By Dan Briody, Thu Mar 06 13:30:00 GMT 2003
After years of getting its feet wet, the software Goliath looks ready to make mayhem in the mobile markets.
Remember what a joke it was when Microsoft decided to enter the burgeoning handheld computer market about 5 years ago? They had absolutely no experience in the market, and their operating system for personal digital assistants (PDAs), then called Windows CE, was widely ridiculed throughout the industry for being too bulky. Not to mention that Palm was an established and respected incumbent with over 70 percent of market share. Microsoft didn't stand a chance, right?
Wrong. Microsoft may have stumbled early in entering the mobile market, but like usual, it is finishing strong. In the third quarter of 2002, Microsoft's Pocket PC operating system, renamed two years ago, had 30 percent of the market sewn up, up from just 16 percent the year before. And Palm's share of the market has been steadily slipping, coming in at 48 percent, according to Dataquest, a U.S.-based market research firm. It's known as the "Microsoft Effect," the sinking feeling a market leader gets when it learns Microsoft is planning to enter its market. And now, the big, bad, boys from Redmond have their sites set on the smart phone market. This time, we'd better take them seriously.
All indications are that Microsoft is going to come after the nascent cell phone operating system with guns blazing. Their product, Windows Powered Smartphone, is starting to gain early traction and Microsoft is prepared to do what it takes to be a player in a market they believe is going to be crucial to their overall strategy. But they've had some early struggles, and breaking into a new market is always treacherous. But given enough time and money, Microsoft has a nasty habit of bending entire markets to their will. Could we be looking at a Microsoft mobile monopoly? God help us.
Cell Phones: The New PC?
For years, Microsoft's motto has been "A PC on every desktop." For the first time in the company's history that motto changed two years ago. The new motto is "Anytime, anywhere, any device." The shift in thinking at the world's largest software company reflects its new understanding that the PC is not the answer to every question, and that mobility and communications are increasing in importance.
The company was taking its newly formed mobility division so seriously in fact, that they put chief executive Steve Ballmer in charge of it for 9 months last year while they got the ship in order. And why wouldn't they be serious? While the worldwide PDA market only accounts for about 15 million shipments a year, the cell phone market is expected to be about 700 million units annually in the next 5 years. Analysts expect the majority of those devices to run intelligent operating systems, like the Symbian OS, or Microsoft's Smartphone OS. And that is a huge opportunity.
"This is definitely one of the priority businesses in the company with a huge upside," explains Ed Suwanjindar, a product manager in the mobile devices division at Microsoft. "The smartphone represents the largest volume opportunity down the road. These devices are totally critical to the extended vision of the company."
What About the Software?
There's an old joke in the computer industry that goes like this: Question: Who does Microsoft's beta testing? Answer: You do. The joke pokes fun at Microsoft's track record of releasing software products into the market place that aren't quite ready for prime time. But often, the quality of the software has little impact on its success.
To that end, Microsoft certainly has the means to compete in the smartphone business. For starters, the company has more than $40 billion in cash sitting on its balance sheet, a war chest that can be used at any time to buy market share through advertising and discounts. While they may not make gobs of money that way, having their operating system on cell phones ultimately will help the company sell more of its established back office programs, like Outlook and Office.
Thus far, Microsoft has signed up some pretty high profile customers for its Smartphone OS. In October of last year, Orange began shipping the SPV, a phone that uses Microsoft's OS to run a host of multimedia functions. Not surprisingly, the phone has been a little buggy, according to analysts. And as such, operators are keeping their options wide open when it comes to choosing an OS. "We're not just jumping on the Microsoft OS, we will be giving our customers options," explains Stuart Jackson, a spokesperson for Orange, which just last week introduced a new phone with Microsoft's main competitor in the OS market, Symbian. T-Mobile, Vodafone, and Telefonica have also announced their intent to distribute devices based on the Smartphone OS.
