Microsoft is the ultimate under-achiever in mobile. They have always talked the talk, and consistently failed to walk the walk. But as a corporation they are as big as Nokia, a giant. And Microsoft have said that they see the transition from the PC metaphor IT and internet world to the mobile metaphor for a decade already. Why are they not dominating the mobile world like they do the PC world?
IN THE BEGINNING THERE WAS SENDO
Many recent to mobile may be surprised that Microsoft has been in smartphones more than twice as long as Apple's iconic iPhone. They launched into mobile a decade ago. Their first launch customer was a brave British smartphone maker called Sendo. You never heard of Sendo? Thats because Microsoft crushed this partner who spent years in litigation with Microsoft, won in the end but the company was kaput by then. Early on when Microsoft brought its Windows to mobile we had plenty of other long-gone smartphone platforms like Palm, like Compaq's iPAQ etc. Oh, and there was something called Symbian also back then.
Microsoft did launch with Taiwanese HTC and then we would occasionally see some activities from Microsoft. Much more talk than walk, they would announce great things, which would inevitably be delayed, ship late, ship with bugs, and missing promised components. Microsoft Windows Mobile became known as the operating system that was even worse than Windows on a PC and most developers hated it.
Microsoft built its ecosystem acound Windows Mobile for nearly ten years and landed as handset makers the 'rest' of the top 5 biggest handset makers, when you remove Nokia. So Samsung, LG, Motorola and SonyEricsson were all suppliers of Windows Mobile handsets. When you add HTC into the mix, it is the six bestselling phone makers now doing Android phones for Google. Microsoft owned this field, had all those makers, and by every tiny bit of logic, if Google can take 45% of all smartphones sold now in July to be on Android, made by Samsung, HTC, LG, SonyEricsson and Motorola - why didn't Microsoft - after ten years of trying - not own 45% of the smartphone market?
Microsoft Windows Mobile did, briefly hold onto number 2 ranking a couple of times in the past decade. But they got there with total market share of just over 10%. Then they were overtaken by RIM Blackberry and Apple iPhone. The last guys Microsoft were able to 'defeat' in the smartphone battles were Palm. They were defenseless against the Blackberry and the iPhone. And Nokia's Symbian phones outsold Windows Mobile always by at least 5 to 1. In the latest quarter we have data, Q1 of 2011 - when Nokia had killed Symbian, Microsoft's Windows Mobile sold 1 handset where Symbian sold 14. I have made the analysis that if you remove Nokia branded Symbian phones, and only take the 'other' Symbian phones like those made by Sharp and Fujitsu etc - even those Symbian phones outsold all Microsoft phones in Q1. Thats how bad Microsoft had become.
Microsoft made many relaunches of Windows Mobile which reached its 6th iteration by 2010. Every relaunch came with top management commitments of learning from the past, of fixing the problems and taking mobile seriously. Along the way Microsoft convinced several handset makers to focus on Microsoft Windows Mobile, including Motorola at one stage and LG at another. Even with Nokia, Microsoft didn't get Nokia to run Windows Mobile, but got Nokia to integrate with its E-Series enterprise/corporate business phones, the Microsoft Office Suite (when that project coordination with Nokia was led on Microsoft's side by Stephen Elop, yes who now is Nokia's CEO).
That great collaboration between Nokia and Microsoft resulted in colossal global market success in the enterprise/corporate space, using Nokia E-Series phones and Microsoft's global Windows PC platform and the Office Suite.. When I say 'colossal global market success' of course I mean 'nothing'. There was zero success, even when Microsoft made this a 'top priority' and placed their wonderboy Stephen Elop in charge. While this is not a blog about Nokia, one should take from this the lesson, that Microsoft's power in PCs and the Office Suite are not a strong factor in helping Nokia sell more smartphones. But I digress. That was failure of Nokia partnerships. What of Motorola and LG?
Both felt they had wasted their effort with Microsoft, nothing delivered on time, nothing worked and their effort was wasted. Both saw their Microsoft efforts being a drag on profits - both saw their profitable phone business go unprofitable during the Microsoft phase - and both left in disgust. Motorola was so upset, they said they will no longer do any Microsoft phones and went 100% Android. LG said they were shifting from a Microsoft based strategy with Android as option, to an Android based strategy with Microsoft as the option.
