Why a Microsoft Smartphone Just Can’t Happen—Not Yet, Anyway

10/10/12Follow @curtwoodward

As Microsoft gears up to show off the newest generation of its smartphone software, there are growing questions about whether the software pioneer might start cranking out its own handsets, too. Microsoft’s certainly helping to stoke that idea by recasting itself as a “devices and services” company, as CEO Steve Ballmer just wrote in his annual shareholder letter.

It’s thought of as the start of a new era, where the tech company everybody loves to hate finally gets with the Apple paradigm and makes streamlined products instead of farming its hardware production out to others. Microsoft is already building its own iPad competitor with the upcoming Surface tablet, right?

Well, not exactly. Microsoft simply can’t be producing its own serious attempt at a smartphone right now—not if the company has its head on correctly.

Note the emphasis on the word serious. Sure, Microsoft might build its own smartphone sometime in the near future. But let’s be clear about the landscape right now: There is nothing to suggest that Microsoft can or should build its own smartphone with the intent of making a serious dent in the current retail market for handsets.

“If Microsoft builds their own Windows phone within the next three or four months, I will call this the most insane thing that Microsoft has ever done,” says Charlie Kindel, a former Microsoft general manager, entrepreneur, and mobile consultant.

Here’s why.

THE CARRIERS

Most smartphones in the U.S. are sold through the stores of the wireless carriers. Even Apple, with its vaunted chain of retail stores, moves most of its iPhones through AT&T and Verizon stores. Throw in the small chunk selling via Sprint, and you’ve got 56 percent of all iPhone sales, according to research by Consumer Intelligence Research Partners.

That means Microsoft, if it really did try to sell its own smartphone, would be even more reliant on the carriers—the Redmond company only has a handful of its own permanent retail sites and they’re veritable ghost towns compared to your average Apple showroom.

So the carriers still control the point of sale for most customers. And the carriers don’t like how Apple’s seemingly overnight dominance of the cell phone market took power out of their hands. Consumers were no longer coming to buy whatever their carrier had kicking around when the contract was up—they came to the store wanting someone else’s product, one that carriers had to beg to get their hands on and subsidize with big up-front payments to Apple.

That’s one of the big reasons the Android platform has exploded, dwarfing the number of iPhones sold. Since Android was opened up to virtually any manufacturer, carriers could order up their own phones without giving in to Apple’s demands or prices. It was a return to the good old days.

And it’s not just Apple. Kindel, who negotiated with carrier executives when he worked on building the Windows Phone 7 platform for Microsoft, found that carriers had a lot of distrust for operating system companies.

“In my meetings with Verizon back in 2009, when we were working on Windows Phone, those were extremely hostile meetings,” Kindel says “There’s just a huge distrust of Microsoft—although at the time, to be fair, Microsoft had no leg to stand on … the Kin burned Verizon massively.”

So why would carriers embrace a theoretical Microsoft handset, built, owned, and controlled by one company in the style of Apple? Sure, Microsoft would probably offer much better terms than Apple, since it would have room to make up. It might even throw some cash at the carriers to pay for marketing, which would be hugely needed.

But even then, the carriers would be put in the position of flogging a phone that nobody really wants yet, with the benefit flowing to one company that controls the whole pie. Microsoft simply can’t sell a large number of smartphones without the carriers, and there’s no sign the carriers are interested.

THE HANDSET MAKERS

The handset manufacturers also have Android to lean back on. As Peter Bright wrote last week in Ars Technica, making a serious push into building and selling its own smartphone would seriously jeopardize Microsoft’s relationships with existing manufacturers who could build devices based on its operating system.

It’s even worse when you’re talking about Nokia. The Finnish company has tied its entire existence to the Windows Phone platform, bringing on a former Microsoft executive to run the show and ditching its old operating systems in favor of growing with Redmond’s new version.

Dumping its own smartphone on the market with an intention of grabbing a lot of sales could severely harm Nokia at its most fragile.

Nokia absolutely needs to sell a good number of Windows Phone 8 smartphones this holiday season if it has any hopes of surviving. That will take a ton of marketing spending, from both Nokia and from Microsoft, in order to get the carriers to push the Lumia line of phones. Rolling out another option from Microsoft itself—which would probably be welcomed as the better of the two by the press, given the Microsoft vs. Apple showdown it would imply—could cripple the Lumia.

On top of all that, it appears that Microsoft has, for at least the near future, signed away its own access to the best of its own operating system. Nokia CEO Stephen Elop told GigaOm that Nokia’s commitment to the Windows Phone platform—when no other manufacturer really cared—landed … Next Page »

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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