After fumbling around in the feature phone business for the past couple of years, Motorola Inc. (NYSE:MOT) is now struggling with something else — success. Its Droid phone, which uses the Android operating system from Google, Inc. (NASDAQ:GOOG), would be selling even better were it not for supply chain constraints that are bedeviling all smartphone makers.

Sprint Nextel Corp. (NYSE:S), which overestimated its first weekend sales of the new EVO 4G smartphone by a factor of three, still had record sales for the new device from Taiwan’s HTC Corp. Apple Inc. (NASDAQ:AAPL) introduced its new 4G iPhone earlier this week to a kind of ho-hum response from observers who expect the company to break new ground every time Steve Jobs appears on a stage.

Still, smartphones are selling so well for everyone, except perhaps Palm Inc. (NYSE:PALM), that parts are hard to get. Verizon Wireless, which sells both the Motorola Droid and the HTC Droid Incredible phones, has said it could would sell more of devices if it could build them . As usual, screens are the likely suspect in the parts shortage.

Also sure to bolster Motorola shares is today’s announcement that the company has reached an agreement with Research in Motion Ltd. (NASDAQ:RIMM) that will end all existing litigation between the two companies. Financial terms were not disclosed other than that the deal includes an upfront payment by RIM and future royalty payments to Motorola. The companies also agree to cross-license some patent rights related to industry standards and technologies, and to transfer unspecified patents to each other.

Motorola’s success with the Droid, even in the face of  competition from the Droid Incredible, has got to make the company feel better after a steep 10-year drop in its share price from nearly $60/share to around $7/share today.

Just this past April Motorola fell from among the top five in mobile phone sales according to IDC, getting booted out by RIM. The rankings are based on total sales of both feature phones and smartphones, so RIM’s achievement was especially impressive because it sells only BlackBerry smartphones. But then Motorola really didn’t have a smartphone either.

Verizon Wireless is planning to add up to four more Motorola Android-based smartphones to its lineup by the end of the year featuring a front-facing camera that could be used for mobile video conferencing. Verizon plans to launch two new phones in July and has already agreed to spend serious money promoting the Motorola phones. Verizon Wireless reportedly spent $100 million promoting the Droid.

Motorola has a long way to go to return to the heady days of $60 share prices. But the company appears to have pointed itself in the right direction.

Paul Ausick

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