Why Microsoft Should Make Its Own Phone: Windows Mobile Revenue Stinks (MSFT)
One argument against it: Industry observer Michael Gartenberg thinks Microsoft won't make its own cellphone because doing so would potentially destroy its partnerships with companies that sell Windows Mobile-based devices, like Motorola (MOT), Palm (PALM), and HTC. "Microsoft now has traction with more than 20 million licenses out there and a great stream of partners and new phones for consumer and business use," Gartenberg says.
The problem: Windows Mobile isn't Windows, lacking both its market share and price tag. Those 20 million licenses don't make much for Microsoft, which only charges $8 to $15 per phone, according to research firm Strategy Analytics. Even at the high end of that range, selling 20 million licenses in a year is just $300 million in revenue for Microsoft. That's couch lint for a company whose sales are expected to near $70 billion next year.
Meanwhile, Apple (AAPL) just shipped 6.9 million iPhones last quarter for $4.6 billion in revenue. Plus whatever revenue Apple gets from selling "halo" Macs to iPhone owners, iTunes songs, and iPhone App Store purchases. Plus whatever goodwill synergy Apple gets with its other products, like using the iPhone as an awesome Mac remote.
So, about that Windows Mobile partner stream? Microsoft would have to sell 300 million Windows Mobile licenses -- almost one third of the mobile market -- at $15 apiece to near $4.6 billion in revenue. And that's not happening next year, 2010, or any time soon. (Moreover, we're not convinced someone like HTC would ditch Microsoft if it were still making money selling Windows Mobile phones.)
Can Microsoft build an iPhone? Probably not. But it doesn't have to build an iPhone yet. It just has to build something better than the phones that currently run Windows Mobile, Palm OS, and lesser phones. Which can't be be that hard, especially with the help of Danger, the mobile platform company Microsoft bought earlier this year.
What's the payout? Even if Microsoft can sell just 1 million Microsoft-brand phones next year at a very low, $300 wholesale price -- half of the iPhone's -- it could equal that $300 million in hypothetical Windows Mobile revenue. Plus commissions on app sales, a few pennies of search revenue from built-in Live Search, potential Xbox tie-ins, etc. Not the dumbest idea we've ever heard.
See Also:
Steve Ballmer Pretends Not To Understand Google Android Pricing Strategy
Another Apple iPhone Advantage: Mac Software Companies
'GPhone' Sales Strong: HTC Eyes 1 Million G1s Shipped In 2008
Palm's New Smartphone Platform DOA?
Having the two WM product lines (Smartphone for non-touch and PocketPC/Professional for touch devices) confuses things as they have different heritage (smartphone was designed to be a phone, Professional was a PDA with a phone tacked on).
The history of the devices does make them more versatile and robust than any of the current competition. years of testing have elimiated a lot of the early problems (that the G1 users are finding with their first generation devices) and the well documented underlying OS that allows anyone to deploy an app (any .Net developer already knows how to build and deploy to a WM device and they don't need MS to approve it - unlike the iPhone scenario).
The Danger devices (Hiptops and Sidekicks) really do deliver a great consumer experience, optimized for non-touch, high usability. They have put a lot of work into an inituative platform and backed it up with some great "cloud" services.
The Zune, with it's connected Marketplace and WiFi sync shows that MS can lead the way in the music player hardware (and the ZunePass with 10 free songs - to keep, no DRM - each month, shows that they get how to engage with loyal users)
I don't know if there's any truth in this new Tegra powered Superphone ... but given the learnings behind them I suspect if MS do go down this path it'll be another example of them getting something really nailed the third time around ;)
youtube.com/watch?v=WRLRjKCGHek
The Zune, with it's connected Marketplace and WiFi sync shows that MS can lead the way in the music player hardware (and the ZunePass with 10 free songs - to keep, no DRM - each month, shows that they get how to engage with loyal users)"
www.techflash.com/Enderle_Microsoft_Ballmer_conflicting_reality34812539.html
Or maybe that wouldn't work because they don't have the business to monetize it with (which Google does...)
Yes, the law of large numbers applies, but the vintage of an average Windows Mobile application is 3-5 years old, and the state of the art for mobile UI has changes massively during that period, driven by the success of the iPhone.
For MSFT to succeed, they need a parallel effort to rethink the underlying UI they need to champion with the development community, and use their balance sheet to financially incent folk to develop a whole new generation of application based on it.
Success means:
Stealing a page from Kleiner and their iPhone fund and jumpstart the next wave of development through distributed investment, and, just as importantly,
Get the community pumped that the hardware their apps will live on will truly rock (and have the appropriate mobile cachet). HTC-standard SKUs aren't a path to win.
I don't think they should bet on a single hardware win. It would be great if consumer hardware was a competency at MSFT, but it is not. They need a Google-like effort to manage risk: Partner to ensure the first ecosystem phone rocks, but have phones 2 through N in the pipeline to launch shortly thereafter.
I think if they carry the legacy support requirements of old apps into this effort, the whole effort is DOA (that legacy weight has slowly killed Windows over the years). Farewell to the old, but the USS MSFT Mobile needs to leave their old friends waving from the dock and sail to new and exciting shores!
Doubt Microsoft's making a big margin on $8 Windows Mobile licenses, though. And I gather margin on iPhone, especially with the subscription revenue, is high.
(Google, meanwhile, has a negative margin...pure cost, no revenue).
PROTIP: stop trying to rip-off Apple, jobso went the hard way since hardware biz has to deal with costs the software biz can't even imagine.
Redo WinMo, come up with a set of standards for OEMs so it won't suck that much when compared to the iPhone.
Hard for anyone to monetize off mobile ads yet, and Google probably ahead of the pack.