NO MIGRATION PATH
Microsoft was lumbering along with Microsoft Windows Mobile, until their nemesis, Apple, entered into the phone space. And before you could say 'Palm' Microsoft's market share was in freefall.. So Microsoft said they'd abandon the Windows Mobile platform, because that was now a decade old, and release a whole new operating system in 2010 for smartphones, Windows Phone, which would be totally new, and be optimized for touch-screen phones. Now, as this was 'totally new' it meant that there was no migration path for developers who had made apps for Windows Mobile.
To me at the time, that seemed truly odd. Microsoft if anyone, should have known better. It was DOS that built Microsoft. Then came Apple with the Mac (like now with the iPhone) and showed a far better way to do personal computers than DOS. So Microsoft had to reverse-engineer the Mac OS and try to create a clone, which we now know as Windows. And today DOS is dead. But Microsoft had a massive global PC lead in DOS based machines in 1984 when the Mac was announced. Even as Macintosh PCs were sold, Microsoft based PCs sold more. And Micrsosoft made Windows first as an add-on over DOS, as a 'GUI' (Graphical User Interface). The first versions of Windows were horrible, it wasn't until Windows 3.0 that it was in any way usable, but the point was, that all Windows PC's were also using DOS, and any recent DOS machine could be upgraded to run Windows (while the older the machine, the more slow this made it). Anyway, it took years, but Microsoft patiently migrated all DOS based PC users to Windows and kept its massive market share edge over Apple. Why they would not do it now, is a mystery to me. But clearly Microsoft messed up big time with Phone 7 (and incidentially, this is why I am so adamant about the migration path from Symbian to MeeGo but thats another story)
And Microsoft didn't really care about that. Right after they announced that there was no migration path, the market share crashed. It was devastated from 9% at Q4 of 2009 to 3% by Q3 of 2010 when the new Windows Phone handsets started to arrive. So Microsoft lost two thirds of its customers in a period of 9 months.
This is incidentially the model I used to estimate what happens to Symbian when Nokia announced on February 11 that they will no longer support the previously-announced migration path from Symbian to MeeGo.
Now, how well did that go with Microsoft partners? They have been bailing out of Windows Mobile for a while. The biggest partner, HTC - who had produced half of all Windows Mobile phones ever made - said they will not even launch smartphones on the last editions of Windows Mobile. But they returned to Windows Phone and gave it a try. Now the latest numbers we have from Q1 is that HTC's Android phones have been outselling HTC's Microsoft Windows Phone smartphones of similar specifications and in essentially the same markets - by about 9 to 1. The new Microsoft OS, which is optimized for touch screens, is doing so badly, that Microsoft's longest running handset partner sells 9 times more on Android than Windows Phone. And HTC was so disgusted by this new boycott against Microsoft (because of Skype) that they shifted their emphasis now to more Android from Q3.
And meanwhile, LG, another maker who does both Android and Windows Phone, has just today announced that they are lowering their target for total smartphone sales from 30 million to 24 million this year. This comes on the heels of Android growing dramatically and activating 500,000 new handsets per month. And LG has been selling tons of Android phones. The annual target lowering is - my analysis, not LG's words - the result of dramatically underperfoming Microsoft Windows Phone smartphone sales. Android is doing just fine for LG, but the reseller boycott is killing Microsoft.
So where was Microsoft's new Windows Phone now? Funny you'd ask. Those who use it, love it. It is a very modern and easy-to-use operating system for modern touch-screen smartphones. But. There aren't any users. In Q1 of 2011 Microsoft Windows Phone had 1.6% market share. While Microsoft had been trying to kill of Windows Mobile, WinMo was still outselling Windows Phone in Q1 ! And the upstart, Samsung's new bada, as old roughly as Windows Phone 7 was not just selling more than Windows Phone, bada was outselling both Micrsosoft operating systems combined! So all Microsoft based phones sold by LG, SonyEricsson, HTC ... and Samsung itself - were outselling bada which is only one of three OS's that Samsung supports, and is not its best-selling OS (Android is, obviously) and yet bada on only Samsung and only as one of 3 OS's is already selling better than all makers of Microsoft smartphones.
