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Can music lift Motorola?
Motorola unveils music phones in hopes that it can make up some lost market share.
March 15, 2004: 1:58 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - Next week at the Cellular Telecommunications & Internet Association conference in Atlanta -- the largest annual cell-phone confab in the United States -- the Motorola booth likely will be rocking as the company puts the spotlight on its three new music-minded handsets.

Its low-end device, the C650, has the ability to play MP3 ringtones (instead of tinny facsimiles of songs) and also offers camera functionality.

The higher-end units, the E398 and E680, include the camera but also function as MP3 players, albeit with far less storage capacity than even the smallest iPod. These models feature swappable SanDisk storage cards, capable of holding about an hour's worth of music. Users can upgrade their storage by purchasing cards that carry as much as 1 gigabyte, or roughly 17 hours of music.

Multimedia phone market

The devices, expected to appear in the United States starting next quarter, represent Motorola's (MOT: Research, Estimates) belated first effort to serve the growing market for multimedia phones.

"It's part of our vision for the device formerly known as the cell phone," says Rob Shaddoek, a vice president with Motorola. "By integrating music on the cell phone, we're taking the first step on that journey."

Unfortunately for Motorola, it's likely to be a bumpy journey. The company has been slow to capitalize on phone trends and has lost its edge to competitors like Nokia.

"Motorola has always had problems with speed to market," says IDC analyst Kevin Burden. "They haven't done a good job with refreshing their product lines."

The most striking recent example was the supply trouble that caused Motorola to miss a critical holiday ship time for its camera phones.

And there are hints of more trouble: Last week AT&T Wireless (AWE: Research, Estimates) announced it was delaying its rollout of Motorola camera phones until April, telling Reuters it "needed to do some further testing" on the devices.

Looking for improvements

It's been a rough month thus far for the company. Besides the AT&T Wireless announcement, Gartner just released its final numbers for the 2003 handset market last week, and the results weren't good for Motorola.

According to Gartner, the overall handset market grew by a healthy 21 percent. Motorola saw its share of that market decline, however, dropping to 14.5 from 16.9 percent. What's more, since March 1, the company's stock has dropped from $18.86 to around $17. The stock's price is still up roughly 13 percent for the year, however.

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The company hopes to reverse its recent troubles with the music-phone rollouts, and these rollouts should give investors their first real glimpse of the operational abilities of new CEO Ed Zander (formerly president of Sun Microsystems). Zander, who joined the company in January, was known for his operational abilities at Sun, and analysts and investors alike are eager for him to apply his prowess to the struggling Motorola.

The music phones are one of the first major new product launches under his watch, and although all the analysts I spoke with predicted slower consumer adoption than for camera phones, the potential exists for these units to take off. If Motorola can improve its operations, it could see its market share increase in the long term as a result of these phones.

"[The potential for music phones] is similar to camera phones," says Phil Leigh, an analyst with Inside Digital Media. "People didn't think they needed a camera phone, but once they saw it, they liked it. Music in the phone is the wave of the future, but it will start slowly."

As cell-phone memory capacity increases and the price drops, Leigh argues, why would people want to carry around an iPod and a cell phone when they could use the phone for both?

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I think Leigh's vision will come to pass, but Motorola investors should not hold their collective breath. To maintain its No. 2 position in the ever-changing cell-phone market, Motorola will need to achieve operational excellence -- an attribute that's thus far eluded the company.

With Zander onboard, however, that could change. Rather than expect these music phones to provide an immediate boost for the company's fortunes, investors should view them as hints of what might yet come.


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