Blog Post

It’s Too Late for Microsoft To Build Its Own Handset

Microsoft (s msft) should be making its own handsets, says Peter Bright of Ars Technica. Licensing an operating system in the smartphone space doesn’t earn much money, so I understand Bright’s point. But the window of opportunity for Microsoft to build its own phone closed down the minute it said it would license Windows Phone 7 to hardware partners. The time to make the break from licensing a mobile OS and start making hardware has passed Microsoft by – at least until the next time the company decides to reinvent its place in the smartphone market, and even then it would bring challenges.

Bright’s description of the financial aspect of this situation I do agree with:

There just isn’t a whole lot of money in licensing a phone operating system like this. We don’t know, because the information isn’t public, just how much a Windows Phone 7 license will cost an OEM, but it’s generally assumed to be a few tens of dollars. Even assuming $30 per unit (which from what I can tell is on the high side), Microsoft’s partners would have to ship a whopping 30 million handsets to make this a billion-dollar business.

The first question that comes to mind then is: why is it a good idea for Google (s goog) to give away Android and a bad idea for Microsoft to charge a license fee? The difference is in the business model. Google wants to keep its core, lucrative business in front of every eyeball it can with search and advertising. By being the dominant search engine, Google gains key information on search preferences or how consumers think when they use the web to find information. And of course, those preferences are paired with contextually relevant advertisements, where Google earns the bulk of its revenue, which it then shares with handset makers who use Android. Simply put: Google doesn’t need to charge for Android and if it did charge, that would add a barrier to adoption by hardware partners.

On the other hand, Microsoft does have to charge for its platform because it only has a small segment of the mobile search market and therefore earns far less money overall on mobile advertising. And by “small segment,” I’m probably understating the difference in both search and mobile search between Microsoft and Google. TechCrunch points out a Pingdom chart comprised of data from StatCounter, showing that Google owns more than 98 percent of the mobile search market. Microsoft’s Bing is a blip on the mobile map, not even registering a half a percent.

So based on the business model and consumer usage, Microsoft isn’t well placed to generate the kind of mobile search revenues of Google. The company has to charge a Windows Phone 7 licensing fee in order to get any real return from the platform. Other revenue opportunities are tied to Microsoft services – which will be heavily integrated into the new handsets — but income from those are variable. The only fixed income from Windows Phone 7 is an up-front fee.

The alternative is what Bright suggests: Microsoft goes it alone and builds handsets of its own and thus controls the entire experience of hardware and software, just as Apple (s aapl) does. Although Microsoft is a software company, it has broken out of the mold with the Zune and Xbox line of hardware. But at this point, it’s just too late for mobile. With Windows Phone 7, Microsoft has lined up hardware partners such as Dell (s dell), Asus, LG, HTC, and Samsung. There’s no way Microsoft can cut these companies off at the knees now and go it alone by building a Microsoft handset.

Perhaps another opportunity will appear when Microsoft can create its own phone, but even then, the company is at risk. Four of the five handset partners are also companies that build Microsoft Windows computers. If Microsoft cuts them out of the loop in mobiles, it won’t sit well with them from a notebook and desktop standpoint. Granted, I doubt that any of these partners would completely jump ship to Ubuntu, but such a situation would raise tensions between Microsoft and its partners.

And taking the theoretical one step further by assuming that Microsoft ever does build its own phone, how would such a beast compete in the market? From a perception standpoint, I’m not sold that consumers would embrace the Microsoft brand on a handset. Microsoft’s Zune hasn’t staged much competition against the iPod juggernaut even though Zune is a compelling device, as is the Zune Pass subscription service. Microsoft’s recent Kin debacle may be more attributable to internal politics and lengthy delays, but even had the device arrived on time, it wasn’t groundbreaking from a hardware perspective. Perhaps Microsoft should just ride the mobile platform licensing train down the tracks and leave it at that.

Related research on GigaOM Pro (sub. req’d):

To Win In the Mobile Market, Focus On Consumers

24 Responses to “It’s Too Late for Microsoft To Build Its Own Handset”

  1. Several comments in this thread referring to perceptions of Microsoft’s past/current failures with no data to back them up. Worthy opinions, but they seem questionable positions from actual experience (survey an appropriate sample size of owners of both an Xbox 360 and a PS3 as to which one they spend most of their time online with; I would believe we would find MS to not be such a failure in reality).

    I’ve flitted around across every smartphone OS over the last 5 years, except Symbian (iPhone OS, Blackberry OS, WinMo 6, android, WebOS). I have personally not found any of them to be totally compelling in the business space other than Microsoft powered devices. The iPhone was a great social phone, my current Droid is a good everyday smartphone (does most things well, not a lot great, other than Google service integration), and of course the BB kills for email. WebOS was a nice GUI overall, hampered by the performance of HW (I was on a Sprint Pre).