ITS EXECUTIVE ATTENTION
So why? Microsoft is the biggest PC operating system maker by a massive margin, with Windows. It kind of inherited that being there at the beginning (although Apple was bigger at the very early age of the PC). So maybe Windows is kind of special. But what of the Office Suite? That is something Microsoft did not own from the start. The world's biggest spreadsheet before Micrsosoft Excel was Lotus 1-2-3. Before Word, the world's bestselling word processing software was WordPerfect. And so forth. Microsoft (under Bill Gates) fought and won those battles. Even Xbox, it was the smallest of the three gaming platforms but for a while was the biggest. I haven't looked recently but I think Wii took over as number 1, and if you add Playstation Portable, then probably Sony is still biggest. But Microsoft has roughly a third of the home gaming console market. Why does it have 3% of the smartphone market after ten years (And a peak of about 12%).
I think its executive focus. Compare to Google. Compare to Apple. When these guys say they go mobile, they are all out. They do everything in the whole company to get there. Eric Schmidt the Chairman of Google says 'Mobile mobile mobile' and he says 'Mobile first' and he says 'Put your best people on mobile' etc. He's dead serious. Or look at Apple. When they were the world's bestselling portable music player brand (iPad and iTunes) they went out to design the device that will cannibalize iPad sales - the iPhone. They admitted later that the iPhone is the direct result of Apple concluding that portable music will migrate from iPads to musicphones. This is bold, this is decisive. No wonder when Steve Jobs announced the original iPhone, they also announced Apple Computer, would change its name to Apple. And now Apple calls itself a 'mobile' company. And make the biggest profits of any tech company on the planet.
But look at Steve Ballmer. He says Nokia is their strategic partner and mobile is their top focus. Next day he says Windows is their top focus. Then he says Office is the top focus. Then he says Cloud computing is the top focus. Then they announce RIM as a strategic partner (oops? What happened to Nokia?) and so forth and so forth and so forth. If you want to win in mobile, this is the biggest contest, the biggest race, the biggest prize in human history. I've estimated conservatively that the 'floor' ie the minimum level of the value of this 'prize' of the digital convergence is in excess of 5 Trillion dollars annually. The real prize is likely double that. And to put it in context, the total PC industry of which Microsoft is a small part, is worth only half a Trillion dollars. It is no accident that Hewlett Packard says the future is mobile. That Dell says the future is mobile. That Intel says the future is mobile. That the BBC says the future is mobile. That Visa says the future is mobile. And so forth. But Microsoft has been in this game for a decade and have squandered every chance they ever got.
So they have yet another chance. It is now clear, that without Nokia, Microsoft Windows Phone would have already died. It is a total market flop. Microsoft is wealthy, could have kept it alive for some quarters, but without the Nokia excitement, it would have died a quiet death like Kin phones and Zune music players etc.
With Nokia Microsoft had a unique opportunity, with ex-Microsoft guy, Stephen Elop (and good friend of Steve Ballmer) in charge. This could easily have been a happy partnership not unlike what Bill Gates had with Apple's Steve Jobs early on (Microsoft's first applications were written for the Macintosh, yes that is where Word and Excel come from, honest!) And Microsoft gave Apple a big corporate loan at one point when Apple was in the doldrums. They were once very close pals.
Now we'd have the world's biggest software operating system maker Microsoft working with the biggest handset maker. Both had tried to do each others' business - Nokia making operating systems with Symbian and Microsoft phones with Kin and could easily say, they should 'stick to their knitting'. This partnership has the potential to be very strong if both work together and use their strengths.
When Microsoft was negotiating with Nokia in late 2010, Nokia's global handset market share (all phones) was 26% and Nokia's smartphone market share was 28%. While earlier many were questioning it, by 2010 a consensus was forming that yes, all 'dumbphones' would migrate to become smartphones during this decade. So Microsoft was approaching this partnership just when Nokia's giant global lead in dumbphones would be ready to migrate to smartphones. Nokia sells over one million handsets per day. The PC industry sells about 300 million devices per year. If Microsoft could get Nokia to adopt Microsoft's OS - and most importantly - get Nokia to agree to pay for the licenses (where Symbian was free to Nokia and MeeGo was free to Nokia, and Google's Android would also have been free) - then Microsoft would have a massive profit engine into this decade.
