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

10/10/12Follow @curtwoodward

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his company access to unnamed, but special features that even Microsoft itself wouldn’t be able to touch.

“We have rights beyond any of the other manufacturers to do unique things and to enforce certain exclusivities for our products. We don’t disclose what those are, or the extent of those. But we have the ability to differentiate,” he said. “We still preserve the same rights under the contract, regardless of who is making those phones. There are certain things we have rights to.”

MICROSOFT ISN’T A HARDWARE COMPANY

Setting aside all of the other facets of the smartphone market for a second, let’s just take this at its simplest: the Xbox is the only piece of consumer electronics produced by Microsoft that anybody purchased in a notable quantity. The rest of the pack includes the Zune music player, the aborted Kin mobile phone, and various stabs at tablet computers.

Organizations of Microsoft’s scale can’t simply swap out their DNA and build an entirely new business because Apple is having great success with that model. It’s why Hewlett-Packard almost evaporated while trying to switch from a hardware maker to an IBM-like software and services business. It’s why Web 1.0 giants like Yahoo and AOL have been swimming in circles for years, trying to figure out what kind of companies they really are.

Microsoft makes all of its money from selling Office and Windows. Everything else is peanuts, or worse.

The surprise unveiling earlier this year of the Surface tablet has led many observers, however, to assert that things have changed. In this view of the world, the Surface tablet is indisputable evidence that Microsoft is challenging Apple’s iPad head-on. Microsoft is pissing off the other manufacturers, even though it needs them to keep building machines that run on Windows.

Except that’s not really true. It’s painfully clear that Surface is a “north star” product, as Kindel has repeatedly said, meant to set a high-end standard for others to follow rather than selling a large number of units.

At its big unveiling in L.A., nobody outside of Microsoft was permitted to touch or handle the thing for more than a few minutes. So nobody knows how many of the claims that Microsoft is making about its capabilities really hold up.

Microsoft only intends to sell the Surface on its websites and in its own retail stores. Even with temporary “pop-up” locations set up just for the holidays, that only amounts to just over 50 storefronts in North America. Apple, on the other hand, has hundreds of stores—and in a reversal of the smartphone business, those Apple stores are the single largest source of iPad sales.

Microsoft is reported to be readying more than 3 million Surface tablets for sale. VentureBeat actually reported that this meant Microsoft was “going big” in its commitment to selling the devices.

Sure, it’s a big number, but put it in perspective: Amazon’s Kindle Fire HD is projected to ship 5 million units by the end of 2012. The iPad hasn’t sold fewer than 3.7 million units in a single quarter since the first three months of 2011—which was right after its first Christmas on the market.

Still not sure? Take it away, Steve Ballmer: “Surface is just a design point … It will have a distinct place in what’s a broad Windows ecosystem. And the importance of the thousands of partners that we have that design and produce Windows computers will not diminish.”

So where does that leave a possible Microsoft smartphone? I’d say it’s one of two things.

On one hand, it could be similar to the Surface—a reference device that shows manufacturers how Microsoft sees its vision being carried to its fullest, along with a niche product that could move a decent number of units for higher-end gadget buyers.

It could also be a last-resort measure in case the phones from Nokia (and HTC or others) don’t take off in the marketplace. I’m not entirely sure how Microsoft’s end-to-end production would make a huge difference if experienced phone makers fail—especially given the fact that Microsoft does not have the years of experience that Apple does building an integrated device and software company.

Former Microsoftie Hal Berenson goes one step further: He thinks that if Microsoft can’t make a dent with the current carrier-manufacturer-OS setup, it might be forced to set up its own integrated wireless service plan. This would involve buying big chunks of access to wireless networks and reselling it under the company’s own brand, a kind of entity called a mobile virtual network operator.

“By going the MVNO route Microsoft would be freed from carrier decisions about which phones to carry, how to price them, how to promote them, how quickly to update them (!), who shares in what parts of the subsidy pie, lock-in terms, etc. It would own its own destiny. On the flip side, it would lose the carriers’ large retail footprint and healthy marketing budgets. And carriers have developed new techniques, such as family plans, that make switching very unattractive for the consumer. But if WP8 fails using the traditional carrier model, this is a tradeoff that Microsoft would be forced to make.”

Now that would shake up the tech world. Would Microsoft be that bold? I don’t think there’s any evidence that it has to act so drastically in order to win in the new computing landscape. There are other routes, particularly offering cross-platform software like Office, that could play more easily into Microsoft’s strengths.

For all of Ballmer’s insistence that Microsoft is a “devices and services” company, it seems like the former is something between a marketing ploy. The services are what Microsoft has always done best.

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

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