    I am not sure what the right strategy is for MS to follow. I do feel that the summary dismissal of a company with its vast resources as pre-destined to failure is perhaps premature. As a business user, I have not found a better business smartphone OS that I would prefer over a Windows mobile variant. I use my phone throughout the workday for office apps, not just email, and Documents-to-Go is just not as tightly integrated. I do not believe that MS will be a juggernaut in this space. But I do believe that they have the resources to gain a foothold, the same as they did when they entered the PDA space against Palm, and when they entered the video game space against Sony.

  2. this is a bit off topic but somewhat linked to this. one of the things which can survive wp7 is to make cross platform app developoment with webos, meego with Qt. Silverlight alone can not save wp7.

  3. Great article Kevin.

    I am completely on board with your assessment. I understand the relationship that Microsoft must maintain with its OEMs. I am of the mindset that at this late stage of the game — Microsoft should take the risk and build their own smartphone platform.

    They must redefine — the user experience. They should integrate (exclusively) with their other properties like Kinect, XBOX 360 and the SkyDrive. The creation of a massively ubiquitous entertainment platform is what Microsoft needs to focus on — Windows Phone 7 could be the hub of that platform.

    The gloves need come off.

    • Google would love that. All the OEMs will then concentrate on Android and possibly Chrome OS as well undermining windows in the process. As it is OEMs are mighty pissed off that microsoft built its own zune and own XBox ditching OEMs in the process. You always got to remember that it is the software+services that wins the day, not hardware which is a commodity, technology industry is unlike any other industry.

  4. coldbrew

    I’m surprised that neither this article nor the Ars’ article mentioned MS’s recent licensing of the ARM architecture. That fact seems to indicate a more vertically integrated strategy.

    I’m not sure which way I believe MS should go-to-market, but alienating partners in their ecosystem seems very risky.

    Technology is now more user/ consumer driven than during the rise of the desktop, and while I’m not sure of all the implications that arise from that, it sure seems highly relevant.

  5. Don’t forget the “Three Screens” strategy Microsoft has been talking about for awhile now. If they do well on the mobile side and have a compelling integration between mobile, desktop PCs, and the XBox in the living room, that mobile success helps fortify the other products’ positions. To Microsoft, that would probably be far more valuable than mobile licensing fees or ad revenue.

  6. Kevin I have to disagree with you on this one, although I agree with the argment that Nokia should just give up on it’s crapnux system.

    You may not realize how big will the app platforms become. In 5 years, they will take over the netbook market. And i wouldn’t be surprised if they take over the non-gamng PC market in 10-15 years. Microsoft has no choice but to throw everything it’s got to invest in it’s own smart phone/touch platform.

  7. It’s true that there isn’t that much money for MS in this space with licensing the Wp7 OS. But “winning” in this space for Microsoft is different than for Apple or Google. Microsoft succeeds if it takes away sales from Apple/Google, thus drying up their cash. Apple/Google badly need the phone revenue while Microsoft makes so much money elsewhere that the phone space is merely a strategic response, but one that they absoutely must win. Even if all the OEMs sell 30mil phones, 1bil isn’t that much money for Microsoft. But if the OEMs sell 30mil or more then Apple/Google will make little money, even if they sell the whole package. Microsoft wins. Actually, the consumer wins because they’ll have great technology and wp7 will force prices way down.

    • Exactly WP7 is defensive. They need to give away their OS for cheap or even free. They can think of monetization later, they should do a google. Build up a huge base first who love your product.

  8. Microsoft needs to succeed in mobile to support its Office and Exchange properties. They might say Bing as well, but it’s hard to make the case for supporting something you’ll likely always lose money at.

    Google and Apple will work to undermine Microsoft (note the only partial Exchange sync support from both of them), and RIM (which has provided huge support to the Exchange franchise) is looking a bit tired.

    In theory, Microsoft should be able to do the best job of supporting Office and Exchange on a mobile device. In theory, this should make them want to build their own phones – one less set of knuckleheads in between Microsoft’s product objectives and the end user.

    We’d probably all bet against their doing it well, but making their own phones still represents Microsoft’s best option to defend Office and Exchange against Google and Apple.

    • The Mobile Developer

      Yes that would be crazy to the max and never be allowed by EU regulators and American Anti-trust issues. Besides I believe Nokia despises Microsoft culture and management. A definite culture mismatch and MS would destroy Nokia from within. Nokia is primarily an Engineering company top-to-bottom with Professional Engineers whereas Microsoft is mostly a marketing and sales company that has very poor engineering track record having no innovation at all. I mean everyone and their brother knows that Microsoft copied or stole virtually every software product the company has ever sold. Get real bubba a Nokia alliance/merger/takeover would be utter madness even if the government would allow it.