I think its fair to say, that most who looked at Nokia in 2010, and projected deep into this decade, would say, that with Microsoft, its very fair to assume Nokia could keep most of its market share and should have more than 20% market share into this decade. That is also what we've heard from several analysts this Spring. I think that was a fair assuption from data from last year. If Microsoft then looked at its 2010 performance, saw it has some sales from HTC and SonyEricsson and LG and Samsung and could add some of that into the mix, Microsoft could easily expect the total footprint of Microsoft Windows Phone could be in the 25% to perhaps even 30% range, towards the second half of this decade when all Nokia phones would start to be smartphones.
SHORT REPLACEMENT CYCLE
So then the cold lessons. First, Microsoft would have known this if they bothered to think. The mobile smartphone market is not like the PC market (or the videogaming console market) in that the replacement cycles are the shortest of any industry. The average replacement cycle is under 18 months globally and far less for smarpthone users. So while in PCs there is time to wait for a couple of years and not lose lots of customers, not so in the smartphone space.
Then we have Apple. To borrow from the crude sex joke about 'when you go black, you never go back' haha (please don't be offended) its very fair to say that about Apple. Once any consumer starts to use some Apple device, the Mac or the iPod or the iPad or the iPhone - in that category, they will never go back. Very much of the evidence currently is that disgruntled Nokia Symbian buyers are going to Apple iPhones. And once you use an iPhone, there is almost no switch back to any other phone brands. Apple has by far the greatest loyalty of any phones.
So the top end of the smarpthones that Nokia was fighting for, quite successfully by Q4 of last year with the N8 - is now rushing to pick up iPhones. The early Microsoft Windows Phone based smartphones by Nokia will not be low-end mass market phones, they will be premium high-cost smartphones. And those customers are now leaving Nokia in droves, never to come back.
And now we have a global reseller boycott of Nokia Symbian phones. So while the Microsoft management hoped they'd 'land' Nokia with something like 20% or more in smartphone market share (like it was in 2010) they now have to watch how badly Nokia falls, and hope it is still big by the end of 2011 when the first Microsoft phones will come with Nokia branding.
Most consumers are not coming to the store to buy 'a Microsoft phone' or 'an Android phone' or 'a Symbian' phone - they come asking for an HTC or a Samsung or a Nokia. So its the Nokia smartphone market share which is critical here. And that is now in freefall because of the reseller boycott.
I cannot recalculate how bad it will be until we have hard data on Q2 sales from Nokia but before the boycott I counted that Nokia will end this year with 12% market share. So the old 'best case' scenario for Microsoft was not that Nokia can have 20% market share that can be migrated to Microsoft, it was down to 12%. That was before this boycott. Now, today, as the resellers refuse to sell Symbian phones, when the customer walks into the store and asks for Nokia, they will typically sell either an Android or iPhone (or in some cases Blackberry). These customers are gone. They now have a memory of their old 2009 model Nokia Symbian phone that didn't do touch screen or had a very cumbersome touch screen experience and they have the wonderful new Android or iPhone (or Blackerry) and are totally in love with the new phone. Their next phone is that brand, not Nokia. These customers lost during this boycott are lost forever. (and the sad thing for Nokia is, that the new version of Symbian is so good, that it would actually build Nokia loyalty if there was no boycott).
But the situation is that bad, that analysts are already saying Nokia in Q2 lost so much sales, that they have fallen behind perhaps Samsung smartphones, or perhaps Apple iPhones (or perhaps even both). Just in Q4 Nokia was bigger than iPhone and all Samsung smartphones added together.
THE WORST THING TO DO NOW
Note, as Microsoft's own Windows Phone OS is selling so badly they are under 2% market share now, anything from Nokia will be better. But the trend is very clear, that when Nokia smartphones are sold in mass market quantities in the Spring of 2012, the remaining market share for Microsoft Windows Phone is not 'the third ecosystem' in size. They will be smaller even with Nokia than Android (first), iPhone (second) and Blackberry (third ecosystem). Its quite possible, depending on how Samsung prioritizes its smartphones, that Samsung's bada will be bigger than Microsoft even with Nokia (as it already is now). So Windows Phone would be at best the 5th ecosystem. And thats before we see what Hewlett Packard does with Palm WebOS (they are seeking partners now) and when Intel's MeeGo based phones are released next year from ZTE, Huawei, Panasonic and LG.
Microsoft thought they were buying into a winner. Nokia looked very strong as a hardware manufacturer last year. Making still solid profits etc. Massive market share advantage over all rivals. Now they are limping in, and we just heard this week that Nokia is resorting to 15% price cuts - after they are making losses. This is desperation moves by Nokia.
