Has Microsoft placed its last mobile bet?

When Microsoft first started talking about building mobile-phone software back in the late 1990s, handset makers that had been in the market for years scoffed. Sure, Microsoft was a huge software developer, but making software for mobile devices is different and more complicated than for PCs, they argued. After all, by the late '90s, some companies had already spent decades developing their mobile platforms.

But Microsoft, with its deep pockets, worked away at it and by last year, after first launching in 2002, Windows Mobile had a respectable 13.9 percent of worldwide smartphone market share, according to researchers at Canalys.

This year brought an abrupt backward slide. By the second quarter 2009, Windows Mobile had slipped to just 9 percent market share, its lowest since early 2006, Canalys said.

Now the questions that most mobile onlookers ask are: what happened and can Microsoft reverse the slide?

While most of them agree about what happened -- in a nutshell, the iPhone -- there's some disagreement over what's to come. Many analysts are saying that Windows Mobile is too far behind and will fade into obscurity or that Microsoft will quit the business. But others say mobile is too important and so Microsoft will buckle down now and invest in a turnaround.

Even Microsoft executives admit they haven't done a very good job of keeping up with the competition. At a meeting with analysts in July, Robbie Bach, president of Microsoft's entertainment and devices division, acknowledged that Windows Mobile has not performed well. While the software works well for business applications, other consumer-centric aspects like browsing, media and video aren't as "rich" as they need to be, he said.

Analyst Jack Gold of J. Gold Associates agrees. Part of the problem is that Microsoft hasn't updated Windows Mobile to include capabilities that people want, he wrote in a recent report. .

Despite the obvious trend in the market toward touchscreens with user interfaces similar to the iPhone's, Microsoft's first response has only just emerged with Windows Mobile 6.5, more than two years after the iPhone hit the market. Gold called it a minor release that isn't apt to draw hordes of new phone buyers.

Microsoft's slide has happened while the market for smartphones is growing at a brisk pace, fast enough to accommodate new devices like the iPhone. From the second quarter of 2008 to the same period this year, smartphone sales grew 13.4 percent, during otherwise dismal worldwide economic conditions, according to Canalys.

In the second quarter of 2009, just two years after its introduction, the iPhone surpassed Windows Mobile, selling 5.2 million phones and garnering 13.7 percent of the market.

Microsoft's inability to keep up with innovations by competitors may have driven some long-time allies away. Palm recently said it would no longer make any new phones running Windows Mobile. Motorola has said that the vast majority of the phones it releases in 2010 will be based on the Android platform developed by Microsoft archrival Google. It has not released any phones based on Windows Mobile 6.5 and says it is anxiously awaiting the next version of the operating system.

In addition, HTC, previously one of the biggest Windows Mobile supporters, has become a very vocal supporter of Android. While HTC used to contribute 80 percent of Windows Mobile phones, that's down to around 65 percent now, said Jonathan Goldberg at Deutsche Bank.

The situation is so dire that Gold says Microsoft at this point cannot win the battle to control the mobile operating system and thus he expects the company to exit the mobile market in the next one to two years.

Nick Jones of Gartner wrote in a blog post that he expects that Windows Mobile 7, a more significant upgrade expected to come next year, will be Microsoft's last attempt at success in the mobile-phone market. "Imagine you're Steve Ballmer, and in two years time WinMo was still 4th in smartphone market share. How much longer would you keep throwing money at it?" he wrote.

Quite some time, other analysts say, arguing that naysayers are ignoring some pertinent facts. "For some reason, everyone we speak with about mobile operating systems wants to entirely write off Windows Mobile. We admit WinMo is not our favorite operating system, and we are equally frustrated by their long development cycles. Regardless, this is Microsoft we are talking about and they have so many advantages that dismissing them out of hand would be a mistake, in our opinion," Goldberg wrote in a June report.

Microsoft has a "mountain of cash," the most integrated desktop synching offer available and strong relationships with developers and the supply chain, he wrote. "Most importantly they have a lot of patience."

Windows 6.5 is, in fact, just the beginning of a new direction for the mobile software that will become more apparent over the next 12 to 18 months, Microsoft executives say. The software, launched in early October, is already off to a great start, with 30 phones running it expected to appear in the first three months, according to Microsoft.

Executives there have been recently describing a new vision for the software that integrates it with other devices like computers and televisions.

"We've changed our strategy in a number of ways," said Andy Lees, senior vice president of mobile communications for Microsoft. "The first is to focus on multiscreen scenarios."

As an example, he points to the fact that many people take photos with their phones but don't ever move those photos off the phone. "They want to put them on the PC and the TV, share them with others, fix red eye, make slideshows. Yet they can't," he said. Microsoft wants to include the software on the device, in the PC and TV, and in the cloud to make it easier for people to manipulate their photos.

The company wants to do that in a way that is not exclusive to Microsoft, he said. "We think we can be catalytic in helping those scenarios," he said.

Whether that vision becomes a reality and is attractive to users, Microsoft has other things going for it compared to the competition, Goldberg said. The company offers a lot of support to hardware vendor partners, something the free operating system developers, like Android, don't offer. That lack of support is the reason that only two Android phones appeared in the first year the operating system was available, he said.

Researchers at iSuppli agree that support for handset makers is a key advantage Microsoft has over some of its competitors. Microsoft offers a complete infrastructure that phone makers need to use its software, iSuppli said. By comparison, phone makers that want to customize Symbian or Android by tweaking the user interface must invest in additional software to help them do so. Windows Mobile includes tools necessary for such changes, iSuppli said.

ISuppli is so confident of the potential for Windows Mobile that it predicts the number of Windows Mobile phones will triple between 2009 and 2013. That will give Windows Mobile a 15.3 percent share of the global market, second only to Symbian.

ISuppli acknowledges that Windows Mobile faces some challenges including strong competition and the loss of some licensees. Still, Microsoft has enough of an edge over competitors that it could turn around its lagging fortunes, it says.

ISuppli also notes that while Microsoft has lost a couple of licensees, they are relatively small and it has simultaneously gained support. Palm only represented a small portion of business for Windows Mobile and Motorola's market share has been declining in recent years, making it less significant, iSuppli said.

But Microsoft recently signed on LG, the number-three phone maker in the world, which has promised to make 50 Windows Mobile models.

Also, Microsoft could gain some traction in the market by leveraging its Zune music software as well as software acquired along with Danger. Danger created the operating system and service that runs the Sidekick phones that are popular with a niche of young users. While the Zune MP3 players have not been a success, users praise the software that runs them. Integrated onto the Windows Mobile platform, Zune software and components from the Danger software could appeal to a wider audience.

Improvements may also come from a decision by Microsoft to try to focus on the hardware form factors of phones running Windows Mobile. The company is making reference designs to help handset partners build attractive phones that will complement the software.

But the question remains whether Microsoft will deliver the features that users want and soon enough to stop its backward slide. Many initial reviewers of Windows Mobile 6.5 found it lacking and Microsoft has not said when Windows Mobile 7 will appear. If it comes out late next year, as some industry observers expect, that will be a full three years after the first iPhone hit the market. In the fast moving wireless industry, that's a lifetime.

Copyright © 2009 IDG Communications, Inc.

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