DIGITAL REVOLUTION LEAVES MOTOROLA PLAYING CATCH-UP

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In the early '90s, the cellular flip phone was not only the hip executive's favorite communication tool, but also an essential status symbol. And its creator, Motorola, was the trendsetter.

In the mid-`90s, however, competitors such as Nokia and Ericsson brought digital technology to the U.S., with features like better voice quality and greater privacy. And Motorola began to lose ground in the marketplace.

While the rival entrants hyped newer, superior digital technology, Motorola focused on the small size of its popular Star-TAC phones. It also took its eye off the U.S. market, instead choosing to concentrate on burgeoning European and Asian arenas.

Soon, Motorola's domestic dominance began to slip. Its cellular business, which just two years ago comprised 53% of all wireless phone sales, slid to 41% last year, according to researcher Herschel Shosteck Associates. This year, in the first three months alone, Motorola's handset share of the $25 billion wireless market declined by 7 percentage points, to 34%.

CAUGHT OFF GUARD

What led Motorola down the slippery slope? First, it was caught off guard in the U.S. by a slowdown in demand for cell phones. Then, it lost its edge with consumers by not keeping up with advanced technology, namely digital phones.

What's more, Motorola was hurt by its decision to produce its own chips. Other marketers decided to use chips already developed by manufacturers such as Qualcomm. Motorola's slower production of chips delayed its response time.

The company isn't ready to cede its position in the market just yet. In July, Motorola announced plans to add digital capability to its Star-TAC models and create a new V-series phone. Some of the its digital phones hit store shelves this month.

For now, Motorola doesn't plan to pitch specific phone models in ads. It is instead sticking with the $100 million corporate branding campaign launched earlier this year via McCann-Erickson Worldwide, New York.

Josh Kiem, director of marketing for Motorola's personal communication division, said the division is evaluating whether to incorporate product-specific messages into its advertising-and, if so, what kind and for what products.

Motorola still claims a sizable chunk of the cellular pie, which is growing, albeit at a slower pace than digital.

Through March, Motorola held a 45% share of the cellular segment, though just 8% of the digital business, according to Shosteck. No. 2 Nokia had a modest 20% of cellular, but a whopping 34% of the hot digital segment.

"Motorola is now a little behind the eight ball," said Kent Olson, consultant with Strategis Group. It "lost market share because [it was] late to the game with digital products [in the U.S.].

"In the early days, Motorola was the manufacturer. Nokia, which got into the market much later, is now pulling ahead."

Mr. Kiem acknowledged the company "did not have some products ready" and, therefore, lost ground.

"We underestimated the resources required to have products across all these technologies," Mr. Kiem said.

UNIQUE TECHNOLOGY

Analysts point out that Motorola makes a wide variety of both analog and now digital phones in the U.S., including a Nextel technology-based phone that no other company makes.

Most manufacturers focus on just a few phones; Mr. Kiem said Motorola is considering licensing-type deals to allow other manufacturers to build some of its phones.

The executive explained that cell phones originally came in plain vanilla varieties, but today the wireless industry offers 32 flavors.

RAZZLE-DAZZLE

"We'd like to try vanilla, chocolate, strawberry and a couple of the razzle-dazzle flavors, but the ability for us to make all 32 flavors-well, it's humbling," he said. "But it's a reality we've come to."

And Motorola still has a chance to whip up a few special sundaes as the wireless-phone market continues to grow and mature.

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