The Microsoft Model Isn't Working for Smartphones

At some point, the MBA courses and business books will recognize that the Microsoft rise to dominance was a rare business event. The then all powerful IBM commissioned Microsoft to build an operating system for its PC, and in doing so endorsed Microsoft-DOS as the solution - and therefore Microsoft as the company all other manufacturers had to work with.

However, Apple only lost the war when Macs were seen as way overpriced compared to PCs and no longer attracted as many new users under Sculley. A better offering can always command a premium price, but if it needs a mass market, that premium price can't be too out of line with the rest of the market.

Microsoft has to show why Windows Mobile is worth more than the $8 to $15 per cellphone cost to manufacturers compared to the open source solutions, Android and Symbian. It has to show the handset makers that there is a guaranteed market of companies and people who want to buy Windows Mobile cellphones.

Now Microsoft has always been about the numbers. Last October, Steve Ballmer talked up the 55 handset makers using Windows Mobile. In January, Todd Peters, VP marketing for the Windows Mobile division, said that the OS would be on fewer devices, and that this would allow Microsoft to be more focused. So those numbers are down.

Microsoft in 4th Place

Last July, Microsoft had to admit that Windows Mobile (WM) missed the self-set target of 20 million units by 2 million. In January at CES, Ballmer trumpeted the 20 million WM handsets sold in 2008. RIM, however, shipped 28 million Blackberries in the year up to 28 Feb, and Apple sold over 40 million iPhones and iPod touches, the OS X mobile platform, in the 23 months up to WWDC.

Windows Mobile, as a platform, is already behind two major competitors in North America - and three worldwide when Nokia is included. With fewer handset makers using it and stronger competition, the license numbers are almost certainly down too.

HTC Hedging Its Bets

In February, in Barcelona at the Mobile World Congress, HTC let drop that it manufactured 80% of Windows Mobile handsets. HTC dressed up WM 6.1 with its own touch screen interface (TouchFLO) so that it looked competitive. Microsoft announced there that it will be partnering with LG, and now HTC is using its interface skills on Android (HTC Hero) as well. HTC will keep manufacturing WM cellphones, but clearly no longer thinks that this is the compelling operating system and thus feels the need to hedge its bets.

Microsoft faces immense problems in trying to grow its share of the smartphone market. Windows Mobile has the Zune problem, as the phones don't have the supporting infrastructure for a truly competitive product. It's no longer enough to offer a phone with lots of functions that you can get to through menus, unless the handset maker charges less.

Today if a smartphone is not easy to use, only the power users even bother to try it, and there are too many good alternatives for consumers. Even in strong Microsoft IT shops, WM is becoming a hard sell. It is far easier for large companies to give out BlackBerries so that staff can get their email instantly, if they want to resist the demands to support iPhone.

Outdated

Windows Mobile needs an up-to-date browser. The latest one is built around Internet Explorer 6, two versions behind. A quick look at the AdMob metrics from May 2008 to May 2009 shows smartphone requests for ads served from their websites going up from 3.2 billion to 8 billion - and the WM share dropping from 16% to 4% compared to Safari (50%), Chrome (4%), and the Prē browser (1%). All of the latter are powered by Apple's open sourced WebKit.

From the way Internet Explorer usage is going down on the desktop, according to Net Applications, it lacks the quality and enthusiastic users to compete on mobiles.

Developers

"Developers, developers, developers" came in one of Steve Ballmer's more famous rants. Those three words may be the sound of doom for Windows Mobile. Windows attracts developers because it's the dominant OS and you can make a living there.

With WM 6.5, Microsoft can finally offer developers a storefront for apps, but it won't be around until September, when Palm's SDK should also be generally available and Apple's app store should be through 1.5 billion downloads. Currently, Windows Marketplace for Mobile takes you to Windows Mobile catalog, which points you to sites like Handango to buy apps.

As Android already offers 5,000 apps, Microsoft needs to persuade the developers of the 20,000 apps Ballmer referred to, to get them to run on 6.5 and persuade WM users to start buying.

My elder daughter downloads apps on her iPod touch several times a week, because plenty are free. Sometimes she buys an app. She is also used to downloading and paying for music, but all she uses her WM cellphone for is calls and texting. Breaking users out of habits is difficult and expensive.

Micropayments and App Stores

Unlike Palm, Microsoft already has a micropayment system in place, but it is designed for Xbox 360 gamers. Microsoft is busy migrating the Zune marketplace there so that music too is available. If Microsoft moves this away from Microsoft Points, which are not equivalent with US dollars or any real world currency, and doesn't require paying in advance, it stands a better chance of making a business that can be combined with selling mobile apps.

However, anything in the iTunes Store plays on an iPhone. It is this simple model that works so well. Microsoft would lose that and risks confusion with any 360 game spinoffs that run on WM but needs to drive traffic to its store.

Leveraging a Monopoly

Another of the problems is strategic. Growing a new market out of its current monopoly with Windows on desktops and laptops will no longer work. Using a laptop or netbook is fine if you have the time to sit down with it, but fewer and fewer want to wait that long between checking email, Facebook, messages, etc., so the smartphone segment of mobile computing will grow and grow. It won't be long before the smartphone is the usual access to the Web and email/messages for many. Then they will only use a laptop or desktop when they need to work on something that needs more screen real estate.

The more time people spend on their smartphone, the more they will be used to the way that OS works, and the less natural Windows will seem. Microsoft's hold on the operating systems market is loosening.

The last serious hope for Microsoft on mobiles is that Intel's ambitions will save it. If Intel produces a chip competitive with ARM, maybe Microsoft can put together a Windows that works on mobiles. Then Microsoft can drive developers to leverage their Windows skills on these mobile computers that run telephone apps.

If Microsoft fails to transition Windows, it will be progressively relegated to the sidelines, in the same way that it marginalized IBM all those years ago.

For more on this subject, see Windows Mobile, the First Sign of Microsoft's Retreat?