Msft has been F'ing the pooch for the better part of 10 years when it comes to WinCE/WinMo derivative products. Hell, they even let RIM come into being by allowing them to make a better piece of "middleware" that let's msft outlook users connect to msft exchange but only if they use RIM's BES. When that shit goes down, you know you totally suck at life.
Mobile Market Hierarchy:
1. Apple iPhone (by a mile). Will end up with iPod like market share when the biz school cases are written. Brilliant strategy, brilliant product, brilliant marketing. And I can type faster on my iPhone 3G than any physical keyboard and will go head to head with anyone on any device. That's how good the iPhone typing algorithms are.
2. Android (but only if VZW pulls their head out of their ass and adopts Android by Q2/Q3 of 09). Otherwise apple really cleans up. Nice job Google, what the F took you so long?
3. RIM but only for 2 more years till the deficiency in their mobile OS prevents real corporate apps from being developed. If you don't believe me, check the stock price and their app store.
4. The Dead pool (nok, palm, LG, moto, samsung, sony/eric). Money losing, low end crap till some of them smarten up and exit the business. See Moto and Nokia's latest quarterly reports for previews.
And that brings me to msft. I used a moto Q with WinMobile for a year and I thought it was mediocre, until I got my iPhone3G. Then i realized how freaking bad Window's mobile is/was and how far ahead apple is.
Msft should stop destroying capital, admit defeat, and exit the freaking market. Don't buy RIM, don't waste any more development dollars, lay off the Zune team and the WinMo losers that have produced junk for an eternity. Msft's CFO should take the cash wad and buy as much apple and google stock as he can. The only other strategy that makes sense would be for msft to buy comcast or twc. At least if they control the pipe, apple and google will have to negotiate with them. As bad as msft has been over the last 10 years, they're still smarter than the service provider management.
Harsh analysis? absolutely. But the next 36 months are going to be ugly and it's not the time to flush good money after bad, and Msft has a lot of explaining to do as to why apple did in 17 months what msft couldn't do in 10 years.
Rock on!
also, xbox is now profitable
A WinPhone is not a bad idea, but the phone will end up being like existing phones. I can imagine the Iphone vs WinPhone Apple campaigns already. ARGH.
"It's (Android) version one... and it looks like version one. They've (Google) got one handset maker, we've got 55. They're available through one operator, we've got 175." - Steve Ballmer, Microsoft
In 2004, Microsoft released the certification knows as "Plays for Sure." This allowed consumers to know that their mp3 player bought from Sansa, Creative, etc. would work with their Windows-based machine. The community of mp3 hardware companies assumed that Microsoft would continue to foster such a community.
However in 2006, MS released the Zune and that passive role Microsoft had in the mp3 player market was gone. MS thought they could make a better product than the rest to actually go head to head with the iPod. Next came the Zune Marketplace which further cannibalized its relationship with other mp3 hardware companies. Mp3s purchased from these other companies would not play on a Zune due to an overly restrictive DRM but songs purchased from the Zune Marketplace could be played on other mp3 players.
Today, a potentially similar situation may be unraveling. Microsoft has created a community of smartphone hardware companies and consolidated that experience with its WinMo platform. Rather than go down just a mobile software store similar to Zune Marketplace, I see MS making a phone of their own. They know licenses of WinMo are not enough as Dan mentioned.
So if all goes according to history, MS releases a new phone with a new OS. MS sells apps for it that work on WinMo and this new OS so MS can make the most amount of money off software. However, WinMo apps won't work on the new MS phone.
Microsoft had a brilliant strategy for years that was essentially immune to obsolescence provided they were alert to the landscape -- EMBRACE AND EXTEND. Find out who is in the leadership position among the OTHER key players and add value.
Instead of being the #2 or #3 search engine, Microsoft could be integrating Google functionality into the foundation classes of Windows.
Instead of being the #2 or #3 personal music player with Zune, Microsoft could become the de facto way that non-Mac users tap into iTunes' vast digital content offerings.
All of Microsoft's problems these days come from the fact that Ballmer has put them on a multi-front battle against everyone and even the most brilliant company in the world can sustain such a fight. It is foolish to believe you could win in every category. That USED to be Apple's philosophy believing that no matter what the product or service, an Apple version would be superior just because it's an Apple version. They've essentially switched places. Apple is craftily embracing and extending with all the key players of almost every industry adding value. The App Store is a phenomenal example of that.
If Mobile OS sales are dismal it is for a simple reason. Windows Mobile is not robust or compelling enough to fully extend the electronic devices they've embraced. iPhone has seriously raised the bar on what consumers and developers expect from a mobile device. RIM/Blackberry is reacting and defending its market share. Motorola and Nokia were broadsided. Android is seriously disrupting the market segment.
If I were advising Microsoft strategically, which I haven't done for many years now, I would advise them to take a completely new approach to Windows Mobile. Instead of trying to fit Windows into a mobile footprint, they need to break Windows beyond the desktop and open everything up to the cloud.
Ray Ozzie is on the right track. Are you listening Ray? I'd go into greater depth on my recommendations but you gotta pay me first. ^^ Point is, the last thing in the world Microsoft needs to do is start fighting with phone makers now. The partnerships already in place with major manufacturers are extremely value but under-utilized. The last thing Microsoft can afford to do at this point is pull yet another Crazy Ivan on its own strategic alliances. That's a very dangerous game of "marketplace musical chairs." I'd advise against it.
The iPhone makes $315 gross, per unit, on an ASP of about $660. At $15 a license, MS has to sell 44 licenses to make the revenue of one iPhone. Last quarter, Apple shipped more iPhones than MS shipped licenses.
Steve Ballmer may like his strategy in the mobile market, but I bet his shareholders don't.