Windows Mobile, the First Sign of Microsoft's Retreat?

In the last quarter, the iPhone and Research in Motion (maker of the Blackberry) overtook Windows Mobile, while Nokia remains comfortably in first place in smartphones. At the end of the June quarter, Microsoft had to admit that Windows Mobile missed it self-set target of 20 million by 2 million.

In today's mobile market, Microsoft is already outpowered by Apple's financial returns. Last quarter Apple sold 6.9 million iPhones at an average price of over $650. With a margin of over 50% (analyst Charles Wolf of Needham & Co), this generates gross profit of over $2.2 billion. In the year up to June 30, Microsoft sold 18 million Windows Mobile licenses for $8-15 per license (Strategy Analytics) for a maximum of $270 million. With RIM reporting gross profit of $1.3 billion and Nokia selling 15.5 million units (mainly N series and E series) in their respective last quarters, Microsoft is falling more and more behind just as the market is expanding.*

Microsoft Falling Behind

Windows Mobile 7 has been delayed. HTC, the Android G1 manufacturer, expected to release a WM7 handset in Q1 2008. Now the next release will, in the words of longtime Microsoft follower Paul Thurrott, "allow smart phones to render Web pages like they did almost a decade ago on traditional PCs". The interim version after that looks as though it will ship in late 2009 (ZDNet's Mary Jo Foley). It looks like too little too late. The iPhone will be through the annual update by then, and the App Store will be closing in on or already past 1 billion downloads.

The situation for Motorola looks dire. Motorola is committed to a Windows Mobile-Android strategy so it don't have to develop its own OS, but it won't have an Android handset until late 2009.

There was little mention of Windows Mobile at the recently finished Professional Developers Conference 2008. Only one preconference session was held. A session on "Location, Location, Location" was canceled (or maybe no-one could find it). The focus was on the Microsoft blue sky cloud computing initiative - Azure - and the Vista replacement, Windows 7.

Lack of Vision

Microsoft is suffering from lack of vision at the top. Sales guys are trained to focus on the next quarter. Nobody seems to be looking at what the necessary pieces are to create the next platform. Yes, the cloud will be part of it, but what devices will communicate with it? For most people, much of the time that device will be an in the pocket iPhone type computer, and if that is an iPhone, Android, or Nokia, how attractive will Azure be?

A major part of the attraction of Windows is the wide range of third-party software. Microsoft needs to persuade these developers that Azure is their future. The problem is that many of the major developers - Oracle, IBM (Lotus Notes), Google, Apple etc. - are Microsoft rivals and will have nothing to do with Azure if at all possible.

For the smaller developers, the failure of Plays for Sure and Zune could always be dismissed - the usual three iterations to get it right, something in the consumer market that Microsoft doesn't do well, Apple had too big a lead, etc. However, a highly visible failure of Windows Mobile, when Ballmer has talked up Windows Mobile being used by 55 handset makers and available thru 175 operators, will affect the takeup of Microsoft's new cloud initiative.

Business Uses Has Driven the Home Market

The power of Microsoft in the home market largely came from being the dominant power in the business world. If a system is easy enough to use at work, why use something different when you go home?

The ease with which Apple has taken advantage of the misstep with Vista comes from the lack of Vista adoption in business. If the business you work in doesn't think Vista is a worthwhile upgrade, why not look at the alternatives?

Changing operating systems is expensive for businesses. This is why Windows NT is still widely used in finance - and Microsoft still supports it. For Windows 7 to gain serious traction, it needs to be cheap and easy and advantageous to deploy across the business. If it fails to gain that traction, the divide between home and work will widen, and Apple will pick up even more market share.

In a year mobile phones sell 4-5 times as many as the total number of PCs. For the time being, many of these phones are simple and can't use the Internet effectively, if at all. However, the artificial distinction between voice, texts, email, and the Internet will progressively disappear - these are all data, and in the future we will all buy bandwidth with perhaps different prices for mobile/WiFi and fixed line (fiber, etc.).

Microsoft is losing market share in several areas, and Apple needs competition. Otherwise, when Jobs leaves, it could fall back to the old habits of "soak the user base" that Sculley and others fostered. It is becoming increasingly clear that Microsoft won't be that competition.

* Figures in paragraph 2 come from Nokia, Apple, and RIM's 10Qs (quarter ends are not the same) and Microsoft's 10K for year end 30  June 2008.