Motorola's credit reduced to junk status

The mobile phone maker's credit rating falls to junk status as the company tries to get its handset business back on track.

Motorola's long-term corporate credit rating was lowered to junk status by Standard & Poor's on Friday as the company continues to suffer from declining mobile handset sales.

The company's rating fell two levels, making it just one notch below investment grade, according to S&P. Moody's Investors Service said earlier this week that it may downgrade Motorola's debt to a level that is just two levels above non-investment grade.

These rating services are downgrading Motorola's credit and debt because the company's mobile handset business has been in serious trouble for more than two years.

And it doesn't look like things will get better for the company anytime soon. In late October, Motorola co-CEO Sanjay Jha told investors he doesn't expect the handset business to get back on its feet until at least early 2010 . The problems are so grave at the company, which reported huge losses for the third quarter, that Motorola is delaying its planned spinoff of the handset division and restructuring the entire business in the hope that it can finally create products that will excite consumers.

The company's No. 1 problem is that it has not had a hit phone since it introduced the ultra-thin Razr in 2004. But even worse than not having a hit phone, the company seems to have entirely missed a significant paradigm shift in the handset market. Consumers are moving away from traditional feature-based cell phones, such as the Razr, and moving toward more sophisticated smartphones, like Apple's iPhone.

In fact, the iPhone surpassed the Razr as the most popular phone in the U.S. for the third quarter, according to NPD Group.

Motorola hasn't ignored the smartphone market entirely, but the handful of Windows Mobile phones it has sold have not fared well. In addition to tough competition from Apple, Motorola faces competition from Research In Motion with the BlackBerry as well as from Nokia, currently the worldwide mobile handset leader.

Compounding Motorola's internal issues is the fact that the world economy is worsening. And outlook for sales of all mobile handsets is expected to be down for the fourth quarter and into 2009. Nokia has lowered handset sale expectations twice in the past month , citing the rising value of the dollar and reduced demand in developing markets for its products. But high-end devices are also in less demand. RIM recently announced that it's fiscal third-quarter sales will be lower than expected in part due to the economy.

 

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