Motorola – Buying numbers

The Moto G will be good for units but awful for profits.

• Motorola is taking a leaf out of Nokia’s book but is taking the strategy one step too far.
• Shipments of the Moto X have been very disappointing leaving Motorola with little option other than to give the hardware away.
• With a 4.5”, 329ppi screen, a 1.2Ghz processor and a nice look and feel, the Moto G looks like a $400 device but it is going to be selling for $179.
• Compromises have been made on wireless connectivity (No LTE), camera and audio quality and memory but the price point is so attractive that these are minor considerations.
• At this price Motorola should see some volume which should help in its battle to recover market share that has halved in the last year. (see here).
• The problem is profitability.
• RFM research reveals that margins will be terrible which will do nothing to reverse the $200m of red ink that Motorola prints quarter in, quarter out.
• Teardowns reveal that the device costs around $123 to build.
• Add on 15% wholesale margin and 25% retail margin and the real cost to Motorola is somewhere around $177.
• This is before any expenditure has been made on sales and marketing and before any R&D expenses have been amortised against the device.
• I would expect at least another $20 per device of cost needs to be added to the income statement before a real measure of profitability can be obtained.
• This leaves the device costing $197 but selling for $179 giving an EBIT and cash loss per device of $18 or EBIT margins of negative 10.1%.
• Therefore if the Moto G is a success, I would expect Motorola’s margins to worsen not improve.
• Of course if it were to sell 30m units, this would be a different story but I think that this is very unlikely.
• Nokia’s case is quite different. Firstly, it does not sell the devices at such huge losses and secondly, it is far better at leveraging scale and platform to its advantage.
• Hence, as volumes continue to ramp, I expect Nokia’s margins to gradually improve.
• Why is Google throwing money away by continuing to support Motorola?
• The only rational answer, other than engineering disease (see here), is insurance.
• Samsung owns half the market for Google Android devices and I am convinced that when it is ready, it will take Android and the developers off in its own direction. (see here).
• This will cut Google off from a market that this year will generate $4bn-5bn in advertising revenues.
• Hence, it must maintain a route to market over which it has control in order to mitigate the risk that Samsung cuts it off.
• I think that think that this is a question of when not if and this is the real reason why Google is prepared to squander vast amounts of shareholder money on Motorola.
• This is likely to be the biggest battle in the technology industry over the next 3-5 years.