      • That may be the best comment I’ve heard for why Nokia is where it is. Both Apple and Google have focused on what users want to accomplish. They certainly have different approaches at the tangible end of the spectrum, with Google going with a minimal, data-centric approach, and Apple considering the entire experience. But, they share a deep consideration for the user.

        Nokia, like Microsoft, is approaching the problem from the technology end of the spectrum. One could argue that RIM is in this camp as well. These ships need to be turned fast!

  9. Kevin,
    While I agree that Kin was totally a pointless move by Microsoft, I do not agree with the analysis and words expressed in your article about Windows Phone 7. Yes, it may not have a few features (e.g. copy-paste) as yet – but these certainly don’t reduce the excitement created by the amazing integration of Office, Email, Calendar, Bing Maps (which in my opinion is far superior than Google’s maps – check out the Silverlight version online), and the fact that Silverlight will be used to build Windows Phone 7 apps. The Zune integration and Photo sharing capabilities with social networks is just perfect! Further, games on this device from XBox Live and other developers are too good to ignore. As far as search goes, I think Bing is getting as good as Google. Again, in some cases Google as been copying Bing search (Image search for example). I would not be as negative as you about this phone. This is not a KIN!

    • The Mobile Developer

      I disagree. In fact WinPho7 IS in fact the Son Of KIN for sure. They share similar UI and backend services and they are most definitely related. Even MS says they will use the “good” parts of KIN in Phone7.

      As for Bing Maps you have to be joking like mad. Google Maps totally destroys Bing. I believe Silverlight is complete proprietary crapware so it is a total non-starter in the Application development world.

      My prediction: Windows Phone 7 = FAIL

      So building their own handset:

      Windows Phone 7 + Microsoft Hardware = DOUBLE FAIL

      BTW, XBox still hasn’t made an overall profit for Microsoft. Remember MS spent billions to develop XBox then cost them billions to fix RRD problems and they still lose money on each console they sell, Xbox Live makes money but not enough to offset the platforms total losses so:
      XBOX = FAIL and of course everybody already know that Zune was an epic failure capturing almost no marketshare. Zune = FAIL

  10. Harry Hawk

    Microsoft with many of it’s technology offers plays the features game like car makers who restrict different feature sets into bundles. You can’t get a stereo unless you get the leather seats… Look at all the different vers. of Win 7 available for example.

    One place MS is doing well economically speaking is in the gaming market where they deliver a product that really delivers what consumers what (with out the bundle feature restriction structure).

    If MS wants to be successful, it has to deliver to people things they want without all the bundle limits. MS has to decide they want to be successful and then decide that want to listen to customers and they want to deliver a top value product (and the actually do it without worry about lock in, feature sets, etc.).

    • Caroline

      “One place MS is doing well economically speaking is in the gaming market where they deliver a product that really delivers what consumers what”

      What the hell are you babbling about?

      The biggest piece of crap console in the history of the gaming market?

      A console with a 66 percent hardware defect rate?

      A console that is dead in 2 out of the 3 major console markets?

      A console with a garbage 50 dollar a year laggy P2P based online gaming network?

      A console with graphics hardware so poorly designed that it is the only console in history to be forced to rely on hyping multiplatform titles instead of custom graphically amazing exclusives.

      Yeah, the 8 billion dollar 8 year long Xbox fiasco is working out ‘well’ for Microsoft…

  11. Sandra K

    Microsoft’s doomed strategy.

    Windows Phone 7 is not “feature complete” (Microsoft’s own words). It is therefore uncompetitive against the 2 dominant phone app platforms, Android and iPhone.

    If Windows Phone 7 doesn’t hit the ground running on release (which it won’t), the OEMs won’t come back for more. The only way Microsoft can stay in the phone market long-term is to make its own handset.

    In the end, Windows Phone 7 is doomed whichever way it goes, as Microsoft is now too far behind to catch up. Even Microsoft now acknowledges that Windows Phone 7 would be uncompetitive in a slate form factor (hence Microsoft moving to other OSes in that market).

  12. This analysis undoubtedly has some truth to it but it is hard to be sure how much when your big bold chart is so clearly inaccurate. Given that the regular search market for Google is known to be around 70% but the chart lists it at 90.57%, how can we take your mobile search numbers seriously?

      • I would agree with Alan. The global non-mobile statistic is clearly incorrect due to StatCounters inability to sample China’s market. That is about ~20% of the total global population measured in a 395,273,361 sample by StatCounter. Using a sample of 0.041% to measure 1/5 of the worlds population is highly inaccurate.