Now. If Microsoft really believed in mobile. If they did their homework (ten years in the smartphone space etc) and abandoned the fantasies that Microsoft Office Suite will matter at all in this fight, they would understand that the biggest factor in mobile phone success is... not handset design, not operating system, not user interface, not app store, not ecosystem, not number of apps, not mobile web, not music, not TV, not camera... it is carrier relationships.
Nokia had the best carrier relationships on the planet. They were able to use those carrier relationships to build 130 carrier billing relationships to Ovi for example. This is what every app developers says, is the preferred way to pay for apps, you get the biggest conversion rate of interest to purchase, if there is carrier billing. Its the hardest thing to achieve. And Nokia is the grand master. Ovi has carrier billing for over 20% of all carriers on the planet including most of the big ones.
Now Nokia faces a carrier boycott not of the Nokia brand, but of Symbian. So Microsoft can safely hope that once that the carriers have a new OS to sell that is not Symbian, they will liff the boycott and sell Microsoft Windows Phone 7 based phones happily ever after.
Not so fast. Just one speedbump: Skype.
Microsoft bought Skype in May. And coincidentially at the start of June we hear from several sources that all of Microsoft operating system phones (Windows Mobile and Windows Phone) are under sales boycott. Why?
Because carriers/mobile operators hate Skype. About 70% of the total mobile operator/carrier revenues and about 40% of their profits come from voice calls. Skype is killing voice calls not in mobile, but on the fixed landline side, where if Skype was a telco, it now would have half of all fixed landline subscribers. Wow. And we all know, most Skype calls are free. So Skype has decimated fixed telco revenues and profits.
What is far worse for the carriers, is that Skype hits the most expensive calls - where most of the profit is. International calls and long distance calls. And for those who believe in videocalls - very relevant to many 3G mobile business cases - we do use videocalls but not the way 3G forecasters expected - 40% of Skype data traffic is videocalls. Note that is not number of calls or minutes, but because videocalls take much more data bandwidth, when measured by total data load, 40% of Skype is videocalls.
So Skype is killing the landline fixed telecoms operators/carriers by revenues, decimating their profits and destroying the future path to videocalls.
The carriers in mobile are having none of that. They can't stop us doing Skype via WiFi but most carriers will forbid us from using our phones to Skype, or have 'fair use' clauses in their data plans, and those unlimited data plans that used to be so popular, are all vanishing, latest to kill its was Verizon yesterday.
There are exceptions. Three the 3G operator group is offering Skype as part of their service bundle. That means, that Three has packaged Skype pricing into their monthly data price. But no carrier/operator in mobile is offering Skype for free. Not when voice is 70% of revenues and 40% of profits. (And Skype messaging - SMS is less than 20% of revenues and well over 50% of profits for most mobile operators/carriers).
When Microsoft bought Skype, I am sure it made a lot of sense for Redmond HQ in the overall big picture at Microsoft to have a bigger presense in the internet business, in telecoms and in social networking. But what they did not factor in, is that no carriers/operators (except those few who bundle it in like Three) will want Skype anywhere near their networks to overload their data and steal their profits.
Now Microsoft is seeing a conflict. It believes in Skype obviously. I also believe in Skype and I think it will finish off most of fixed landline telecoms and will be a nice telecoms 'new' carrier on the fixed side. They will also eventually do some deals on some networks in mobile. But all carriers/mobile operators will do Voice Over IP (VOIP) but (almost) all will do it without Skype. The carriers do VOIP in their way, with their billing and their pricing plans, making sure they get some revenues from their VOIP services. And they will not do that with Microsoft.
And the carriers are very cautious. They do not rush into silliness. So they have calculated the Skype effects in their networks for years. And they know Microsoft, the Evil Empire, very well. They will never accept any Microsoft smartphones even if those have Skype 'crippled' or blocked, knowing if they let Microsoft in, they will only postpone the eventual launch of Microsoft's Skype into their market.
No, this was the wrong move. Now Microsoft's Windows Phone (and Windows Mobile) are instantly the most hated smartphone OS by the carriers. So they go elsewhere. There is plenty of choice. But Microsoft just destroyed its last chance to come back in mobile. They better hope for a strong long life of the PC..