But many phone manufactures have very publicly shunned the Microsoft OS. Sendo recently withdrew its plans to use the Microsoft platform. Samsung just last month became an investor in Symbian. And Motorola, in addition to being a founding member of Symbian, has chosen develop its own OS around Linux. Nobody said this would be easy, even for Microsoft.
A Two Horse Race
The most serious competition to Microsoft will come from the Symbian Alliance, a group that is backed by Nokia, Sony Ericsson, and Motorola, the top three handset makers in the world. More established than Microsoft in the mobile markets, Symbian will prove a worthy competitor. But Microsoft has already taken moves to preempt the group, hiring away a number of top executives from Symbian.
Microsoft's strategy in beating out Symbian consists of going straight to operators to win their approval and sell them on the idea of a standard platform, which would conceivably lead to explosive growth of the smart phone market. In addition, the company is trying to push new manufacturers of the phones, like low cost Taiwanese hardware makers, to alter the dynamics of the cell phone market. "The expertise required to build a cell phone is now broadly available to a new set of companies like the Taiwanese companies," says Suwanjindar. "The handset market has been democratized. You don't need to be Nokia or Ericsson to build a good handset." That may or may not be true, but one would have to ask why then Nokia still manufactures more than a third of the cell phones sold today.
The wildcard in the mix at the moment is Linux. Some of the handset makers have dropped hints that they may use the open source operating system as their solution, saving the cost of paying either Microsoft or Symbian to license their OSes. Analyst Isaac Ro of Aberdeen, a market research group on Boston, says that may only be a negotiating tactic, and that most handset makers are at least considering both Symbian and the Microsoft OS. But their predictions lean towards Redmond. "We think the Microsoft mobile platforms will lead the market by 2005," says Ro.
Most recently, Microsoft has begun targeting the CDMA marketplace. In January, the company released a version of its software that will work with CDMA networks, an area of the market that Symbian is not yet focused on. "Microsoft sees CDMA as an opportunity," says Ro. "It gives them a chance to gain some strength there. I would say that it is not so much them giving up on GSM, but that the people allied against them are in GSM, and it will be easier for them in CDMA."
Commoditizing the Handset Market
Microsoft's end game in the cell phone business may strike fear into the hearts of handset makers, however, more than competing software providers. If Microsoft can succeed in shifting the consumer's focus from the hardware to the software in handsets, an already commoditized handset market becomes further commoditized. In other words, no one will care who makes their phone anymore, so much as they care whose software it runs. This may sound like folly to you, especially with the importance that consumers now place on the brand of phone they carry. But history has proven that Microsoft is capable of this kind of shift.
In the early 1980s, Apple Computer had a dominant market share in the personal computer business, and a stellar brand name to boot. Then Bill Gates and a little software startup called Microsoft appeared on the scene, developed an operating system similar to the MacOS, and changed the PC business forever. Today, the most important question a PC buyer asks when selecting a product is "What operating system does it run?" If the answer is not Microsoft, which almost never happens, chances are that computer will sit on the shelf. Could the cell phone business be in for the same fate?
Right now, the handset makers are allied against Microsoft. But all of that could change. "At the end of the day, the customer's decision is going to be based on the software experience they have," says Microsoft's Suwanjindar. If he is right, and Microsoft does eventually work the bugs out of their current product, we might see some of the big handset makers using the Microsoft OS on some models of phones, and the Symbian OS on others.
The response to Microsoft throughout the mobile industry is quite often very emotional. Some people refer to them as "the Evil Empire." Some people blame them for everything from monopolistic business practices to buggy software. But regardless of how you feel about Microsoft, you can be sure that they are going to have their say in the mobile marketplace. The question now is whether the wireless world is ready for them.
After failing miserably at every attempt to become the next great American author, Dan Briody settled in San Francisco and started writing about the technology revolution in the mid-90s. Today he is the author of Red Herring's Wireless Watch column, and he is still trying to write the great American novel.