How Motorola's Xoom Tablet Launch Affects Investors

Includes: GOOG
by: Stephen Frankola

After a long wait, filled with anticipation, excitement, and a few scares, the Motorola (NYSE:MMI) Xoom tablet is finally on sale in the United States. I have written about some of the more important news items in the tablet's pre-launch history, and I'll address some of the most recent and noteworthy pieces of news in this article while detailing the specifics of the tablet's launch.


Motorola Mobility (MMI) and Google (NASDAQ:GOOG) teamed in creating the Xoom, the first tablet computer that comes with Google's Android 3.0 operating system, Honeycomb, which is the first operating system built specifically for tablets. Google has been developing different versions of the Android operating system for years, though all before Honeycomb had been tailored to mobile phones. Motorola is recognized as a major smartphone manufacturer; it's Droid series (available through Verizon (NYSE:VZ)) was how many consumers were introduced to Android.


The Xoom tablet is not an iPad clone; Motorola, for better or worse, definitely tried to differentiate itself with a meaningfully-different hardware and software package. At first glass, the screen size and dimensions are different than the iPad's - the Xoom sports a 10.1 inch display, which is bigger than the iPad's, and its widescreen orientation allows it to show video in a more natural way.

The Xoom is powered by a dual-core Tegra 2 processor and contains a gigabyte of RAM, 32GB of storage, and other very capable components. Importantly, the initial model that's now on sale is equipped with an antenna that runs on Verizon's (VZ) 3g network along with WiFi capabilities, and in contrast to what the world had thought prior to today, customers do NOT have to purchase a data plan or activate anything at the time of purchase.

Buyers of this 3g-enabled Xoom will get a free upgrade later this year when Verizon launches its LTE 4g network, and consumers who aren't interested in using cellular data should be able to buy a WiFi-only Xoom in the near future for about $600. The current Xoom retails for $800.

Where and When

The Xoom was launched at Best Buy (NYSE:BBY) and Verizon stores. Best Buy began taking preorders earlier this week and units became available in store to pre-orders and the general public on Thursday, February 24th. Verizon is subsidizing the Xoom by $200 for people that agree to a 2-year data package, though customers can opt for a month-by-month plan if they are willing to forfeit the subsidy.

Why Consumers Should Care About the Xoom

The Xoom is many things to many people; to some, it's the Chosen Tablet, sent to free the world from the oppression of the iPad. To others, it's a poorly-executed great idea; lots of consumers have minor gripes about the tablet, whether it be about the relatively-expensive price (when compared to the base-model $500 iPad), lack of certain features (limited Flash support at launch, not currently running on 4G wireless network) or some other issues (Honeycomb being, as all Android operating systems are, still a work in progress). Many other consumers are interested in the deluge of tablets that will hit the marketplace during the rest of the year - Apple's (NASDAQ:AAPL) iPad 2, HP's (NYSE:HPQ) Touchpad, the Blackberry (RIMM) Playbook, and many other Android offerings. Other people just think tablets are pointless.

But, overall, I think that Motorola did a pretty good job with the Xoom. They provided consumers with a lot of features that they had been asking for - a smaller bezel, more powerful hardware, Android, and at the last minute, no need to pay to activate the cellular data innards. It's not perfect, and it certainly not all things to all people, but I think that Motorola did a good enough job that plenty of people salivating for an Android tablet will buy the Xoom.

Best of all for consumers, Motorola set a pretty high bar, so manufacturers launching tablets in three, six, or 12 months will make sure the products are pretty spectacular because a serious competitor to the iPad now exists.

Why Shareholders Should Care About the Xoom

The Xoom has the ability to meaningfully affect Motorola Mobility. The company reported 2010 revenue of $11.5 billion; the "mobile devices" product segment, which includes smartphones (and will include the Xoom) was responsible for 68% of the company's revenue. Motorola Mobility still makes plenty of "dumbphones" too, and on a unit basis, only 37% of phones sold by MMI in 2010 were smartphones.

However, as is true in the entire mobile phone industry, MMI's sales mix is becoming more smartphone-oriented, which is described in the annual report as having a favorable impact on average unit selling price and gross margin. I would expect that the Xoom will have a similar, positive effect on gross margins, which were 25.9% for the entire company during 2010.

Estimating the sales potential of the Xoom is difficult, but the environment of the mobile computing marketplace is promising. In their 2010 annual report, MMI predicts that the tablet segment will "more than double" in 2011. In the fourth quarter of 2010, global tablet sales were estimated to be about 10 million units. In 2010's fourth quarter, the iPad dominated the market with a 75% share, but Android tablets had already claimed 22% of the market despite not running Honeycomb, Google's tablet-specific operating system. Motorola seems to believe that there will be 35-50 million tablets sold in 2011, and if Android's 26% share of the smartphone market is a reasonable benchmark, ten million Android tablets seems like a fair baseline, if not low, sales estimate.

Due to the technological capabilities and positive reception of the Xoom and its first-mover advantage, I think that that Motorola can sell 3-5 million Xooms this year; at the high end of that range, the Xoom would boost company revenue by billions of dollars and potentially increase gross margin by almost a billion dollars. Analysts seem to be baking in some of these expectations already, as the average analyst is predicting $13.3 billion of revenue and about $300 million in net income for 2011. A very successful launch (coupled with success in the rest of MMI's product lines) seems like it could lead to company performance that exceeds current expectations.

Lastly and less tangibly, the Xoom hmay help convert technology consumers to the church of Motorola. Now that the Atrix 4G smartphone has launched at AT&T (NYSE:T), Motorola has smartphone offerings at both Verizon and ATT; if Xoom buyers like the product, they'll be more likely to buy a Motorola smartphone. The Xoom is clearly a great addition to Motorola's high-tech product portfolio, and hopefully Motorola can sustain the excitement and positive momentum that the Xoom has created.

Disclosure: I am long MMI.

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