Motorola’s (MOT) plan to spin-off its handset unit was set back further by the news that its domestic market share fell to 21% in the second quarter compared to 32% for the same period last year. The company’s sales in the US have been the one bright spot for its imploding cell phone operation.

In the June reporting period, Motorola’s handset revenue fell 22% to $3.33 billion. The unit’s operating loss hit $346 million compared to a deficit of $332 million last year. MOT shipped 28.1 million portable phones during the three months down from 35.5 million in the same quarter last year.

In the second quarter of 2006, Motorola’s global handset market share peaked at 22%, putting it in second place behind Nokia (NOK). In that period, revenue from the mobile phone unit rose 46% to $7.14 billion. Operating income moved up from $493 million the year before to $799 million. Motorola shipped 51.9 million handsets in the quarter, up 53% from 33.9 million in Q2 2005.

Over the course of two years, Motorola’s portable phone business has lost over half of its revenue. Its share of the global market is probably no better than 13%.

Motorola’s plan is to separate its handset business from the rest of the company. Shareholders will hold ownership in both that new company and stock in the balance of the firm which is in the set-top box and enterprise communications business. It is hard to imagine why anyone would want to keep shares in the mobile phone company.

The handset operation may have no value at all. With losses that are running at a rate of almost $1.4 billion a year, the new company would need to be given at least $3 billion are part of the separation. There is no indication that the sum would be adequate if the operation cannot be turned around quickly.

Motorola’s handset business faces the problem that it does not have any models that are selling particularly well. The Razr carried sales in 2006. Competition has increased since then. The company is up against the traditional large operators which include Nokia, Samsung, LG,and Sony Ericsson, and a new class of smartphone firms including Apple (AAPL) and RIM (RIMM).

The odds are relatively high that Motorola will continue to have falling handset sales. It is not hard to imagine that it would sell only 100 million units over the next four quarters. That makes turning a profit almost impossible.

Motorola has another option. It could close its handset business completely and license its brand name and current product line to another company. Motorola still has brand equity. It was the first company in the world to market a cellular phone. The most likely candidates to take on this kind of arrangement are Samsung and LG which could use the additional share to move closer to Nokia which now has 40% of the market .

Motorola’s current yield per handset is about $100. If the company can get a license fee of $5 a phone, its income from a license would be about $500 million a year and most of that would go to operating profits. This would not get operating income back to where it was in 2006, but it would stop the bleeding and give the company a reliable flow of cash.

Motorola’s share price is not going back to $26 where it traded less than two years ago. But, it could move up from its current $10 level to near $15 where it traded at the beginning of 2008. Shareholders would end up with a smaller company but one which would be highly profitable.

Douglas A. McIntyre 

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