unveiled the company's flagship product, the Droid, a so-called smartphone that aims to take on Apple Inc.'s hot-selling iPhone and a bunch of other similar devices from the likes of Nokia, Samsung and Sony-Ericsson.

Jha is betting Motorola mobile's future on smartphones supported by other cellular devices he describes as "feature phones," or less technology and software rich products targeted at price conscious customers in the developed countries and consumers in less affluent parts of the world who use phones primarily for basic voice and text communication.

"Smartphone success for us in 2010 will drive, almost singularly, our financial performance in 2010," Jha said during a conference call to discuss the company's third quarter results. "Throughout next year, we will continue to shift our product mix as we focus on addressing the smartphone opportunity and reduce our reliance on feature phones. Our smartphone traction is the quickest driver of our financial performance."

In other words, the Schaumburg, Ill.-company's mobile division's future, as envisaged by Jha, will be determined by how successful it is in selling primarily smartphones. Feature phones will be less prominent in the company's product lineup because "there's not a huge amount of profit pool in feature phones, especially in emerging marketplaces," according to Jha.

Smartphones, on the other hand, have higher average selling prices and have the potential to lift margins at Motorola mobile devices.

This strategy is reminiscent of the Motorola Jha was recruited to rescue. In the earlier part of this decade, Motorola came out with phones like the Razr—and before that the StarTac in 1996—which had runaway success and propelled the company to a 22 percent market share by 2006, raising sales in the mobile division to a record $28.4 billion with shipment of 217 million handsets.

Many analysts since then have blamed Motorola's precipitous drop from the top ranks of the world's handset manufacturers on the company's strategy of occasionally rolling out super-phones like the Razr that initially receive enthusiastic response from consumers—driving up sales temporarily—only to burn out as buyers move on to competing devices from rivals.